The Economist - CyberWar

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7 The world this week 39 11

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14 14 On the cover Modern societies are ever more reliant on computer systems linked tothe internet, giving enemies more avenues of attack.ltis time for countries to start talking about arms control on the web: leader, page 11. Are the mouse and keyboard the new weapons of mass destruction? Pages 25-28

The Economist online DaiLy news and views: news anaLysis. onLine-onLy coLumns, bLogs on poLitics, economics and traveL, and a correspondent's diary E-mail: newsletters and mobiLe edition

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Letters 18 On Pakistan, the Republican Party, the Los Angeles Times, Californi a v Texas Briefing 25 Cyberwar Warin the fifth domain

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33 34 Vol ume 396 Number 8689

first pubti . heel in Se pt ~ m b ~rt843 totokl'partin · a' .....",contl>5tbetween

intelligence, which pteSSel!or....ard, and an unworthy, timid ignoranceob5/ructing our progress. •

Editoria l ofliCft in London and ab a, Bangkok. Beijing . Ber lin . Brussels. y iro. Chicago. D~lh;. Frankfurt, Hong Kong, Je rusalem . Joh.nn~tJurg, Los "'n901es,

Leaders The threat from the internet Cyberwar Financial reform in America Adecent sta rt China and Taiwan Knowyour customer The return of wheat rust The disease eating away our daiLy bread Global economic policy Austerity aLarm Bad language Against "fairness~

United States Guns and the Supreme Court The uninfringed Espionage Spies like us China policy Yuanimpressed The " mini-stimulus" Aprophet in his own house South Carolina Wacky races Louisiana's economy Sue, baby, sue Biofuels under scrutiny The age of ethanoL lexington USS Kagan prepares to set sail

The Americas 35 Brazil's presidential campaign In LuLa's footsteps

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Asia China and Taiwan The ties that bind? Japan's sumo scandal Caught off-balance The Philippines changes president Sic transit GLoria Bangladesh and war crimes BLighted at birth Areferendum in Kyrgyzstan Better than feared Pakistan 's role in Afghanistan Ganging up on India Banyan Asian urbanisation and climate change

Middle East and Africa 44 The religious right in east Africa SLain by the spirit 45 SomaLiland's election ALittLe bit of hope 46 Commerce in Iraq Why business is still in the dumps 46 JerusaLem's settLements Yet more controversy 47 A power struggLe in Iran Over the country's biggest university Europe 48 German poLitics Angela Merkel is reprieved 49 The Bettencourt affair Sarkozy's cosmetic problem 49 Hungarian politics Orban flexes his muscle 50 Catalan autonomy AnationaLity, not a nation 50 The Greek economy Protesting, weariLy 51 Church and state in Russia Art under arrest 52 Charlemagne What's really wrong with the Eurocrats

Gun control Two-nil to the gun lobby, but with pLenty of money still to be spent on lawyers, page 29 . Bewa re: beh ind the civiLity it's a war out there in the Supreme Court: Lexington. page 34. Farewell to Robert Byrd, senatorsenotorum: Obituary, page82

Brazil's next president DiLma Rousseffis cruising towards victory on the coat·tails of the ever-popuLar Lula. But there is moreatstakein October's eLection than meets the eye. page 35

Wheat rust Agenuine food scare to worry about-a nd also Learn from: Leader, page 14. Acrop-kiLLing fungus is spreadi ng out of Africa towards the world's great wheat-growing areas, pages 57-58

Mexico City. Moscow, New York, Par;', San Franc:iI<:O. sao Paulo, Tokyo , W.shington

•• Contents continues overleaf

4 Contents

The Economist July 3rd 2010

Britain 53 Poverty in austerity

Still with us 54 The budget wars Once more unto the breach

Energy Big oil firms are chasi n9 after gas, which is less

risky and more accessible, page 59. Why large companies

of all sorts are sitti n9 on cash, page 68 and why they are

gaining from e-commerce: Economics focus, page 74

55 Criminal-justice reform The rattling of keys 55 Outsourcing torture Back before the courts 56 Bagehot Thetimeofthethree kings International 57 Farming Rust in the bread basket 58 Sanctions on Iran Anything to declare?

59 60 61 61 62

Reforming WaU Street The Dodd-Frank bill is no panacea, though it fixes some important things: leader, page 12. The

battle in Congress continues, but the int ernational picture is

murkier stilL pages 65-67. I n defence of Sarbanes-Oxley: Sch umpeter, page 64

62

Business Oil firms dash for gas Vapourtrails Biotechnology Chemistry goes green Portugal v Telef6nica Overruled BiginJapan The cult of Peter Drucker Corporate crime Not guitty? Sportswear The swoosh heard around the world

70 Iron-ore derivatives Fixed are floating 72 Buttonwood Anaemic equities 74 Economics focus The effects of e-commerce Science and technology 75 Disease and intelligence Mens sana in corpore sano 76 Ocean acidification The other carbon-dioxide problem 77 The genetics of ageing Methuselah decoded Books and arts 78 lebanon Garden ofthorns 79 The politics of nudity Flashing flesh 79 Caravaggio Dial Mfor murder 80 Joys of craftsmanship Handy work 80 The S&l crisis Wisdom of experience 81 New York' s 1939 World' s Fair All love and war 81 Fakes and mistakes Whodidn'tdoit? Obituary 82 Robert Byrd Doyen of the Senate

Briefing 6S Financial regulation Not aU on the same page

89 Economic and financial indicat ors Statistics on 42 economies, plus closer looks at global M&A and the world's biggest ba n ks

69 Intelligence and disease

69

Parasites a od pathogens may explain why people i n some parts of the world are cleverer

70

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Next week We publish a special report on gambling. Theinternetis radicaUychanging the business of gambling. Now policy must catch up, argues Jon Fasman

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Finance and economics Companies' cash piles Show us the money Klaus Regling Eu rope's bail-out officer China and Taiwan Branching in Joe Cassano at the FCIC No ordinary Joe

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Politics

plied to federal curbs on guns.

This case concerned a ban on handguns in Chicago.

China and Taiwan signed one

of their most significant agreements since 1949: a deal designed to liberalise trade and investment across the Taiwan strait. Hundreds of tariffs will be reduced in both directions. 80th governments are eager to convince Taiwan's voters that they will benefit from stronger ties with the mainland. The Philippines inaugurated its new president. Benigno "Noynoy"Aquino is the son of the late Corazon Aquino, who led the "people power" revolution against Ferdinand Marcos in1986. In his first speech as president,Mr Aquino pledged to stamp out corruption. Nepal's prime minister, Madhav Kumar Nepal, announced hisresignation,justin time to avoid what might have been a messy confrontation during a budget session. His departure comes as part of a deal with the Maoist party, which wants its own leader at the head of government. Only two weeks after horrific rioting in Kyrgyzstan killed perhaps 2,000 people and drove hundreds of thousands of ethnic Uzbeks from their h omes, the interim government held a nationwide referendum. International monitors praised the polling, in which an overwhelming majority voted in favour of devolving power from the presidency to the parliament. Australia's new deputy prime minister held days of closeddoor negotiations with the bosses of big mining companies, in an effort to resolve a heated dispute over the imposition of a proposed "super profits" tax. Bang bang In a huge setback for advocates of gun control, America's Supreme Court ruled by 5-4 that local- and state-government restrictions on owning handguns were unconstitulion aI, extending the remit of a decision in 200S which ap-

the Senate and laid on the same catafalque that was used

at Abraham Lincoln's state funeral.

In another 5-4 decision the Court also decreed that stu·

Friends again?

dent clubs which seek recognition at public universities must adhere to requirements

Turkey closed its airspace to Israeli military flights, a

that they offer admission to all students, regardless of background. A Christian society at the Hastings College of Law in San Francisco lost the case. It has been told it cannot exclude gay students.

month after Israel's deadly raid on a flotilla to Gaza in which nine Thrks were killed . Nonethe less, an Israeli envoy held secret talks with the Thrkish foreign minister to begin restoring frayed ties between the former allies. Voting took place in Guinea to elect a new president. Sekouba Konate, the military ruler, promised not to stand for any office and to return the country to civilian rule, which was suspended after the army seized power in 2008. Asno candidate is likely to win the first round of voting outright, there will be a run-off.

The Senate held confirmation hearings for Elena Kagan, Barack Obama's choice to replace John Paul Stevens on the Supreme Court. RepubHcans focused on Ms Kagan's lack of experience as ajudge (she wasan academic before being appointed solicitorgeneraD.Ms Kagan emphasisedher "mo dest" approach to legal reasoning. Legislators in Congress moved to cut almost $4 billion in aid to Afghanistan after a newspaper expose of corruption in the country. The FB I claimed to have uncovered a Russian spy ring. The agency spent a decade infiltrating the cadre of undercover Russians, who lived as normal suburban Americans but were allegedly gatheringpolicy information. Ten people were arrested in Ameri ca, but are not charged with espionage. Another man was detained in Cyprus and granted bail; he then disappeared. Robert Byrd died at the age of 92. The longest-serving senator in American history was first elected to the Senate to represent West Virginia in 1955. Mr Byrd's coffin was brought to

The East African Community came into force onJuly 1St. The member states of Burundi, Kenya, Rwanda, Tanzania and Uganda hope their common market will promote freer movement of labour, money and services, and maybe eventuallythe adoption of a com mon currency. But observers are not expecting the countries' lucrative customs posts to be dismantled. America's Congress approved tougher sanctions on Iran, targeting foreign companies that supply the Revolutionary Guards or d eal with the country's energy sector. Stranger than fiction wo brothers who allegedly hired a hit man to kill Rodrigo Rosenberg, a lawyer in Guatemala, handed themselves in to authorities. The country was plunged into a deep political crisis when Mr Rosenberg recorded a video accusing the president of ordering his murder, and then suppose dly arranged it himself. Haiti scheduled its presidential election for November 28th. The vote was postponed after the country's devastating earthquake in January.

Rodolfo Torre, the leading candidate to be governor of the state of Tamaulipas in Mexico, was shot dead in his motorcade six days before the election. He had promised to fight drug-trafficking gangs. Wulff call The election for a new president of Germany, a largely ceremonial role, had to go to a third round of voting in the Reichstag after Angela Merkel's pick, Christian Wulff, failed to secure the outright support of legislators in two previous rounds. Mrs Merkel is under pressure from some of h er coalition partners over the government's austerity measures and support for a eurozone bail-out. There were riots in Greece as parliament debated pension reform and cuts to public debt that are being demanded by the IMF and European Union in return for a rescue package. In Spain workers on the Madrid Metro caused disruption when they went on strike over government budget cuts.

A statue of Joseph Stalin that had stood in his hometown in Georgia since the 1950S was quietly removed to a museum overnight by the authorities. Gori is to get a replacement commemorating "the victims of Russian aggression"in the 200S Russia-Georgia war.

..

8 The worLd this week

The Economist July 3rd 2010

Business The House of Representatives approved the Dodd-Frank bill, which if passed by the Senate will bring in the most sweeping changes to America's

financial regulatory system since the 1930S. Negotiations had been completed on ironingau! the differences hetween the House and Senate versions of the finallegislation, but they were reopened

after Republicansobjected to some last-minute amendments; a proposal to impose a tax on banks and he dge fun ds was subsequently removed.

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Office produced a gloomy long-term outlook for Amer ica's budget. The agency forecast that under current law publicly held federal debt would rise from an estim ated 62% of GDP this year to 80% in 2035. But under its alternative fiscal scenario, which factors in costs that are expected to accrue but are not presently accounted for, such as increases in Medicare paym ents to doctors, public debt could reach 1.85% of GDP in 2035. Money-go-round

Worries about the health of banks in the e uro zone contributed to a sharp fall in stockmarkets around the world as around 1,100 banks prepared to repay €442 billion ($613 billion) in one-year loans they borrowed from the European Central Bank lastJune. Investors were relieved by news that the take-up of new ECB three-month loans offered to banks was much lower than expected, though signs of economic weakness in America and China continued to trouble investors.

With the share prices of Spa nish banks coming under heavy pressure, Spain's central bank announced that the consolidation of the country's savings banks, or cajas, was nearly complete; they will get €ll billion ($13.5 billion) to help the restructuring. The European Union pushed forward with a controversial plan to rejig ba nke rs' bonuses that would reduce the amount payable in cash and increase the element of shares in bonus schemes. The unfriendly skies The WTO made public its ruling on Boeing's six-yearold complaint against Airbus . The thrust of the decision was already known and, as expected, the trade body found that Airbus, and particularly its A380 super-jumbo project, benefited fro m illegal European subsid ies. Airbus m aintained that 70%of Boeing's claims had been rejected and that the W TO could not find that European launch aid resulted in a "material injury" to American interests, nor that the subsidies caused losses in jobs and profits in America's aircraft industry. A preliminary ruling on a counter case brought by Europe against Boeing is expected this month.

There wasa twist in the battle to win control of Vivo, the Brazilian mobile-phone operator owned by Spain's Te le (anica and Portu ga l Telecom , when the Portuguese government blocked Telef6nica's bid to buy PT'S stake in the business. Telef6nica had earlier raised its offer to €7.lS billion ($8.8 billion), to which 74% of PT shareholders agreed. The board of Le Monde backed a takeover bid put together by three businessmen, all of whom have links to the opposition Socialist Party; after journalists at the French newspaper voted against a rival offer from a consortium that included France Telecom. Noble, the world's secondbiggest offshore-drilling contractor, agreed to buy F D R Holdings, valuing its smaller rival at $2.16 billion. Noble operates in the Gulf of Mexico; its share price has dropped by around 25% since the explosion on the Deepwater Horizon rig in April and the resulting oil spill. The company said the acquisition would bring immediate cashflow benefits. In one of India's biggest-ever mergers, Re liance Communications sold its mobile-mast business to GTL Infrastructure

in an$u billion deal that was made possible only by the recent ending of a feud between Anil and Mukesh Ambani, brothers who between them control the various Reliance industries. TeslaMo tors' debut on the NASDAQ stockmarket was a success. Tesla, a maker of electric sports-cars, has developed a saloon, the Model S, which is expected to sell for around $50,000. Despite losing almost $300m since its launch in 2003 by a group of Silicon Valley entrepreneurs, including Elan Musk, the company's chief executive, Tesla increased the number of shares it offered to meet strong demand. Its share price rose by 40% on the first day of trading. Some right royal interference

Ajudge described Prince Charles's intervention last year to halt a bUilding project of lux ury apartments in central London as "unexpected and unwelcome". The prince communicated his dislike of the design of the modernist complex to the Qatari emir. The property arm of Qatar's sovereign-wealth fund had backe d the project. Other economic data and news can be found on pages 89-90

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11

Cyberwar It is time for countries to start talking about arms control on the internet

HRO UGHOUT history new technologies have revolu· lionised warfare, sometimes abruptly, sometimes only gradually: think of th e chariot, gunpowder, aircraft, radar and nuclear fission. $0 it has been w ith information technology. Computers and the internet have transformed economies and given Western armies great advantages, such as the ability to send remotely piloted aircraft across the world to gather intelligence and attack targets. But the spread of digital technology comes at a cost it exposes armies and societies to digital attack. The threat is complex, multifaceted and potentially very dangerous. Modern societies are ever more reliant on computer systems linked to the internet, giving enemies more avenues of attack. If power stations, refineries, banks and air-traffie-control systems were brought down, people would lose their lives. Yet there are few, if any, rules in cyberspace of the kind that govern behaviour, even warfare, in other domains. As with nuclear- and conventional-arms control, big countries should start talking about how to reduce the threat from cyberwar, the aim being to restrict attacks before it is too late.

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The a rmy reboots Cyberspace has become the fifth domain of warfare, after land, sea, air and space (see pages 25-28). Some scenari os imagine the almost instantaneous failure of the systems that keep the modern world turning. As computer networks collapse, factories and chemical plants explode, satellites spin out of control and the financia l and power grids fail. That seems alarmist to many experts. Yet most agree that infilt rating networks is pretty easy for those who have the will, means and the time to spare. Governments know this because they are such enthusiastic hackers themselves. Spies frequently break into computer systems to steal information by the warehouse load, whether it is from Google or defence contractors. Penetrating networks to damage them is not much harder. And, if you take enough care, nobody can prove you did it. The cyber-attacks on Estonia in 2007 and on Georgia in 2008 (the latter strangely happened to coincide with the advance of Russian troops across the Caucasus) are widely assumed to have been directed by the Kremlin, but they could be traced only to Russian cyber-criminals. Many of the computers used in the attack belonged to innocent Americans whose pes had been hijacked. Companies suspect China of organising mini-raids to ransack Western know-how: but it could just have easily been Western criminals, computer-hackers showing off or disillusioned former employees. One reason why Western governments have until recently been reticent about cyber-espionage is surely because they are dab hands at it, too. As with nuclear bombs, the existence of cyber-weapons does not in itself mean they are about to be used. Moreover, an attacker cannot be sure what effect an assault will have on another country, making their deployment highly risky. That is a drawback for sophisticated military machines, but not neces-

sadly for terrorists or the armies of rogue slates. And it leaves the dangers of online crime and espionage. All this makes for dangerous instability. eyber-weapons are being developed secretly, without discussion of how and when they might be used. Nobody knows their true power, so countries must prepare for the worst. Anonymity adds to the risk that mistakes, misattribution and miscalculation will lead to military escalation-with conventional weapons or cyberarms_ The speed with which electronic attacks could be launched gives little time for cool-headed reflection and favours early, even pre-emptive, attack. Even as computerised weapons systems and w ired infantry have blown away some of the fog of war from the battlefield, they have covered cyberspace in a thick, menacing blanket of uncertainty. One response to this growing threat has been military. Iran claims to have the world's second-largest cyber-army. Russia, Israel and North Korea boast efforts of their own. America has set up its new Cyber Command both to defend its networks and devise attacks on its enemies. NATO is debating the extent to which it should count cyberwar as a form of "armed attack" that would oblige its members to come to the aid of an ally. But the world needs cyberarms-control as well as cyberdeterrence. America has until recently resisted weapons treaties for cyberspace for fear that they could lead to rigid global regulation of th e internet, undermining the dominance of American internet companies, stifling innovation and restrictingthe openness that underpins the net. Perhaps America a lso fears that its own cyberwar effort has the most to lose if its well-regarded cyberspies and cyber-warriors are reined in. Such thinking at last shows signs of changing, and a good thing too. America, as the country most reliant on computers, is probably most vul nerable to cyber-attack. Its conventional military power means that foes will look for asymmetric lines of attack. And the wholesale loss of secrets through espionage risks eroding its economic and military lead. Hardware and soft war If cyberarms-control is to America's advantage, it would be w ise to shape such accords while it still has the upper hand in cyberspace. General Keith Alexander, the four-star general who heads Cyber Command, is therefore right to welcome Russia's longstanding calls for a treaty as a "starting point for international debate". That said, a START-style treaty may prove impossible to negotiate. Nuclear warheads can be counted and missiles tracked. Cyber-weapons are more like biological agents; they can be made just about anywhere. So in th emeantime countries should agree on more modest accords, or even just informal "rules of the road" that would raise the political cost of cyber-attacks. Perhaps there could be a deal to prevent the crude "denial-of-service" assaults that brought down Estonianand Georgian websites w ith a mass of bogus requests for information; NATO and the European Union could make it clear that attacks in cyberspace, as in the real world, will provoke a response; th e UN or signatories of the Geneva Conventions could declare that cyber-attacks on civilian fac ilities are, like physical attacks with bomb and bullet, ~.

12

leaders

The Economist July 3rd 2010

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of bounds in war; rich countries could exert economic pressure on states that do not adopt measures to fight online criminals. Countries should be encouraged to spell out their military policies in cyberspace, as America does for nuclear weapons, missile defence and space. And there could be an international centre to monitor cyber-attacks, or an international "duty to assist" countries under cyber-attack, regardless of the nationality or motive of the attacker-akin to the duty of ships to help mariners in distress. The internet is not a "commons", but a network of net-

works that are mostly privately owned. A lot could also be achieved by greater co-operation between governments and the private sector. But in the end more of the burden for ensuring that ordinary people's computer systems are not co-opted by criminals or cyber-warriors will end up with the latter-especially the internet-service providers that run the network. They could take more responsibility for identifying infected computers and spotting attacks as they happen. None of this w ill eradicate crime, espionage or wars in cyberspace. But it could make the world a little bit safer. _

Finandal reform in America

A decent start A somewhat clumsy bill is hardly a panacea, though it fixes some important things T IS touted as the biggest overhaul of American finance Isince the Great Depression. The 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act, now nearing the end of its odyssey through Congress, tackles almost every aspect of American finance from municipal bonds to executive pay. Its success, however, rests on a simple question: does it make another crisis significantly less likely? The reform does make progress in three critical areas: regulatory oversight, derivatives and dealing with troubled banks that are too big to faiL Yet by itself, this bill, whose passage in the Senate is still not quite secure, is an incomplete remedy (see pages 65-67). Much depends on how American regulators implement its provisions. Congress left several meaty matters for later, including the crippled mortgage giants, Fannie Mae and Freddie Mac. And even more is riding on how the Basel club of international banking supervisors compel banks to raise their buffers of capital and liquidity. Start with what the bill gets right. Though the financial crisis was global, it originated in America's uniquely fragmented financial system,overseen by a patchwork of federal and state regulators. Dodd-Frank missed its chance to eliminate that patchwork, but offers decent alternatives. It creates a council to advise regulators on emerging threats. It consolidates oversight of consumer financial products, from mortgages to credit cards, in a single agency. And big financial firms that aren't banks can be yanked into the embrace of the Federal Reserve. Though a secondary player in the crisis, derivatives are a perennial candidate for causing the next one because they add opacity and leverage to the financia l system. Most derivatives that now trade dealer-to-dealer will be traded on public exchanges. That will lessen the risk that one dealer's failure brings down others. An extreme proposal to stop banks trading derivatives has been mercifully scaled back. (The Volcker rule, limiting banks' ability to trade on their own account, also seems likely to hurt Wall Street profits less than some feared.) The most important provision is the resolution authority under which federal regulators can seize any financial company whose failure threatens the financial system, and quickly payoff secured creditors while imposing losses on shareholders and unsecured creditors. This is an improvement on

the status quo. Such resolution authority already exists for banks, but for other companies like Lehman Brothers and American In ternational Group, regulators face a dreadful choice of either bailing out the company and its creditors or letting it go bankrupt. Yet in its zeal to protect taxpayers, Congress has made the resolution process so similar to bankruptcy that counterparties and lenders may still choose to abandon a troubled firm to avoid losses. Other steps are still needed: for example, regulators should create a new ring-fenced group of creditors who would be exposed to losses in resolution. But the horrible truth is that the effectiveness of any such body w ill be discovered only when a real crisis occurs. Meanwhile there are two other ways to mitigate the risks flowing from banks that are seen as too big to faiL One is to claw back the subsidy such firms enjoy in their borrowing, both to encourage them to shrink and to pay for the clean-up when they faiL Barack Obama has proposed a bank tax that would serve the purpose. Despite the failure of the G20 to agree on such a tax last week, America (and other countries) should press ahead. The other is to force financial institutions to have more capital and liquidity to make collapses less likely in the first place. Negotiations in Basel have slowed as Europeans fret that stiffening standards may slow lending and hinder economic recovery. Implementation should indeed not be rushed. Yet in the longer term bigger buffers are essential. Still a work in progress In America Dodd-frank's actual impact will depend greatly on how regulators like the Fed and the new consumer agency enforce its provisions. The risks cut two ways. Banks and their lobbyists may persuade regulators to interpret the new rules in the friendliest possible way to Wall Street, as they did before the crunch: the treatment of the ratings agencies, which seem to live a charmed life, will be a good test. In the opposite direction, regulators may overreach-stifling innovation which, for all its recent excesses, has over time been a force for good. At the G20 Mr Obama boasted of "leading by example" on financial reform. In fact, Dodd-Frank is too idiosyncratically American and too incomplete to be a true template for others. And his claim that it would keep a financia l crisis like the one the world just went through "from ever happening again" is bound to prove wrong. Yet imperfect though it is, the reform is proof that even a government as fractious as America's can move with impressive speed when the motivation is there. _

The Economist July 3rd 2010

14 leaders China and Taiwan

Know your customer That China is trying to bribe Taiwan, not browbeat it, is good news. But Taiwanese caution is still warranted HE Economic Co-operation Agreement, or TFramework reached this week beECF A,

tween Taiwan and China was hailed by both sides as one of the most important landmarks on the road to lasting peace since 1949. That was when the Communists routed the Nationalist Kuomintang, the KMT, leaving it with Taiwan as a last redoubt. The ECFA is indeed a welcome development, though it guarantees neither peace nor China's ultimate goal, the "reunification" of Taiwan w ith the mainland. It should be taken for what it is: a trade deal that should help Taiwan both economically and politically. Fear that it brings Chinese sovereignty closer has made the ECFA bitterly divisive in Taiwan itself. Its critics point out that China has never ruled out the use of force to bring about unification, nor stopped adding to its battery of coastal missiles menacing the island. They regard the ECFA as war by another means; a Trojan horse that Taiwan shou ld have shunned. These critics are right about China's intentions-to win support in Taiwan . But there are still at least three good reasons why Taiwan (and the West) should welcome the deal. First, it is, as befits a sop to public opinion, a good one for Taiwan's export-oriented economy (see page 39). It not only opens up the Chinese market further; it also reduces the risk that Taiwan, the world's 17th-biggest exporter, will be left isolated, by the "noodle-bowl" of bilateral trade agreements, in which its regional competitors are entangling their economies. Second, its impact on Taiwan's domestic politics will be limited. Voters there understand China's intentions very well and are unlikely to be swayed by a few tariff cuts. A tiny minority favours imminent unification. A slightly larger minority

would like the island to declare formal independence soon. But, since a declaration of independence might provoke a Chinese invasion, the vast majority would like to prolong Taiwan's current, peculiar status of de facto independence. Politics in Taiwan looks like a battle between pro-independence and pro-unification camps. In fact it is about how best to preserve the status quo. Since the alternative might mean a war, possibly even w ith America, Chinese moderates also have an interest in that status quo. That is the third advantage of the ECFA. In China it can be used to show hardliners that, slowly, progress is being made towards unification. China's bellicose approach to Taiwan as it embraced democracy in the 1990S achieved the opposite: its sabre-rattling boosted support for Taiwan's pro-independence opposition. The wonders of democracy Those who accept bribes should do so wa rily. Taiwan needs to be careful that the secretive way ECFA has been negotiated does not become a model for the future. The Beijing regime has always preferred to clinch deals behind closed doors. It remains petrified of democracy in Taiwan, and in particular of anything, such as a referendum on ECFA, that might smack of a plebiscite on Taiwan's future. And it is still not clear whether China will now tolerate its other trading partners signing trade agreements with Taiwan. This could provide China with the chance for a new form of blackmail over Taiwan. Against that, such skulduggery would lose China the goodw ill it has bought this week. China has always played a huge role in Taiwan's politics. Better that it should play it the ECFA way, with trade and other benefits meant to entice and reward, and gain popularity. than the old one, with belligerent th reats and diplomatic pressure designed to frighten and coerce. _

The return of wheat rust

The disease eating away our daily bread A genuine food scare to worry about-and also learn from

I

N at a research station in south-west Uganda, William IWagoire, a plant breeder out 1998,

Stem rust Cou ntri .. with confirmed ca , ~ ,

checking his crops, came across someth ing th at everyone thought had been driven from , , , , , , , " 0 the face of the Earth: the crim1999 2001 03 05 07 1)9 son cankers of stem rust. a disease that was once wheat's deadliest scourge but had not been seen since the Green Revolution that transformed agriculture in the second half of the 20th century. Since then stem rust has spread from a corner of Africa'sGreat Lakes to countries as distant as Iran and, recently; South Africa (see page 57). Scientists now fear that the fungus cannot be kept out of Punjab, one of

the world's great bread baskets. So far rust has not caused a disaster. But that is mostly because of luck, and luck does not last. In the right conditions stem rust destroys everything in its path. After decades in which they have not encountered the disease most of the world's wheat varieties have fallen behind in the endless battle of thrust and counter-thrust waged by predators and prey. They are defenceless. Wheat is the most w idely planted crop in the world, providing a fifth of mankind's calories. So the return of stem rust could cause vast suffering, threatening mass hunger in some of the world's most populated areas. Scare stories abound, but this is one worth taking seriously. Fortunately, the story of wheat rust-albeit punctuated with carelessness and complacency-is not just of destruction but ~~

16 leaders

The Economist July 3rd 2010

~ also

of unacknowledged successes. Plant breeders have come up with remedies and strategies that could keep stem rust at bay. But they urgently need more help. For decades wheat was protected by a single rust-resisting gene identified by Norman BorJaug, the scientist behind the Green Revolution (in fact the growth in yields that was that revolution's great achievement began with his research into rust). The evolution of rust to overcome this genetic barrier enabled the disease to spread. But in the past few seasons plant breeders have developed new defences. Instead of erecting a single barrier, they now set up several lower defences that reduce rust's harm. By itself, each would be inadequate. Together, however, they offer enough protection-and have the advantage thatitismuch harder for a disease to defeat four or five separate defences than just one. "Rust never sleeps," Borlaug once said. But it can be sedated. To go from identifying a disease to developing a new generation of seeds in a decade is remarkable. Plant breeders and the Gates Foundation financing them deserve credit, especially for acting before an epidemic, not during one. Alas, out in the fields of the emerging world, farmers do not have the same foresight. Profoundly conservative, most are reluctant to change the seeds they have been using for years unless they can see the threat. That alas is the road to famine. Knowingthis,seed banks, farm-extension services and other institutions exist to badger and educate farmers. But they have been run down. Borlaug's own International Maize and Wheat Improvement Centre (better known by its Spanish acronym, CIMMYT) has seen the budget of its global wheat pro-

gramme cut by 40% in real terms since 1980. In retrospect that complacency looks dangerous. Only five institutions in the world are able properly to identify stem rust, and three will not accept foreign samples. So though a lot of work has been done in laboratories, much more is needed outside them to produce seeds on a commercial scale, get them out in the countryside and persuade farmers to use them. It would be a far better use of public money than most farm subsidies. Insomniac rust At the same time, if such help is to have public support, the right lessons need to be drawn from the return of stem rust. For many people the resurgence of the disease is a cautionary tale of excessive scientific meddling, over-dependence on too few crops and genetic engineering. If only, the argument goes, the world had not made itself dependent on a single failed gene, wheat would not be under threat. The truth is almost exactly the opposite. Without Borlaug's rust-resisting wheat, millions more people might have been malnourished. The gene he discovered-ST31-was surely one of the most beneficial finds of human history. It was the product not of genetic engineering but of patient, old-fashioned cross-breeding, of the kind farmers have been doing for centuries. So is the new generation of anti-rust seeds. (Genetic-engineering efforts have started, but remain in the laboratories.> Science is the solution to stem rust, not the cause of its return. The real moral of the story is that farmers and breeders need every tool, including GM, at their disposal in the constant battle against disease, predation-and complacency. •

Global economic policy

Austerity alarm Both sides in the row over stimulus v austerity exaggerate, butthe austerity lobby is the more dangerous CONOMIC policymaking, like hemlines, has fads. Last .t.s %ofG OP o year the leaders of the G20 2: group of big economies led a : global Keynesian boost, pledg8 ing fiscal stimu lus worth a com2005 06 07 08 09 101 10 bined 2% of world GDP to prop 'Rkh ,,"oomi .. IF",,,. ,! up demand. At their most recent gathering, in Toronto on June 26th-27th, the club's rich-world members pledged "at least" to halve their deficits by 2013. Though they left themselves wiggle room, the change of tone was clear. Thanks to Greece's sovereign-debt crisis, which has terrified politicians, stimulus is out and deficit reducti on is in . The trend has been most noticeable in Europe, where every big economy has spelled out spending cuts or tax increases in recent weeks. But it is evident everywhere. japan's new prime minister, Naoto Kan, has pushed a debate about raising the consumption tax to the top of the campaign for the upper house of parliament. In America, Congress's fears about the deficit have thwarted the Obama administration's efforts to pass a new mini-stimulus(see page 3]). Until recently the deficit-cutting rhetoric exaggerated its likely short-term impact. Germany has long been one of the loudest proponents of the need for austerity. But its near-term plans (tightening worth 0-4% of GOP in 20u) are modest. Spain

I

G20 budgetdeficit*

E

was the only big European economy forced by financial markets into immediate, tough austerity. Yet now Britain has chosen that route, w ith a budget that promises tightening worth 2% of GOP in 2011. The expiration of America's stimulus implies a fiscal tightening of some L3% of GOP in 2011, a figure which could rise considerably if Congress prevented the ex' tension of George Bush's tax cuts. Much could change, but for now the rich world looks set for a collective fiscal adjustment worth around 1% of its combined GOP next year, the biggest synchronised budget contraction in at least four decades. Goodbye Keynes, hello Hoover To Keynesian critics the switch to austerity is a colossal blunder. Paul Krugman, an economist who writes in the New York Times, frets that officials who "seem to be getting their talking points from the collected speeches of Herbert Hoover" will push the world economy into a depression. With unemployment high, output far below its potential, private spending still weak and interest rates close to zero, Mr Krugman and his allies argue that fiscal stimulus remains an essential prop to the economy and that deficit-cutting now will spell stagnation and deflation. From the other side, supporters of the shift to austerity believe it is both essential and appropriate: deficit spending cannot goon forever, and by boosting firms' and households' con-

~~

The Economist July 3rd 2010 ~

leaders 17

fidence and lowering the risk premium on government debt, well·designed fiscal consolidation can actually boost growth. Jean-Claude Trichet, president of the European Central Bank, argues that fiscal thrift will increase private spending by reducing uncertainty about government tax policy and debt. Both sides of this debate oversimplify their cases. Mr Krugman's crude Keynesianism underplays the link between firms' and households' behaviour and their expectations of future tax and spending policy. For example, firms across the rich world are hoarding cash. Their reluctance to invest may have more to do with regulatory, financia l and fisca l uncertainty than weak consumer demand (see page 68). If governments address those worries, businesspeople may start spending. The advocates of austerity exaggerate more dangerously still. They base their argument on cases in the 1990S, when countries such as Canada to Sweden cut their deficits and boomed. But in most of these instances interest rates fell

sharply or the country's currency weakened. Those remedies are not available now: interest rates are already low and richcountry currencies cannot all depreciate at once. Without those cushions, fiscal austerity is not likely to boost growth. The austerity fad is also distorting politicians' priorities. Many European governments, for instance, are fixated on cutting their deficits, when they should also be trying harder to shake up their labour and product markets. A new analysis by the IMF suggests that fiscal austerity coupled with structural reforms would yield far higher growth than austerity alone. In America the new deficit-focused climate is preventing politicians from passing a temporary (and sensible) fiscal stimulus package without inducing them to tackle the sources of the country's huge medium-term deficit by, for instance, reforming social security. The result probably won't be another Hooveresque Depression. But it could be a recovery that is weaker and slower than it should have been. _

Bad language

Against fairness What's wrong with the British coalition government's favourite word OW could anybody dislike H the notion of fairness? • Everything is better when it is fair: a share, a fight, a maiden, a game and (for those who think blondes have more fun) hair. Even defeat sounds more attractive when it is fair and square. A sense of fairness, as any parent knows, develops irritatingly early. A wail of "It's not fair!" is usually the first normative statement to come out of the mouths of babes and sucklings. People seem to be hard-wired to demand fairness. Studies in which people are offered deals that they regard as fair and unfair show that the former stimulate the reward centres in the brain; the latter stimulate areas associated with disgust. For the British fair play is especially important: without it, life isn't cricket (especially when you score a perfectly good goal against the Germans and it is unfairly disallowed-see above, reO. Their country becomes quite pleasant when the weather is fair, though unfortunately it rarely is. And these days fair-trade goods crowd their supermarket shelves. Fairness is not only good, but also moderate, which is another characteristic that the British approve of. It does not claim too much for itself. Those who, on inquiry, admit that their health and fortunes are fair-to-middling navigate carefully between the twin dangers of boastfulness and curmudgeonliness, while gesturing in a chin-up sort of way towards the possibility of future improvement. The French have taken to using lefair-play in sport,presumably because (as their coach's refusal to shake hands with his opposite number after losing to South Africa suggested) their own culture finds the concept rather difficult. When talking politics, however, the French, like the Americans, tend to go for the more formal notion of justice. But fairness appeals to the British political class, for it has a common sense down-toearthiness which avoids the grandiosity of American and continental European political discourse while aspiring to do its

best for all men-and of course for maidens too, fair and other· wise, for one of its virtues is that it does not discriminate on grounds of either gender or skin colour. Not surprising, then, that Britain's government should grab hold of the word and cling to it in the buffeting the coalition has had since the budget on June 22nd proposed higher taxes and even sharper spending cuts. "Tough but fair" is what George Osborne, the Conservative chancellor of the exchequer, called the cuts he announced. "It is going to be tough, but it is also very fair," said Vince Cable, the Liberal Democrat business secretary. At last, something they could agree on. Fair dos Yet the fact that everybody believes in fairness is a clue to what's wrong with the notion. Like that other warm-blanket word, "community", it signals limp thinking. What exactly is "fair" about restricting trade, for instance? Or "unfair" about letting successful people in business or other fields enjoy the fruits of their enterprise without punitive taxes? "Fairness" suits Britain's coalition government so well not just because its meanings are all positive, but also becauselike views within the coalition-they are wide-ranging. To one lot of people, fairness means establishing the same rules for everybody, playing by them, and letting the best man win and the w inn er take all. To another, it means making sure that everybody gets equal shares. Those two meanings are not just different: they are opposite. They represent a choice that has to be made between freedom and equality. Yet so slippery-and thus convenient to politicians-is the English language that a single word encompasses both, and in doing so loses any claim to meaning. Fairness is fudge. This newspaper will have none of it. We reject the wide, woolly notion of fairness in favour of sharper, narrower words that mean what they say, like just or cruel. Sadly, British politicians are unlikely to follow our lead. They will continue to paper over their cracks with fairness. Which, given how handy the word is, is probably fair enough. _

,. Pakistan's politics

The new Republican agenda

SIR - Banyan took an overly

SIR - Your analysis of what is wrong with the Republican

pessimistic view about Pakistan Oune19th). He should have noted that Pakistan never gave democratic legitimacy to dictators even though such rulers became darlings of the West during the cold war and after the terror attacks of Septemberuth 2001_ Moreover, the world owes its gratitude to Pakistan for the sacrifices it made when the Soviets invade d Afghanistan. Today Pakistan's armed forces and people are making further sacrifices to defeat extremism and terrorism. Although this is not Pakistan's fight alone, no one should have any doubts about the resilience of the people and government of Pakistan in tackling the crises they may face from either the situation in Afghanistan or from outsi de interference.

ticians have been as adept as the military at pandering to the religious right. Witness Zulfiqar Ali Ehutto's proscription of the Ahmadi religious minority as "non-believers" and initiation of the " Islamic bomb" project, Nawaz Sharif wanting to declare that he was the Amir ul Momineen, or defender of the faith, and Benazir Bhulto, who authorised the Pakistan intelligence service's backing of the Taliban in Afghanistan. Military leaders don't always get it wrong. Under General Pervez Musharraf as president Pakistan saw its biggest ever economic boom, an effective grassroots administrative system was started,and an independent and vibrant media was encouraged.

Party hit one right note: voters expect solutions, not just rage ("What's wrong with America's right",]une 12th). President Barack Obama and his party in Congress came to power by riding the powerful tailwinds of discontent; Americans were rightfully angry that some on Wall Street had caused a financial crisis that left many families with a pink slip instead of a pay che que. The Democrats have taken advantage of this anger to force their agenda through Congress, while blocking Republican bipartisan solutions. Democrats have steamrollered through both chambers their policies of expanding governm ent, increasing spending and swelling our debt. It is no surprise that American voters are once again angry, sick with bail-out fatigue, government overreach and runaway spending. Americans feel like Washington is no longer listeningtothem . This new wave of anger offers the Republican Party an opportunity to promote its policies, which reflect the philosophy that America's future depends far more on empowering individuals than empowering big government. These pro-growth solutions, such as Paul Ryan's sound plan to deal with the deficit,include tax relief for individuals, fam ilies and small businesses, a comprehensive American energy bill and real health-care reform that lowers costs and improves care. Common sense solutions will not only sate voter anger and erase economic uncertainty, but bring sanity back to Washington policies.

SHAHIDJAMIL

SENATOR KIT BOND

London

Washington, DC

SYEDA SULTANA RIZVI

Pakist an high commission London SI R - Pakistan's civilian poli-

SIR - Reading about Pakistan's

SIR - Let me see if I understand

army reminded me of the old saying that there are countries with armies and there are armies with countries. Evidently Pakistan falls into the latter category.

The Economist's argument. You want a more centrist Republican alternative, more or less exactly like the option that John McCain offered as a candidate during the 2008 presidential election, but which you, aself-styled centre-

MURAU REDDY

Loke Hiawotha, New Jersey

right newspaper, rejected in favour of Barack Ohama, who thus far seems to he the most left-wing American president since the second world war. Now that the Republicans are testing the electoral waters with less centrist options, you decry this trend. Does that mean you're going to come out of the closet and tell us in plain terms that you made a mistake at the 2008 election? No, you equivocate here and there but are still plainly in the Obama camp. And then you tell us, laughably really, that the Republicans ought to mimic David Cameron's winning electoral recipe in Britain . This is the formula that saw Mr Cameron's Conservative Party increase its share of the vote from 33% in 2005, when the British economy was booming and the labour Party's Tony Blair was at the height of his powers, by a whopping three percentage points to 36%at the election on May 6th this year, when labour defended the most incompetent, financially bankrupt government and in Gordon Brown the most disliked prime minister I can ever remember. Wow! That's some model to emulate. JAMES ALLAN

Professor of law University of Queensland Brisbane Excellent j ournalism in LA - Thank you for acknowledging the "extremely good" foreign reporting in the Los Angeles Times in your leader on American newspapers ("Not dead yet", ]une12th). We are mystified, however, why you then suggest that we get out of the business of international coverage, and leave the cosmopolitan residents of southern California to having their global perspective largely defined by a single newspaper based on the east coast. We have the largest expatriate population of virtually every country in the world living within our primary circulation area. Our priorities reflect our readers' deep interest about places like Iran and South Korea; our state's

SIR

large military communities

deserve the commitment we have made to coverthe wars in Afghanistan and Iraq; and the intense local interest about the cross-bord er issues of immigration and Mexico's drug violence should not be left to the editorial whims of others. We find it disturbing that The Economist, a defender of globalisation, free markets and open societies, is seemingly cal1ing for a further diminution of Americanjournalism engaged with the world beyond our borders. RUSS STANTON

Editor Los Angeles Times Oh say can't you see It has been almost a year now since your leader and reporting on California v Texas ("America's future",July uth 2009). Although you proclaimed then Texas's bright future and California's m eltdown, issue after issue of The Economist suggests the opposite. Over half the articles in your recent Technology Quarterly Uune 12th) referred to California's innovative citizens, industries or researchers. By contrast, a quote in an article on new missiles from a consultancy based in Austin was Texas's only contribution, putting it almost on par with TQ'S references to Slovenia. Similar results are found in the regular science section of your newspaper, where two of the four articles in the same issue also highlighted California'sresearch. I challenge The Economist to perform asimilar check over the past12 months. If the Lone Star state is shining so brightly, why are your reporters so consistently drawn to the innovations illuminated by California's golden sun?

SIR -

MICHAEL SCHWERIN

San Diego _

letters are welcome and should be addressed to t he Edito r at The Economist. 25 StJames's Street. Lo ndon SWIAIHG E-mail: [email protected] Fax: 020 7839 4092 More letters are avail.clble at: Eco nom ist.com/letters

A proud history the strength of Warren Berkshire H~ltllla\\'ay (Note: the above portrait is not Mr. Buffett.) Nearly 15 years ago, GEICO became a proud part of Warren Buffett's famed holding company. Back then, the Gecko was one of the hardworking people - sorry, reptiles - in our GEICO offices. Now he's helped GEICO become not only the third-largest car insurance company in the country, but also the fastest growing. Which is no surprise. For over 70 years. GEICO has worked hard to save people hundreds on car insurance. So why not give the Gecko a call to see how much you could save? You'll find he's easier to reach than Mr. Buffett.

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Unfair fight Acorrespondent's diary explores the simmering violence in Papua, the easternmost corner of Indonesia, in a disput e over control of natural resources worth billions of dollars. Mostofthe guerrillas who fight forindependence have only bows, arrows a nd wooden spears Economi st.com/ asia

Under siege Blockaded by Israel, Gaza's 1.5m inhabitants depend on a network of tunnels t o bri ng i n everything from herbs to motorbi kes and to export their produce. Watch a slidesh ow of photographs by Bruno St evens, who has been recording life in Gaza for the past 11 years Economlst.com/ middLeeast

United States: Thejudge report Our bloggers pass judgment on the Supreme Court's latest batch of rulings and a pot ential new member Economist.com/ unitedstates

Asia: Sejong and the dty South Korea's president fi nds his attempt to scale back the building of a new city thwarted by members of his own party Economi st.com/asia

Science: Science in the Arctic The icy island of Spitzbergen appears isolated and inaccessible, but is i n fact rathertively Economist.com/science

Science: Rethinking the jet Jet engines have been poweri ng aircraft for decades. Some engineers think the time has come for a complete redesign Economist.com/ science

Africa: Somatitand votes Our correspondent observes a poll in a place considered by many to be beyond hope Economist.com/ africa

Economics: Summit for nothing Our guest network of economists debates whether G20 summits are worth having at all, and how such gatherings should go about solving global economic problems Economf st.com/ economics

Business: One to watch An obituary of Nicolas Hayek, who is credited with saving Swiss watch ma ki ng Economist.com/ business-fj nance Johnson: The sound of embarrassment An attempt to decipher the Russia n foreign mi nistry's statement about a spy ring Economist.com/ bLogs/ johnson

Business: End of an era, Live Larry King's departure provides CNN with an opportunity to rethi nk its news coverage Economi st.com/ business-fi nance Britain: Bagehot's Last stand The outgoing Bagehotcolumnistand the Britain editor discuss the foibles and failings of political commentary Economi 5t.com/britain

The

Economist

Tea with the general Wesley Clark led NATO's forces during the Kosovo crisis, ran for president in 2004 and now works for InZero, which specia lises in cybersecurity. He talks about the risk of cyberwar, how it differs from "warwar",and how defence contractors can triumph in cyberspace Economist.com/ a udlovldeo/ teawith

Dailychart: Winners and Losers An a nnua I review of the world's leadi ng banks shows which made-and which lost- most moneyin 2009 Economi 5t.com/ dai Lycha rt Subscribers to The Economist can search back 13 years by going to: Economist.com/activate

@Asia

Society'

Center on U.S.-China Relations 725 Park AYe. at 70th St.

New York City AslaSociet~org/RIVE R SofICE

21

Executive Focus

l ondon · Competitive packages A~

the UK', indepen!l@nl civil.wi~tic;ln regulator, !ilIf@iI'Mdingpub/ic is at the hurt of all the eM doe, whether by regulating nlety,

intere~t

promoting choke. value and fa ir treatment for iI~ation users or with respect to environmental issues around airporu. With 3n inftucnce that reilches around the globe, the eM plays a key role In helping to shape t he future of ..",ialian intltmationaUy.

It's an t)fciting time to join the CAA. Following the decision of Harry Bush, (jroup Dire
we are reshaping this role. The eM has recently launched a two-year development programme covering strategy and policy development, process improvements ilnd capability building. As Group Direttor, Regulatory PoUcy. you'll b@ rp5ponsibll! for driving fOfWard major policy devt'lopnwnts including.1n integrated approach to e(Ooomk reglitalion and consumer policy and influendng strateilic ,h~nge in the European ~rena. Furthermore the.> Queen's SpeKh Induded a 8iU to reshape and modernise the legrslation that appties to economK regulation of airports. So thiS is a pivotal point at which to le~d this Ktivity. Group Director rolt i~ a board level rol@. appoJnt~ by th@ ~t~ry of for Tr.-.s.port.. tlnd demands an elCceptional individual. You will have broad I!xperitncl! of policy developml!nt and regulatory thinking alongsidi! "sound gra5p of e
St~te

chllnr lind intE'flld E'ffE'dJvi!ly M challeng'ng i~S\U!S with h'gh profili! sta~l!ho!dl'n is ailical The eM is also looking 10 3ppoint 3 new Director of Economic Regul31 ion rE'porting to thE' Group Director. This is a eM appointnll'nt .md you will manllge the dl!velopml"nt of price cantrol propo'iills. W(UfE' complillO<1! from regu!8ted businelses and lead on the Implementlilion of lIny changes made 10 the r~gulalory Ira~r1LAs such. you'U oller strong leade.-ship skiHs. as well as firsl-class eKpertise and significant experience in ".'gul~tory E'conomics and thE' fT\/InagE'mE'nt of pric~ controa:. For more In/ormation em thue Imporhnt roli!s, Induding det~ib; on how 10 apply, plE'ase visit www.veredus.co.ukFOfaninlerma!and confidential d.stuuion please taU Vtiedus: Ka tie Yeo on 020 7932 4237, Pi!ler john on 0870 190 4383 or JamE'S Greengrass on 020 7932 -4286. The closing datE' for lIpplications is 10am on Monday 26 July 2010. The ~fIIment and eM promote afT ~lIiIl opportllnitks policy Appolnrmtntl ¥e madE' on mrrlt following a fiJIr af)(j Iransparenr process. andwe follow the guidelines of!he OffICe of lhe Commissionrr for Public Appointments. Applbtiom ;,re welcomed regarrJle« of gender. age, mar/la/status. di$abUity, religi<m, ethni!; origin, political opil1ion, sexual ork"tilrio" or whether or net)'Oll hil't'C ckPMrJ=b.

Department for

VEREDUS

Transport

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22

Executive Focus (,;, \> IU'''2\

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THE ~ WORLD BANK

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Deputy Director

Su,tainability on the World Stage

The ImernJtiooJi Sustainab ility Un it {lSUI,

J

division of The Prince's Char itie<; Foundation,

Finance Professional

is recruiting a Deputy Dire<;!Or. This Ilew post rellee!> the growing influence arid s<:ope of

the unit. The succcssful applicant will work closely with, arid when mxcssary deputise for, tllC Oire.:tor. Extern ally the Deputy Director will I"Slablish p.lftnershiP'l with third p.1fties inchJding NGOs, pr ivale comllilnics, academ ic institu tions and government agencies working on >ustai nability; espe<:ially OOdies such as The World Bank and the reg ional de\'elopmeol banks. Interna ll y thc Delll.Jty Director will work on sett ing overall $Iratcgy, >upcrvising research

The World Blink is the leadirg mJllilateral dev£lopnent instttutiorl and a Vital source of fnanClal and techlltcal aSStstance to developtng cOtmtnes around the world. The ContJoller's Vice Presidency is Imegral to the organililt on·s banking activities and is focused 0'1 'inancJaI integl1ty and rontrol. financial reporting and moni.ming, as WEll as O'l professional technical service in financial management ard accountilg.

projects, prepari ng budgets and team management.

The Financial Reporting a nd Analysis Division (CTRFA ~, under Ihe C()Iltro!ier"s Vice Presidency, is looking for a Firance Professional fo' its Washington. DC learn This position covers a broad range of duties tnc uding financial and nanageme'lt rel»ftrn~. corporate financial analysis, ard tecmiCllI actOlJllling under US GMP and IFAS.

The role will w it

iJ

profcssiooal with significa nt exper ience, ga ined within the global

>u stainab il ity agenda (e.g. sustaina ble agricul1ure, tropical forests, d imate cha nge, oceans, fisher ies or biod iversity). An ideal backgroond will ind~ working in developing coontries, with famil iarity of relevant pol icy Jnd knmvledge of bi·lateral Jnd multi· lateral relationships. Self confidence alld the abilily 10 operate al Ihe Vl'fY highesl level of Governments are important. Based in cenlral London the role will involve extens ive inler nalional travel. The ISU is a prominenl contributor to lhe global debate and works to achieve a consensus between the public, pr ivate alld NCO sectors orl critical is>ues affecti ng the developmellt of solutions 10 address the deplet ion of nalural capital. This is an exciling time for an experienced and dynamic indiv id ual ro help intluence the future of the debate and the ISU. Interested candidates shoold forward IheirCVro oor rl'Cru i lmenlconsul lan~ David Brownlow, by fX)S I 10: Hu ntswood, Abbey Gardens, Abbey SlrC<.i. Reading.. Berkshire, RGI 3BA or by ema il 10 isu6 huntswood.com or call 07795 81481 6 to disc[)Ss the opportun ity. Closing date for applications: 30th July 2010. First interv iews will happen over the following si x week$. Despite the sum mer holidays an earl y appointment is hoped for. There is an opportunity for there to be interim cover for the role whilst the recruitment process plays out - anyOilC interested should speak to David Brown low.

www.princescharilies.org

unite for

children

Selecti on Criteri a Ouahlted candrdales should al a rrtnlmum hold a CPA. CA or equlvalefll certification such as ACCA; haYc 0 minimum 01 5ycars rela tod cxpcricnco; Slronq koowled!le of fillaocial insuuments IIlciud n!l derivatives. and exceUent ana'ytical. interpersonal, and communicatioo skills. Prior e~perience in a major accOU'l1ng firm is a plus.

Spectfic delails and selection criteria are in t'1e IXlsitlOll description. The WOlld Bank is committoo to ach eYing diversir., in terns of gender. natio'l
• f ll"'l unlce ,,~

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

Programme Communication Specialists (Polio) Duty S t atio ns : New York Headqu3r1eIS, Regional Offices In Amman , Ket hmandu. Cou ntry Offices in Afghanislan, Angola, Chad. ORC, Nlgerie, Suda n Closin g D. t e: 16 July tOl0 If you are a commun ication a nd aocial mobilization expert passionato aoout making a luting diffe ' ence for ch'ldren, the world's leadmg children 's rights organiullion wou ld like t o hea r from you. Help UN ICEf acce le ra te its response to t he Gl obal Polio Eradicetion Initiative IGPEI) an d eradicate polio by 2012. Communication plays a cruclel role In polio era d ication, fostering underst and ing 01 t he disease and acceptance of the vaccine, and w e are looking for expe rienced programme communi<:atlon profeuionafa. All apo nlib ilit i..: • Prvvi tlu uvel"lIl~iltltlfship tu IIl:In~ IIIH:I ylo b,,1CUIIIIIIUI1;<:iltioll sllilto:g;IIH into operat lone] programmes toward developing commun cation plens o f ectlon for (I) beh aViour ch.nijo at the IndlvlduolJhousehold level; (bl SOCial mobililation of civil soc iety orRan;zations; and Ic) increased communi ty participation in end ownership of polio ef'ad iClltion pt ogremme. • In collaboration with govcrnment and GPEI partnors, load thc concept io n. design, f,eld·testing, SC (l i ing up and monitoring of innovetlve oomrnunicetion str·alegies; • ManaR e Monitor;nR & Eva lu ati on reporting process on socia l a nal ysis, strategy develop ment. programme indicators. communication outcomes lind impllCt on immunizll!iM Targets In r raginna l liM country I!'!VIII activitiAs; QualifiCllt;o ns: • Advanced university degree in social sciences. . 5· 10 y"arll prng'l!I'Isiv"ly rllspnMi blfl work fllrpflf,,, ncn in Ih" pbnning and m lHll' gement 01 soci al development program mes , includi ng 2-6 years in devel09lng co untries. • Fluency in English is required. Knowfedgo of Ihe local working langua901 of Ihe duty stationls) o f your inlerest is an assel . Villt us al www.unicef.org/about/employ toregisterinoure.flecruitmentsvstem. and search using exact kel'words 8S en ior Communication For Development Specialist" or ' P ro gr;,mme Communica tion Specialist Polio ~ to apply. PI J;:II¥J;: no!!r thlll o n ly candid il tn w ho alii under ~eriou s consitlefllti(ln wi ll be conlllcted. In Itte selection of Its SlIIff. UNICEF is committed to divf/i"S'1y and pender equillily lind without di$ rinction "$ /0 rllCe. If/]( or relPll,·on . • nd wi/hout dm:riminal ion 01 persons with disabilities: I-'hmen, nationals of devfllopinQ counrrifls. lind all .....ell Qualirsed CIIndidll r"S .re strongly encoJJt1IgiJd 10 apply.

the leading intemational insurance re s e arch c ent re, is 10000ing for a

Research Director - Head of Insurance and Finance Thc Hcad of In,U'Unl:C and Fina'''."C (Keseu,,·h l)ir«IO<) will Jim:1 lhe In,umncc and Fin.nce Kesearch I'rogmmme. a ~ "y piffar of 1lIe Go",,'·a A,socialion· ,
rol~

i ndlUi<' ·

• Boi ng current on ""w developments and lead ing research in in,urar,,:e and fina ...." • Managing 1lIeGene,'. As,ociation·s high ·level nelwork, in the insurance and fina ...." aren~ (esp. CFO and CIO indust!)' nelwork, as w~1t a, Ihose of leading re""archu,) • Rep",,,,nling The Geneva A<
• Readines, to travc1: attend coni."' ..... ' and mttting.< and visit "'pens in the field Qu«lijic""ons of rhe ctmr/ir/t!u:

• At least len year> of .. peri ..... e in in,umnceJfinar,,:e resean:h andior ha'·ing occup i.d a <enior finance_reb"d po,ition in the in,urance or wider financial "",,·ices indu
The Economlst July 3rd 2010

23

Executive Focus

£

THE CBlNESE UNI VERSITY OF HONG KONG

Dean of the Faculty of Law The Chinesc Uoi\'crsil), of 1·long Kong. founded in 1%.1. is rcwg nil.cd loc.1l1y. nationally :Uld inlem:llionally :1$ II IOlll"Jnkcd comprehensive research uni, crsi l), \\hose bilingunl and multicultural dimens ions of student education. scholarly output and contribution to thc community meet hIgh standards of c;\:cdlem;c. With 11 learn of on~r 2.000 full -tinl C teaching and research starr. the IIni\'ersi t ~' offers II broad spcclnJm of programmes up 10 PhD level in various disciplines organized under dght Faculties (\'i7. Arts. Au ,j nes.~ Administration . FcllIaltioll . Engineering. La ...... M~.:'dicil1(". Scit-ncc: and Social Science). In 2009-10. ullderl:rndwllc and postgr.'l(hHllctnrolmenl in puhli<:I)-rllnded pmgmmme~sl rlncl~ to II 500 ~mJ 3. 100 re~I>t.'\:ti\ ely (Jlllp:lIll'wlI-'.wM• .I;'I/UJIJ:).

Th.. Facu ll)

BE

lOB

Do you want to contribute to l atin

America and the Caribbean? You can make a difference at the Inter·American Development Bank.

We are sea rching for outstanding ind ividua ls to fi ll these pOSiti ons:

dAA~

Lead Specialist - Head, Treasury MiddLe Office

or I.,IIW

Si nce its est.'l.blishlllenl in 2:~ \\'ilh the fi rsl SllIdent intake in 2006. Ihc Facully of L~.I\\' has already seen lhe gmdU(llion of th rce LLM .one JD and one PCLL ( PO!a gnld uate Ccnifieale in UlWS) classes. The firsl LLB cohort I\ill gradU:lle in 2:010. Elliry 10 Ihe Facully of L..1w al evcry ICI'el ha$ heen highl) cnmpelili ve Cum:nllyaround 1,200 swdellts an; slwJ ying al the Fllcul ly. of whOoI11 260 life IIlldergroldulltc.s. Whilsl predominantly local lit IIl1dergr:ldllale lelel. Ihe s lmlenl body is intcrnaliul1al;u po~tgr..uullle Ind. \\ith tUfJtinuing e" lXln~iul1 . The Facility pridu ilself on h;lI'ing recruited an intcm(\tion ~1 team of over 40 rull' Lime tellching ami rcsc:Jrch sUlff. of \\ hom 70% tolllC from uUbkJe Hong Kong . Stale·of-Ihe-art racilities. including moot roorts. intemctive classrooms lind a specialized law library. have contributed to the creali!)n of an innOI atilc \\'orld-class leaching and research environmenl. J)clru I ~ of the Facuity n1.1y be found at JIIII':1I111IWJ(/I'·.ClI"k.~duJIJ:J.

Will collaborate with the Bank's Treasury (TRY) tactical groups to project, fore cast. analyze, calculate, teport and secure all TRY ct iliul business intelligence as well as drive general business p rocess enhancements to increase efficiencies and cont rols.

Attorney Will provide legal advice 10 Bank's man1lgemenl and professional staff with respect to HH! Bank's operations. As project counsel, he/she will participate in the planning, analysis, processing, negotiation, uecution and administration of lending and technical coopera tion operations, and formalize the correspon ding legal documentation.

T he l)eanshi p

Education Senior Specialist · Haiti

The Dcan<;hip of the F:K:ully or 1.;.1" \\'ill hemme \·ac.1nt from AlIgll"t 2011 . The University nuw invites al'plio.:alions tlml numiuf1tious of qualifird candidates for thl.' n(>xt Deanship. The Dean "ill be a nl4.'mbcr or the Unilc~ity senior mamlgemem Lellll1 reporting to the University Council via the Viee-Chanceilor/Presidt'nt orthe Provost. The Dean wi II lead the Facuh y. which is emergmg from i1s foundational slage. to ilS ne.xt stage of development. Hong Kong is an international cilY. \\(.,11 placed both geogr..l.phically lll1d cullLlrall y to playa preeminent role in mceling the educatiOnal needs of lhe fasl growi ng and increasingly globaliled AsilL-Pncific Region. l'long Kong's legal s)stem is on the one hand rooted in th e Common Law tradi ti on. Hong Kong demands on the other hand a wider ~ nowledge base and skill s on the part of its lawyers who an increasingly regionall), :and g10b..111y engaged. The new Dean willml'(lt with unilllW opportunities to dcvel op innol'ati\c tcaching and rescarch structures that cater tl) Hong Kong's and the region's special needs .

Will be responsible for the dialogue with the Haitian authorities and the partners of the Bank to deftne, propose and execute the education strategy and its implementation in the country. French Is a requ irement for this pOSition.

Operational Risk Management Specialist Will establish a fo rmal operalional risk management framework and coordinate with the re levant business units to mitigate opetational risks by undertaking periodic analysis on operational risk data to ensure past mitigation efforts have achieved the desired effects.

Senior Credit Risk Specialist Will be responsible for providing the assessment of t he main credit risks in the assigned non·soverelgn guaranteed operations, as a project team leader or individually ar'ld may undertake the credit r isk assessmen t of the Bank's treasury portfolio and derivatives counterparties.

RC(lu ired Quallfleations Cundidmcs should be legal scholars with intern:tl ion<~ swnding. qo.1lified for 1I1'pointmcnt at professor lel'el. They should ha\'c th e requisite c>;perienee. inle reSI and leadership qualities. including e ., cell ellL interpersonal and communielltion skills.

Economist (Andean region)

Salary lll1d frmgc benefils for the post WJII be hiGhly compcl llll"{'. commensu rule wi th qualifications and e:-.periencc. Please send applicalions/nominations under confidential cover. wjlh Ihe post marked. to the Search Commillte for the Deal1 of the Faculty of Law. clo Prol"osl's Office. The Chinese Unil'ersit y of 1I0ng Kong. Shalin . N.T.. llong Kong Ifu:: (852) 2696 1462: ... -mai l: S(,Dean ;hip-Lllw@ uab .c uh~ .edu.hk I. All appl ications/nominations will be trcat... d in stnet confidenrx. The I\:rsonal lnrorn13tion Collecti o n Statcment will he prol'idl'(lupnn requcst. Considcmtion of applications/nominations will continue unti l Lhe post is filled . The Uni\"C rsily rcSCI"'!'es th~' right 10 fililhe post by invitation.

The Economist July 3rd 2010

Are you looking for cha llenging work?

Will conduct policy-oriented comparative economic research and provide advice on economic trends and deve lopment as pects in lhe And@an (@gionto op@rational unitsofthe Bank concerning the content and contribution to development of their
,'IDB

For full lob descrlptio ru, assignment locations, respooslblllUi!$ an d requ irements please go to www.ladb.org/caree rs The lOB offCfS ~ com pctlU~e tompcu$Oll1on ~nd benefits pa[k~g~ ~nd a dlVl'fn ~nd tnttusln wetk !nvlfenm~nt .

24

Executive Focus

f~

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......

..:-.;,: , ;;.r Mekong River Commission The role of MRC is 10 promote IIIld roortltnale &uSl.unable miinagement and developmenl of water and related resources for the countries mutual beoer.t and 11111 p&oples· wen being. MRC Is looking lor II higtl cabbefcandoOale woo Is a nabonal of anyone 01 tile toor L<mef Mekong Coonlnes 10 lin \he position 01 CEO 01 ~s $eaetaiat when the lerm 01 the im:urmen t international CEO ends in ea~ 2011.

Chief Execulive Officer (CEO)

The

ceo leads me MRC Seaelanat, which has two office 1oca1l0ns in Vientiane.

Lao PDR, and Phnom Penh , Cambodia, to become a world dass, financial~ secure, prl)f&sslonal. int&mational organization, 58M"9 M&kong counlries 10 achieve the B(l~ VISion It enSUlCS lhot the orgonllll1ion octivc!y works for Il"Ic implcrnerl!O~on of the MRC Mi$S'on through all b proglllMmeS lind ac:ttvi~es. The CEO IS the SlJalegic, strudured resull·orienled, and ooulralleader respcnsible fQ" inspinng the MRC Secretariilt and other &lakel1oklers II) work together to acruevt a vision lor II Mekong River Basin that iseconom CIIlI)' ProspeI"!IOOs. socially ).lsl and environmenlal.,. sound.

An expression 01 intere&! rOf \he position should include lhe rolowing . • PeraxlIII O!!taJs °C..n::.a.ntWae' CandiOate·s Ml!temt!nI0 MRC Pt!fSOIlaI HisIory Fam C. m bod ia Na lion al U.. ko ng CommiUee Viet Nam National Mekong Committee 23 H8fl\I Tre. Ha Noi. \WI Nam 23 MIlO nEt To un ~ ROItd, E. mait vnmc.p!!!!!!!IelCl/lJTlail.com Phnom Penh. Cambodia Th li Na tiona l Mekong Com mittee E·ma~· oU_$OphannaQcnmc.govkh Department of waler ReSOU"Oes

Llo National Mekong Committe.

18(Y3 RI!I"UI 6 R()a(j .

SOl P!1W WIllana Building

Prime M,nister"1 OffICe. Vlertflilne. lao PDR Phayllhai. Bangkok 10400 Th8i1and E·mail: II"tl"l'l'?Gll"llTl(:rTl(lkong org E·maiI: tnme8dwr.ma~ ao II"t

euras ia group

II

Deflfllng the Budne.\s of

Senior Level Opportunities Available

THE INSTITUTE O F INTER NATI ONAl. FI NANCE The 1",'I;"'le ofJ,,(~rn"'iQMI Firnm<'e is rhe I\vrld's largesl 8/0/",/ (lssucialion "ff;~(1~<'i(l1 iMlill'lions will, m'a 400 member" i~ mort /I"", 70 <'OImlrio. We "r()"ide t'Collomi,' ",wl),sis 10 "ur memb"" <m global mocroccorwmic ",,,/ t'Ul'ital ",,,,kel ,/el'l:/opmmlS, ocl as" ....hide/or exchanging ,.iews "n g/ob,,/ SI'f'l'n'isory ami re8"I(l/o,-y issues, and sen'cas af"rurnfor "nsaging tI,e pril'OIefi'tancial communi!." in discussions with Ihe ,,,,blic secWr <'" emerg ing markets policy iss""s.

C hid Reprl'Senla l;" c, III'

Po~tic.s.

Rcpr~cnt a lh'c

Office, Beijing, China

The Institute "~rren{ly seeh a Chief Re~mali,'e (0 be bastd in Beijing {() manage the II F Repre"""lali\'e Office and 10 f(K~S on member relations alld .. g~lruory policy !k"elopmenls in China and lhe reg ion. Resron,ib i)il"'s "'ill include de\"Olop ing aoo enhancing re!alionshirs ",ilh regional financ;al firms aoo wilh global financial firms wilh offices in lhe region. The Chid Kcp<escnlali'·e will also fo<;us on <.Ie,·cloping and enhancing re1a' ionshirs ",i,h global and regional regul.tory bodies. Appl icanls should ha'·e at leaSl 10 years· prof.,,;o",l "perience in the fin",,,ial services indu
Senior Econo mist - As ia/Pacific The Senior E<;O'lOmi!ical and information sources . Hei>he will also be expeeled 10 main'ain dulabascs of hi,tori(:all irnc scries and forecaslS for assigned ,·ountries. mainta in and dIed dJlabases for co",i'tency. ron,truel e.temal financing aoo debt profiles. maintain real·time monthly data. and prepare final databases both for internal u>c and external ci",ulal ion. Appl icanlS ,houJd ha'·ea M..ICllior Phi) in Inl·1 fA:onomics aoo 5-7 }·ears' professional experie""e writing macroeconomic analytical rerons. prefembly focused on East Asia. S,rong Engli.!' writing s~ills ar •• s>cntial. along with souooquantitati,·e. spreads"ut and dmabase ab iliti.... Regional language skills will be given preference. T..,·el will be required . To apply for eilhcr of lhes.e positions. please emai l cover ie ner (with sa lary requ ireme nts) and resume in M icro",ft Word format to pe rsonnel @lif.eolll For more inform:ltio n On the IIF. plea
Practice Head, Middle East: An ex!Xrie.nced analys( 10 lead our Eas( ~arch division. The ideal candidale will hal·e d «,p

Middle

knowledge of:l. counlry or sub- region (SmdJ Ar:lbla, Iraq. or Gee. preferred), Uld a bro.1d under:mnding of the emir<- regio n .

Practice Head, Africa: An expcrien ~ :l.Il:l.Jysr 10 lead the firm'.!: AfriCl r=:irc h divi~ion. lhe ide:al candid:'le musl hall.. {terp knowlc:d!;C' o f a count ry or 5l1h-rtgion in 5ub-5.iholran Africa , and ~ broad

undersllnding of Ihe oominelll.

I'I"\I.CII("('

heads

tllUlit assess the

nsb !"('Sultlng from pooliuc:ll, 5eCunt)',

lind L'COnomic dtvdopment& for EU!":lsia Groups diems in vuious 5«lOrll. Applicants mUSt have an adv~ nced degree- In poolllic:lt scienc~

or rdellllm di.\Ci p lin ... (PhO prdn-red),

~J 1":I~ t 10 p'M1> nf experience

o;;onduo;;dng r~3rch on the rCSlon, and rdcvant la nguage fluency.

Director, London: A ll expcrienced l"OI::lrcn manaGer or busincss d ..vetopment prot~ional l o lead our London office. lh~ idfSl candidate will o\'crse~ and expand dient coverage and marketing efforu in the UK :lnd CQntinen(:;d Eu rorx'. as well as devdofl lo tlgt(,rm 5a1e5 51r:t ll"g~ and initialiv~ for the regi on. I·k or ~ he will also m:l.nage com plex rest""arch projecl.'l. Applic:lnts mwt have an ad\l".l.ncoo dq;rec in political science or relevan t disciplinc, and :u least 10 yCiT5 of cxperiene.. conducting rese~rch or managing ~ hminrss division in financial .services or the corPO!":l'" $«lor. For more information , please visit www.eurasiagroup.net EurasQ GI"Oup is tile wor\fs leadng, hCeper(lenl gklbll pciitl::a risk. researct a"\d coosuItn;llrm. WfJ pr~ tIirnt~ with lnIorma¥on 8IId IJlSI.~ cn/loW poIticiIl ctevetoomenlS 11"l)'I"Il1M\IeI5. AI apoIcants IIl.lSt bB eligb! to worI! in tte us Il" tile LK Previous COOStJtino exoorlMce is lU'erred. Eurasia GroI.p san Eq,JaI 0pp01l11t~ ~r.

The Economist July 3rd 2010

25

War in the fifth domain

Are the mouse and keyboard the new weapons of con fli ct? A T THE height of the cold war, in June 1"\..1982, an American early-warning satellite detected a large blast in Siberia. A missile being fired? A nuclear lest? It was, it seems, an explosion on a Soviet gas pipeline. rhe cause was a malfunction in the computer-control system that Soviet spies had stolen from a firm in Canada. They did not know that the C IA had tampered with the software so that it would "go haywire, after a decent interval, to reset pump speeds and valve settings to produce pressures far beyond those acceptable to pipe-

line joints and welds," according to the memoirs of Thomas Reed, a former air force secretary. rhe result, he said, "was the most monumental non-nuclear explosion and fire ever seen from space." This was one of the earliest demonstrations of the power of a "logic bomb". Three decades later, with more and more vital computer systems linked up to the internet, could enemies use logic bombs to, say, turn off the electricity from the other side of the world? Could terrorists or hackers cause financial chaos by tampering with Wall Street's computerised trading systems? And given that computer chips and software are produced globally, could a foreign power infect high-tech militaryequipment with computer bugs? "It scares me to death," says one senior military source. "The destructive potential is so great." After land, sea, air and space, warfare has entered the fifth domain: cyberspace. President Barack Obama has declared

America's digital infrastructure to be a "strategic national asset" and appointed Howard Schmidt, the former head of security at Microsoft, as his cyber-security tsar. In May the Pentagon set up its new Cyber Command (Cybercom) headed by General Keith Alexander, director of the NationalSecurity Agency (NsA). Hismandate is to conduct "full-spectrum" operations- to defend American military networks and attack other countries' systems. Precisely how, and by what rules, is secret. Britain, too, has set up a cyber-security policy outfit, and an "operations centre" based in GCHQ, the British equivalent of the NSA. China talks of "winning informationised wars by the mid-21St century". Many other countries are organising for cyberwar, among them Russia, Israel and North Korea. Iran boasts of having the world's second-largest cyber-army. What will cyberwar look like? In a new book Richard Clarke, a former White House staffer in charge of counter-terrorism and cyber-security, envisages a catastrophic breakdown within 15 minutes. Computer bugs bring down military email system s; oil refineries and pipelines explode; air-traffic-control systems collapse; freight and metro trains derail; financial data are scrambled; the electrical grid goes down in the eastern United States; orbiting satellites spin out of control. Society soon breaks down as food becomes scarce and money runs out. Worst of all, the identity of the attacker may remain a mystery.

In the view of Mike McConnell, a former spy chief, the effects of full-blown cyberwar are much like nuclear attack. Cyberwar has already started, he says, "and we are losing it." Not so, retorts Mr Schmidt. There is no cyberwar. Bruce Schneier, an IT industry security guru, accuses securocrats like Mr Clarke of scaremongering. Cyberspace will certainly be part of any future war, he says, but an apocalyptic attack on America is both difficult to achieve technically ("m ovie-script stuff") and implausible except in the context of a real war, in which case the perpetrator is likely to be obvious. For the top brass, computer technology is both a blessing and a curse. Bombs are guided by GPS satellites; drones are piloted remotely from across the world; fighter planes and warships are now huge dataprocessing centres; even the ordinary footsoldier is being wired up. Yet growing connectivity over an insecure internet multiplies the avenues for e-attack; and growing dependence on computers increases the harm they can cause. By breaking up data and sending it over multiple routes, the internet can survive the loss of large parts of the network. Yet some of the global digital infrastructure is more fragile. More than nine-tenths of internet traffic travels through undersea fibre-optic cables, and these are dangerously bunched up in a few choke-points, for instance around New York, the Red Sea or the Luzon Strait in the Philippines (see map on next page). Internet traffic is directed by just 13 clusters of potentially vulnerable domain-name servers. Other dangers are coming: weakly governed swathes of Africa are being connected up to fibre -optic cables, potentially creating new havens for cyber-criminals. And the spread of mobile internet will bring new means of attack. The internet was designed for conve- ~~

The Economist July 3rd 2010

26 Briefing Cyberwar ~

nience and reliability, not security. Yet in wiring together the globe, it has merged the garden and the wilderness. No pass· port is required in cyberspace. And al· though police are constrained by national borders, criminals roam freely. Enemy states are no longer on the other side of the ocean, but just behind the firewall. The ill· intentioned can mask their identity and 10' cation, impersonate others and con their way into the buildings that hold the dig· itised wealth of the electronic age: money, personal data and intellectual property. Mr Obama has quoted a figure Of$l tril· lion lost last year to cybercrime- a bigger underworld than the drugs trade, though such figures are disputed. Banks and other companies do not like to admit how much data they lose. In 2008 alone Verizon, ate' lecoms company, recorded the loss of 285m personal·data records, including credit·card and bank-account details, in in· vestigations conducted for clients. About nine-tenths of the 140 billion e· mails sent daily are spam; of these about 16% contain moneymaking scams, includ· ing "phishing" attacks that seek to dupe reo cipients into giving out passwords or bank details, according to Symantec, a security· software vendor. The amount of informa' tion now available online about individ· uals makes it ever easier to attack a com· puter by crafting a personalised e·mail that is more likely to be trusted and opened. This is known as "spear·phishing". The ostentatious hackers and virus· writers who once wrecked computers for fun are all but gone, replaced by criminal gangs seeking to harvest data. "Hacking used to be about making noise. Now it's about staying silent," says Greg Day of McAfee, a vendor of IT security products. Hackers have become wholesale provid· ers of malware-viruses, worms and no· jans that infect computers- for others to

use. Websites are now the favoured means of spreading malware, partly because the unwary are directed to them through spam or links posted on social-networking sites. And poorly designe d websites often pro' vide a window into valuable databases. Malware is typically used to steal pass' words and other data, or to open a "back door" to a computer so that it can be taken over by outsiders. Such "zombie" machines can be linked up to thousands, if not millions, of others around the world to createa "botnet". Estimatesforthe number of infected machines range up to 100m (see map for global distribution of infections). Botnets are use d to send spam, spread mal· ware or launch distributed denial·of-service (DO os) attacks, which seek to bring down a targeted computer by overloading it with countless bogus requests.

wholesale espionage, attacking the com· puters of major Western defence contractors and reputedly taking classified details of the F-35 fighter, the mainstay of future American air power. At the end of 2009 it appears to have targeted Google and more than a score of other I T companies. Experts at a cyber-test-range built in Mary· land by Lockheed Martin, a defence contractor (which denies losing the F-35 data), say "advanced persistent threats" are hard to fend off amid the countless minor probing of its networks. Sometimes attackers try to slip information out slowly, hidden in ordinary internet traffic. At other times they have tried to break in by leaving infected memory-sticks in the car park, hoping somebody would plug them into the network. Even unclassified e·mails can contain a wealth of useful information about projects under development. "Cyber-espionage is the biggest intelligence disaster since the loss of the nuclear secrets [in the late 1940sl," says Jim Lewis of the Centre for Strategic and International Studies,a think-tank in Washington, ~c. Spying probably presents the most imme· diate danger to the West: the loss of hightech know-how that could erode its economic lead or, if it ever came to a shooting war, blunt its military edge. Western spooks think China deploys the most assiduous, and most shameless, cyberspies, but Russian ones are probably more skilled and subtle. Top of the league, say the spooks,are still America's NSA and Britain's GCHQ, which may explain why Western countries have until recently been reluctant to complain too loudly about computer snooping. The next step after penetrating net· works to steal data is to disrupt or manipu' late them. If military targeting information could be attacked, for example, ballistic missiles would be useless. Those whoplay ~.

The spy w ho spammed me Criminals usually look for easy prey. But states can combine the criminal hacker's tricks, such as spear-phishing, with the in· telligence apparatus to reconnoitre a target, the computing power to break codes and passwords, and the patience to probe a system until it finds a weakness-usually a fallible human being. Steven Chabinsky, a se· nior FBI official responsible for cyber· security, recently said that "given enough time, motivation and funding, a deter· mined adversary will always- always- be able to penetrate a targeted system ." Traditional human spies risk arrest or execution by trying to smuggle out copies of documents. But those in the cyberworld face no such risks. "A spy might once have been able to take out a few books' worth of material," says one senior American military source, "Now they take the whole library. And if you restock the shelves, they will steal it agai n." China, in particular, is accused of

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28 Briefing Cyberwar ~

war games speak of being able to "change the red and blue dots": make friendly (blue) forces appear to be the enemy (red), and vice versa. General Alexander says the Pentagon and NSA started co-operating on cyberwarfare in late 2008 after "a serious intrusion into our classified networks". Mr Lewis says this refers to the penetration of Central Command, which oversees the wars in Iraq and Afghanistan, through an infected thumb-drive. It took a week to winkle out the intruder. Nobody knows what, if any, damage was caused. But the thought of an enemy lurking in battlefighting systems alarms the top brass. That said, an attacker might prefer to go after unclassified military logistics supply systems, or even the civilian infrastructure. A loss of confidence in financial data and electronic transfers could cause economic upheaval. An even bigger worry is an at· tack on the power grid. Power companies tend not to keep many spares of expensive generator parts, which can take months to replace. Emergency diesel generators cannot make up for the loss of the grid, and cannot operate indefinitely. Without electricity and other critical services, communications systems and cash-dispensers cease to work. A loss of power lastingjust a few days, reckon some, starts to cause a cascade of economic damage. Experts disagree about the vulnerability of systems that run industrial plants, known as supervisory control and data acquisition (SCADA). But more and more of these are being connected to the internet, raising the risk of remote attack. "Smart" grids", which relay information about energy use to the utilities, are promoted as ways of reducing energy waste. But they also increase security worries about both crime (eg, allowing bills to be falsified) and exposing SCADA networks to attack. General Alexander has spoken of "hints that some penetrations are targeting systems for remote sabotage". But precisely what is happening is unclear: are outsiders probing SCAD A systems only for reconnaissance, or to open "back doors" for future use? One senior American military source said that if any country were found to be planting logic bombs on the grid, it would provoke the equivalent of the Cuban missile crisis. Estonia, Georgia and WWI Important thinking about the tactical and legal concepts of cyber-warfare is taking place in a former Soviet barracks in Estonia, now home to NATO'S "centre of excellence" for eyber-defence. It was established in response to what has become known as "Web Warl",a concerted denialof-service attack on Estonian government, media and bank web servers that was precipitated by the decision to move a Sovietera war memorial in central Tallinn in

The Economist July 3rd 2010

2007. This was more a cyber-riot than a war, but it forced Estonia more or less to cut itself off from the internet. Similar attacks during Russia's war with Georgia the next year looked more ominous, because they seemed to be coordinated with the advance of Russian military columns. Government and media websites went down and telephone lines were jammed, crippling Georgia's ability to present its case abroad. President Mikheil Saakashvili's website had to be moved to an American server better able to fight off the attack. Estonian experts were dispatched to Georgia to help out. Many assume that both these attacks were instigated by the Kremlin. But investigations traced them only to Russian "hacktivists" and criminal botnets; many of the attacking computers were in Western countries. There are wider issues: did the cyber-attack on Estonia, a member of NATO, count as an armed attack, and should the alliance have defended it? And did Estonia's assistance to Georgia, which is not in NATO, risk drawing Estonia into the war, and NATO along with it? Such questions permeate discussions of NATO'S new "strategic concept", to be adopted later this year, A panel of experts headed by Madeleine Albright, a former American secretary of state, reported in May that cyber-attacks are among the three most likely threats to the alliance. The next significant attack, it said, "may well come down a fibre -optic cable" and may be serious enough to merit a response under the mutual -defence provisions of Article 5. During his confirmation hearing, senators sent General Alexander several questions. Would he have "significant" offensive eyber-weapons? Might these encourage others to follow suit? How sure would he need to be about the identity of an attacker to "fire back"? Answers to these

were restricted to a classified supplement. In public the general said that the president would be the judge of what constituted cyberwar; if America responded with force in cyberspace it would be in keeping with the rules of war and the "principles of military necessity, discrimination, and proportionality". General Alexander's seven-month confirmation process is a sign of the qualms senators felt at the merging of military and espionage functions, the militarisation of cyberspace and the fear that it may undermine Americans' right to privacy. Cybercommand will protect only the military ".mil" domain. The government domain, ".gov", and the corporate infrastructure, ".com" will be the responsibility respectively of the Department of Homeland Security and private companies, with support from Cybercom. One senior military official says General Alexander's priority will be to improve the defences of military networks. Another bigwig casts some doubt on cyber-offence. "It's hard to do it at a specific time," he says. "If a cyber-attack is used as a military weapon, you want a predictable time and effect. If you are using it for espionage it does not matter; you can wait." He implies that cyber-weapons would be used mainly as an adjunct to conventional operations in a narrow theatre. The Chinese may be thinking the same way. A report on China's cyber-warfare doctrine. written for the congressionally mandated us-China Economicand Security Review Commission, envisages China using cyber-weapons not to defeat America, but to disrupt and slow down its forces long enough for China to seize Taiwan without having to fight a shooting war. Apocalypse or asymmetry? Deterrence in cyber-warfare is more uncertain than, say, in nuclear strategy: there is no mutually assured destruction, the dividing line between criminality and war is blurred and identifying attacking computers, let alone the fingers on the keyboards, is difficult. Retaliation need not be confined to cyberspace; the one system that is certainly not linked to the public internet is America's nuclear firing chain. Still, the more likely use of cyber-weapons is probably not to bring about electronic apocalypse, but as tools of limited warfare. Cyber-weapons are most effective in the hands of big states. But because they are cheap, they may be most useful to the comparatively weak. They may well suit terrorists. Fortunately, perhaps, the likes of al-Qaeda have mostly used the internet for propaganda and communication. It may be thatjihadists lack the ability to, say. induce a refinery to blow itself up. Or it may be that they prefer the gory theatre of suicide-bombings to the anonymity of computer sabotage-for now. •

2, Also in t hi s section 30 A Russian spy ring busted 31 China trade policy 31 The "mini-stimulus" fails 32 South Carolina's mid-term races 32 louisiana 'seconomy 33 Biofuels under scrutiny 34 lexington: Elena Kagan's confirmation

For daiLy anaLysis and debate on America , visit Economist.com! united states

Guns and the Supreme Court

The uninfringed WASH IN GTON. DC

]\va-nil to the gun lobby, but with plenty of money still to be spent on lawyers aR the "biller" Americans Ba rack Obama accused in 2008 of "clinging" to their guns (and religion), this has been a sweet week. In June of that year five of the nine justices on the Supreme Court ruled in Dev HeUer that the right to bear arms set out in the second amendment really did apply to individuals and not just to the "well regulated militia" in the arguably ambiguous sentence that ends by saying "the right of the people to keep and bear arms, shall not be infringed." Now, almost exactly two years later, and again by five votes to four, the court has rule d, in McDOl1ald v Chicago, that this right must be acknowledged by state and local governments and not only by the federa l one. The two findings, taken together, represent a big step forward for the gun lobby. Heller ruled that the second amendment should be construed as a personal right to keep and bear arms for lawful purposes, most notably for self-defence within the home. It struck down a handgun ban in Washington, DC, as unconstitutional. But because the capital is an enclave of the fe deral government, the ruling did not resolve the status of similar bans elsewhere. Otis McDonald and his fellow plaintiffs in McDonald wanted to keep handgunsfor protection but were prohibited from doing so by ordinances in Chicago. The court has now rule d that under the "due process"

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clause of the 14th amendment the right to bear arms cannot be infringed by either the states or the federal government. Alan Gottlieb, vice-president of the Second Amendment Foundation, said that as a result of McDol1ald "the right of the individual citizen to have a gun is constitutionally protected in every corner of the United States." Hesays that his organisation is preparing challenges against restrictive antigun laws across the country, in order to "win back our firearm s freedoms one lawsuit at a time". The National Rifle Association says that it, too, is planning legal challenges to gun laws across the country; it claims there are 20,000 of these.

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And yet campaigners for gun control have not been cast into utter gloom. They are consoled by the fact that in this week's ruling Justice Samuel Alita, writing for the majority, made a point of repeating something else the court sai d in Heller: the right to keep and bear arms is not "a right to keep and carry any weapon whatsoever in any manner whatsoever and for whatever purpose". Thecourtemphasised two years ago that it was not questioning longstanding regulations such as preventing felons and the mentally ill from owning guns, or keeping guns out of sensitive places such as schools or government buildings. "We repeat those assurances here," wrote Mr Alito in the new opinion. The Brady Campaign to Prevent Gun Violence, a bipartisan movement that advocates gun control, did its best to put on a brave face, claiming to welcome the court's rejection of the gun-lobby argument that its "any gun, for anybody, anywhere" agenda was protected by the constitution. Paul Helmke, the campaign's president, note d that the court had again recognised that the second amendment allowed "for reasonable restrictions on firearms, including who can have them and under what conditions, where they can be taken, and what types of firearm s are available." Criminal-background checks, which states or cities can require, are rising (see chart). But who is to decide which restrictions are reasonable and which offend against what the Supreme Court has now declared to be a fundamental right? That battle will now return to the lower courts. Blanket or near-blanket bans on the possession of handguns, such as those in Chicago and the adjacent city of Oak Park, will almost certainly be struck down. But these are very rare. In the case of most other regula- ~.

30 United States ~

tions McDol\ald offers little guidance. Can assault weapons be banned? Can guns be banned from public places? Should there be rules on how they are stored at home? Should they be registered? In a dissenting opinion, Justice Stephen Breyer berated the majority for setting the judges on lower courts a "mission·almost-impossible". If the jurisprudence of gun control is treacherous, the politics are a nightmare. In an average year more than 100,000 Americans are shot by guns, more than ]0,000 fatally. And yet support for stricter gun controls is declining- from 59% in 1994 to 40% last April, according to a CBS News poll last April. Gun-control regulations tend to be popular in cities and unpopular, often deeply so, in rural areas.

The Economist July 3rd 2010 For that reason, the Democrats may be pleased that the Supreme Court has at last entrenched the second amendment so firmly. This makes it harder for Republicans to scare voters into believing that a Democratic president intends 10 take their guns away. The sale of guns surged after Mr Obama's election, perhaps because the clingers believed they had to stock up while they still could. Harry Reid, the Democratic majority leader in the Senate, who faces a tough re-election battle in Nevada in November, was quick to give the McDonald ruling a warm welcome. "The right to bear arms", he said, "is one of the essential freedoms on which our country was founded." And it will be earning mon ey for lawyers for years to come. _

Espionage

Spies like us LON DON A ND NEW YORK

An unusual spy n etwork is busted by the FBI NVISIBLE ink, meetings in a park, buried pots of money, bags switched at stations and a goo d·looking Bond girl as well. The story of the n Russian secret agents uncovered by the FB I this week has everything to turn it into a low-budget spy movie. But it has even more 10 turn it into a slapstick parody of one:spies who fail to dig up any secrets but post their photos on Facebook and who argue with their masters about the ownership of their safe house. According to the documents provided by the FBI to the courts, the suspects were "illegal" agents of the Russian Foreign Intelligence agency (SVR), a descendant of the KGB, who had mostly lived in "deep cover" since the 1990S in sleepy suburbs of New York, Boston and Washington, DC. The cover was good: "they couldn't have been spies ... look what she did with the hydrangeas," one neighbour told the

I

Net\! York Times. The spying, less so. In fact, the spies were not even successful enough to have espionage charges brought against them. Their task, it seems, was to infiltrate influential political circles in America and find out their thinking on Russia and Sa rack Obama's intentions for last year's summit in Moscow, but there is no sign that they succeeded beyond what could have been gleaned from reading the better papers. (One of the alleged moles, Vicky Pelaez, was, in fact, a left-leaning columnist for EI Diario, New York's largest Spanish language newspaper.) The FB I court documents paint a picture of a professionally inadequate team trying to justify their usefulness (and their expenses) to their Moscow masters. The intercepted dialogue between the conspirators is more reminiscent of Graham Greene's "Our Man in Havana" than any-

thing written by Ian Fleming: LAZA RO: They tell me that my information is of no value because I didn't provide any source .. .it's of no use to them. PELAEZ: Really? LAZARO: Yes. They say thaL.without a source ... without stating who tells you all of this ...it isn't .. .your report isn't .... PELAEZ: [Interrupts] Put down any politician from here. Another intercepted message shows the director of Russia's intelligence service, SVR, displaying an alarming interest in the house in which the conspirators live. "We are under the impression that C. views our ownership of the house as a deviation from the original purpose of our mission here. We'd like to assure you that we do rem ember what it is." The revelations have caused embarrassment in Moscow,not so much because Russia was caught spying on America, but because it did it so clumsily. Old KGB spies this week lamented the decline in professional standards. But the scandal has rather more serious domestic implications too. It punctures the mystique that helped allow the security services to gain such clout under Vladimir Putin, Russia's former president and present prime minister and a former KGB spy. The story discredits him and his circle of siloviki, the former and present members of the security services. Being laughed at is worse than being feared. Mr Putin tried to play down the whole incident. In a conversation with Bill Clinton he almost managed to turn the whole thing into a joke: "You've chosen the right time to come to Moscow. I hear your police have got carried away and put people in jail...but that's their job after all; really, they are alljust doing their job . .." Yet even Russia's official foreign ministry response was low-key, particularly compared with the rants of a few years ago. It admitted that the detained "illegals" are indeed Russian citizens and expressed the hope that America will show them some understanding. America's officials were similarly calm. "I do not believe that this will affect the reset of our relationship with Russia," said Robert Gibbs, the president's spokesman. "We have made great progress in the past year and a half working on issues of mutual concern." Still, the question of the timing of the arrests-years after the operation started but only days after Barack Obama's recent cordial meeting with President Dmitry Medvedev- seemed puzzling. Conspiracy theories abound. Was the scandal intended by hardliners in Washington to torpedo the improving relationship with Moscow? Was it plotted by Moscow's hardliners to undermine Mr Medvedev? Was it meant to strengthen Mr Medvedev's hand against the siloviki as part of an American policy of playing Mr Medvedev against Mr Putin? ~~

United States 3 1

The Economist July 3rd 2010 ~

Or was it merely designed to win the administration a few good headlines after a rough few weeks? The official line, that the suspects were on the point of fleeing, got some confirmation from the fact that one of them did indeed get away to Cyprus, where he was arrested and then, inexplicably, bailed. At any rate, neither America nor Russia seem to have any desire to jeopardise the "reset" in their relations. As for the future fate of the illegals, Mr Putin may have some good advice. when British spooks were caught in Moscow using a transmitter hidden in a rock, Mr Putin argued there was no need to extradite them: "If these spies are sent out, others will be sent in. Maybe they'll send some clever ones that will be hard for us to find." • China policy

Yuanimpressed WASHINGTON, DC

China's adjustment of its currency is too small and slow for many HINA might have hoped for better. The decision at last to suspend its exC change-rate peg to the dollar bought the Chinese government little more than a moment's peace with its largest trading partner. Ominously, Charles Schumer, a Democratic senator from New York, is still busily pressing ahead with legislation designed to force China into a significant revaluation. Mr Schumer has sought congressional action against Chinese trade policies since 2004. But with unemployment still near 10% and little change in the dollar-yuan rate since 2008, his strategy has attracted growing support. The senator introduced a new measure, with bipartisan sponsorship, in March this year. If passed, the bill would force the lTeasury to issue a ruling on whether China is manipulating its currency (a determination Tim Geithner, the treasury secretary, postponed making in April). Chinese goods might then be subject to import tariffs. China's new exchange-rate policy has not deterred the senator, who says it will not "placate" his colleagues. He may soon offer his measure as a floor amendment to a bill with lots of support, and some reckon the chances of approval are good. That possibility seems to make the White House nervous. Barack Obama has emphasised that the yuan must eventually appreciate. But in comments at the recent G20 summit he explained that he did not expect a rapid rise in the currency. Instead, the administration would be "paying attention over the next several months".

The White House is pressing Mr Schumer to give China more time to revalue. A blow-up over trade and the currency could pose serious diplomatic difficulties for the administration: Mr Obama needs Chinese help to deal with Iran and North Korea. And with the global recovery in a fragile state, the world cannot afford a serious trade row. Critics respond that with America's economy stuck in the doldrums, China's undervalued currency means that America is importing unemployment. They argue that the "flexibility" is mostly bluster. Since the policy was announced, the yuan has appreciated by just 0.7% against the dollar, and markets are expecting only a 2-3% rise over the whole of the next year. However, that is only a little slower than the pace at which the yuan rose at the beginning of the 2005-2008 period, over which time the currency appreciated by 20% in total. According to some analyses, a further revaluation of that size would bring the yuan close to fair value against the dollar. But with America's trade deficit swelling towards pre-recession levels, legislators are anxious to see faster results. Their expectations may be unrealistic. China faces its own internal battles over its currency, pitting its diplomats against its powerful export lobby, so it may have little choice but to pursue only a slow revaluation. A sudden appreciation could damage its manufacturers, doing more harm than good 10 the global economy. Both American and Chinese leaders are nervous about the impact of European economic troubles on their own economies. Mr Obama may again prevail on Congress to give China more time. But American voters are frustrated and legislators are fearful. What little patience China has won may soon run out. •

Schumer is not going t o shut up

The " mini-stimulus"

A prophet in his own house WASHINGTON,OC

The president's push for more stimulus hits the buffers ARACK OBAMA'S plea to stimulate B economic growth now and cut deficits later got a mixed response from world leaders at the G20 summit in Toronto last weekend. And the reception back home was a lot worse. On June 24th Democratic leaders in Congress withdrew a stimulus plan after failing, for the third time, to get the necessary 60 votes in the Senate to proceed. The defeat was all the more humbling because the bill had already been fiercely pared back. In his February budget Barack Obama had proposed $266 billion of new stimulus measures over the next few years. The "American jobs and Closing Tax Loopholes Act" that Democratic leaders in Congress unveiled in May contained only $79 billion-worth: extended unemployment benefits, health-insurance subsidies for the unemployed and Medicaid grants to the states. (The entire bill would have added $134 billion to deficits because of extensions to expiring tax breaks and Medicare payments for doctors.) It was then repeatedly whittled down, finally to just $34 billion, in a vain attempt to win over a few Republicans, The package failed for several reasons, including opposition from business groups (and Republicans) to its increased taxes on multinationals and on the carried interest of private-equity fund managers. But the main reason is that record deficits and the sovereign-debt crisis in Europe have heightened the political price of any new borrowing, even as the graver threat of future entitlement spending goes unmet. "We've reached a new political equilibrium-you can't add to the deficit but you can't cut it either," notes Andy Laperriere of lS I Group, a brokerage. These days Mr Obama needs at least a few Republican senators to pass almost anything, but recent primary battles have shown deep antipathy among Republican voters to any increase in spending, deficits or taxes. So while a stand-alone extension of unemployment benefits may eventually pass, the prospect of any sizeable new stimulus has faded. The pre-mid-term gridlock means that even an extension of George Bush junior's tax cuts, which expire this year, is not assured, even for America's middle class. That would be a big blow to the president. The latest defeat comes at a pinched time. The winding down of most of last year's $862 billion stimulus package (the ~.

32 United States

I

The Economist July 3rd 2010

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price grew in the spending from the original $787 billion) has already factored substantial fiscal tightening into the economic outlook as aid to states dries up and temporary tax cuts end. JPMorgan Chase estimates that these will subtract L8 percentage points, at an annual rate (see chart), from growth in the first half of next year, though it reckons there will be enough underlying momentum in the recovery 10 keep growth above 3%. Without a mini-stimulus bill, though, the drag increases to 2-4 points. A failure to renew Mr Bush's tax cuts would add another percentage point to that. So if underlying growth flags even a little, that fiscal tightening could be enough to tip the economy back into recession . A surprise plunge in consumer confidence in June was the latest reminder that this gloomy scenario cannot be ruled out. • South Carolina

Wacky races CO LU MBI A, SOU TH CAROLIN A

Thrills and spills in the South HE television comedian Jon Stewart T has a recurring segment entitled "Thank you, South Carolina" on his popular "Daily Show". Recent attractions have included the antics of Governor Mark Sanford, who went missing for several days last summer ostensibly hiking in the Appalachians but actually visiting his secret girlfriend in Argentina; and those of a South Carolina man arrested after being caught on surveillance tape having sex with a mare named Sugar. Hollywoo d types laughing at southern hicks is hardly new, and usually unfair: in South Carolina military technology thrives around Charleston, one of America's ten job-creating cities. But even the most passionate South Carolinian has to

admit that Mr Stewart will have plenty of fodder to choose from for his segment as the mid-terms approach. One prominent option would be Nikki Haley, 38, a conservative Republican state legislator and the daughter of Indian immigrants, who swept from last place to first in the primary after an endorsement from Sarah Palin, and then handily won the run·off. Ms Ha' ley's campaign has been rocked by two unproven allegations of marital infidelity, for which no evidence has been presented and which she denies. Despite the racy smears, she remains on track to become both South Carolina's first minority and first female governor- the latter perhaps a particular hurdle in a state that doesn't have a single female state senator and ranks last among the 50 states in the num' ber of women lawmakers overall. But the pundits are not writing off her Democratic opponent Vincent Sheheen, a 39-year-old state senator from a wellknown political family, He is expected to link Ms Haley to her political mentor, the tarnished Mr Sanford. Ms Haley wi1l also have to convince voters in bible country that she is really a Christian. Born Nimrata Nikki Randhawa and raised in the Sikh reli· gion, she was baptised into the Methodist Church when she married. But the grave charge that she doesn't actually "acceptJesus Christ as her Lord and saviour" dogged her throughout the primary campaign and will doubtless be renewed . Then there is the strange skirmish for the Senate, in which Jim DeMint, an arch conservative and a favourite of the teaparty movement is pitted against Democrat Alvin Greene, an unemployed mili· tary veteran who is facing a felony charge for obscenity. Mr Greene was unknown even in his hometown until he managed, without campaigning and with virtually no money, to defeat a well-funded former state legislator, Some believe Mr Greene, who is black, won his primary because his name was listed before his opponent's name on the ballot, or perhaps because voters confused him with the gospel singer Al Green. But Mr Greene's chances of getting any further are non-existent. Next candidate for the show comes the remarkable case of Tim Scott, a 44-year-old state legislator who looks likely to become the only black Republican in Congress. On June 24th Mr Scott pulled off a stunning victory in the run-off for the Republican nomination against Paul Thurmond, the youngest child of the late Strom Thurmond, still the most popular politician in South Carolina's history. Finally, there is the duel in South Carolina's second congressional district between a five -term Republican congressman, Joe Wilson, and his Democratic adversary, Rob Miller, a former Marine and Iraq veteran who gave Mr Wilson the closest race of his career two years ago. Mr Wilson, who

Is Haley saved?

shot to fame last September when he shouted "You lie!" at Barack Obama during a joint session of Congress, has amassed nearly $4m for the contest, while Miller has raised $2.3m. Each raked in some $lm from their supporters within 48 hours of the outburst. According to the non-partisan Centre for Responsive Politics, the combined $6m-plus already collected makes their bout, for now anyway, the most expensive congressional race of 2010. Pretty good going for two little words, • Louisiana' s economy

Sue, baby, sue NfWORU ANS

The state is up in arms about the ban on deepw ater drilling surrounds the Obama administra' IinRONY tion's moratorium on deepwater drilling the Gulf of Mexico. The people it presumably intends to protect- the residents of south Louisiana, whose fisheries and shorelines are being fouled by BP'S stillgushing Macondo well, and the oilfield workers who could be at risk from another disaster- are probably its loudest critics, Nearly two out of three Americans support the ban, according to one recent poll, but gulf coast residents are split down the middle. And in Louisiana, where the ener' gy industry is a mainstay of the economy, state leaders and opinion-makers have been nearly unanimous in opposing the moratorium. Opponents estimate that as many as ~~

The Economist July 3rd 2010 ~

22,000 well-paid jobs are at stake-those of rig workers and the people who provide support services for them. Although the moratorium is supposed to be in force for only six months, critics fear its effect could last much longer, asrig·ownersare likely to have moved their equipment in the mean· time to rival drilling locations, such as off Brazil and west Africa. Already, moratorium opponents note, Louisiana's rich fishing grounds, which produce about a third of the seafood eaten in the lower 48 states, have largely been shut down, and their future is in grave per· il. For coastal communities, the impact of these two blows could be crippling. "We'll go from the lowest unemploy· ment in the nation to the highest," Damon Chouest, vice-president of a large oil-ves· sel support firm, recently told the TimesPicayune, Louisiana's largest newspaper and a vocal opponent of the drilling ban. "The spill was bad, but the worst impact on the economy is from this moratorium." On June nnd a federal judge based in Louisiana weighed in on the side of Horn· beck Offshore, a local oilfield-services company that has sued to block the ban. Martin Feldman, a Reagan appointee, called the government ban on drilling ca· pricious and unsupported by any evi· dence. The moratorium "seems to assume that because one rig failed and although no one yet fully knows why, all companies and rigs drilling new wells over sao feet also universally present an imminent dan· ger," Mr Feldman wrote. The Obama administration is pursuing a two-pronged strategy 10 keep the ban in place. The interior secretary; Ken Salazar, is refining his moratorium order, hopefully in ways that will meet the district judge's objections. The administration has also reo ferred the decision to the appellate court, which also happens to be based in New Orleans. But the drilling remains on hold as the legal wrangling goes on. There are strong arguments on either side about the fairness of the ban. Those who oppose it note that a plane crash does not lead government regulators to ban fiy· ing, and say the same logic should prevail in this case. Evidence is also mounting, they say, that BP cut corners on Deepwater Horizon, suggesting that the accident was an aberration. A number of experts who helped Mr Salazar prepare his recommen· dations to the president have come out against his moratorium, calling it "punish· ing the innocent". Those who support the ban, though, point out that the disaster has also proved that the Minerals Management Service, the federal agency that oversees offshore drill· ing, was more a paper tiger than an assiduous regulator. And if another disaster occurred, they ask, would the government or the industry be able to fight an oil war on two fronts? •

United States 33 Biofuels under scrutiny

The age of ethanol CHIC AGO

A dysfunctional system may becom e m ore so

" A MERICA'S sensible fuel," reads a r t TV advertisement, while a soothing melody plays in the background. Other ads tout a fuel that promotes peace and is economical, home·produced, clean and renewable. So what is this magic potion? Ethanol, of course. Growth Energy, a lobby group, is spending $2.sm on America's first national television campaign for the stuff. "No beaches have been closed due to ethanol spills," one ad notes. Growth Energy planned the cam· paign before the BP disaster, butthe push could hardly be better timed. After the oil spill Barack Obama declared that "the time to embrace a clean energy future is now." Biofuels will be part of that future. However, most policymakers agree that the industry must move beyond corn ethanol, which is less efficient than the sugar-derived stuff and pushes food prices upwards. The new Renewable Fuel Standard (RFS2), which took effect onJulylSt, limits conventional ethanol t01S billion gallons of the annual 36 billion gallons of renewable fuel that must be used for transport by 2022, and the administration has just announced extra funding for algae· based biofuels (see page 60). But with a viable new biofuel yet to emerge, lobbyists are still pushing to support the old one. Corn ethanol should not be maligned, argues Tom Buis of Growth Energy. While next-generation biofuels, such as cellulosic ethanol, are struggling to come of age, corn ethanol is well·established . Between 2000 and 2008 it shot from 1% t07% of America's fuel supply. Regulators

Green gold

have given ethanol a few recent boosts. In February the Environmental Protection Agency (EPA) concluded that ethanol emits 20% less greenhouse gas than petrol. In June the agriculture department noted that ethanol plants have become more efficient. But the industry wants more. production will soon hit the "blend wall", when ethanol will meetlO%of fuel demand; the EPA allows blends of up t010% etha· nol (more might corrode engines). The industry wants the EPA to raise that cap t01S%, though in June the agency delayed a ruling. In the meantime, ethanol's advocates want to extend their existing perks and add others. A tariff on ethanol imports and a tax credit for blenders are due to expire in December- these should be renewed, lobbyists insist. The govern· ment should also require most new cars to be flex-fuel vehicles (FFVS), able to use blends of up to 8S% ethanoL And petrol stations should be required to install pumps that blend petrol with ethanol. Ethanol's advocates say that such measures will bridge the gap between today's biofuel and those of the future. FFVS and a higher blend limit, for example. would help grain ethanol expand but would also open the market for cellulosic fuel. In the meantime, corn ethanol continues to enjoy its subsidies. Between 200S and 2009 the tax credit for blending petrol with ethanol cost $17 billion. This year it will cost some $S-4 billion. Surely the money could be better spent somewhere else.

34 United States

The Economist July 3rd 2010

Lexington I USS Kagan prepares to set sail Behind the civility, it's war in th e Supreme Court

HIS may not have occurred to you, but aSupreme Court judge TFirst: is like an aircraft-carrier_ How? Just count the ways. longevity. One of the first carriers to arrive off Afghanistan after 9/11 was the USS Enterprise, a carrier that first saw service in the Cuban missile crisis of 1962. When it retires in 2013 it will have given 51 years of service. An investment that continues to payoff after half a century is a wonderful thing_Thejustices of the Supreme Court are also investments for the long term_ This week saw the retirement, still sound at 90, of Justice John Paul Stevens, who got his commission from Gerald Ford and has served on the court for 35 years. Second: raw power. Once confirmed by the Senate, justices may sit for life and rule as they please, regardless of the expectations of the president who nominated them or the promises they gave the Senate in confirmation hearings. A long-serving justice can make a deeper mark on America than a president. In 24 years on the bench Thurgood Marshall, the first black justice, did as much for racial equality in America as Lyndon Johnson, who chose him . True, ajustice is boxed in by the other eight judges on the bench, the words of the constitution and the rules of jurisprudence. But that leaves ample latitude. "Do what you think is right and let the law catch up," Marshall said. Last: like an aircraft-carrier, a justice goes to war. Behind all the civilities the Supreme Court is indeed engaged in a high-stakes war between its conservative majority and liberal minority. The fiction Barack Obama adopted when nominating Elena Kagan to replace Mr Stevens is that he chose his own solicitor-general and this former dean of the Harvard Law School because she happens to possess the wisdom of Solomon, not because of her politics. But everybody knows he needs a liberal to stop the court from moving further to the right than it already has under John Roberts, the present chief justice, a man more stealth-bomber than aircraft-carrier, whose professions of judicial modesty during his own confirmation hearings in 2005 gave little inkling of the controversial decisions over which he has since presided. It is a safe bet that Mr Stevens would not be retiring at all but for his desire to let a Democratic president pick his successor. At her confirmation hearings in the Senate this week some of Ms Kagan's Republican interrogators wryly acknowledged the

truth of the matter. You are a liberal person, I am a conservative person, but elections have consequences and that's just America, said the relaxed Lindsey Graham from South Carolina. Jeff Sessions of Alabama got more steamed up. Ms Kagan had barely practised law; her college thesis seemed to bemoan the decline of socialism in New York; when serving in the Clinton White House she had tried torestrict gun rights; at Harvard she had treatedmilitary recruiters in "a second-class way". Having clerked for MarshaH, was she also going to do asshe pleased and wait for the law to catch up? Was she,gasp, a "legal progressive"? If Ms Kagan was unsettled by this fusillade she did not betray it. She did not in fact betray very much at all other than a serene confidence and a puckish wit. Despite having complained in 1995 about the "vapidity" of the confirmation process, she chose vapidity over valour once she was in the hot seat herself, evading hard questions about her judicial philosophy, and abortion and gun rights, on the ground that it would not be "appropriate" to "grade" past cases in case they came up to the court again . As for being a "legal progressive",she told Mr Sessions "I honestly don't know what that label means." Barring some unforeseen calamity the cautious nominee will shortly beconfirmed and USSKl1gan will sail forth to do battle. Her arrival in Mr Stevens's place will not much change but should at least preserve the existing imbalance of power on the court. If she turns out to be the liberal of Mr Sessions's fears and Mr Obama's hopes, she will follow her predecessor's example and make common cause with a like-minded minority (Sonia Sotomayor, Stephen Breyer and Ruth Bader Ginsburg) against the conservative majority composed of Mr Roberts, Antonin Scalia, Samuel Alito and Clarence Thomas, Anthony Kennedy, the court's swing voter, is conservative on most issues.

For better or worse, there will be no truce To judge by the fast-growing proportion of voters who decline to identify with either party; Americans are repelled by the bitter partisanship that has gripped their political institutions. They may regret the fact that their supreme tribunal has succumbed to the same affliction instead of standing above politics. In 2007 Jeffrey Toobin of the New Yorker wrote a book ("The Nine") arguing that from 1992 to 2005 the cautious instincts of swing justices such as Lewis Powell and Sandra Day O'Connor produced rulings that reflected public opinion. But this, said Mr Toobin, was about to be challenged by a powerful conservative rebellion that gathered strength with the appointment in 1991 of MrThomas, who believes that years of rulings by liberaljustices, including Miranda on criminal warnings and Roe on abortion, went beyond the constitution and should be reversed. The past year's performance of the Roberts court has confirmed the liberals' fear. Exhibit one was the Citizens United ruling, which threatens to unravel the whole tangle of campaign-finance law and which Mr Obama calls "a green light to a new stampede of special-interest money in our politics", So the court is not only divided within itself but also sailing towards a new collision with the executive branch. Some will deplore this new sign that America's dysfunctional polity is being crushed in the vice of faction. Others will say it is part of the necessary, institutionalised and never-ending quarrel that is the genius of the American system. Either way, the struggle continues . • Economist,(om/blogs/lexington

35

Brazil's presidential campaign

In Lula's footsteps SliD PAU LO

Dilma Rousseff is cruising towards victory on the coat-tails of a popular president. But there is m ore at stake in October's election than meets the eye

ATTHE moment only one thing matters 1"\..to Brazilians: the performance of the national football team in the World Cup, where lifting the trophy forthe sixth timeis considered almost a right. Even a normally hard-working city like Sao Paulo, where supermarkets open at 7.00am and heavy traffic is a way of life, came to a standstill for Brazil's matches. Across the country factories, offices and even health posts shut down. But the country's politicians are limbering up for a different contest. On July 6th the campaign for October's gen-

eral election formally kicks off. It will be the first presidential election since democracy was restored in the1980s in which the name of Luiz Imicio Lula da Silva does not appear on the ballot. But Lula, Brazil's president since 2003, is nevertheless the dominant figure in the campaign_ For the past18 months he has put all his efforts into trying to get Dilma Rousseff, his former chief of staff, elected as his successor. She is not an obvious presidential candidate: an efficient though notoriously bad-tempered administrator, she only

joined Lula's Workers' Party (PT) in 200L She has never before stood for elected office. But several more senior figures in the PT were forced out of politics by a corruption scandal during Lula's first term, and others have proved electoral flops. Barely known to the public at the outset, Ms Rousseff spent half of the past year recovering from lymphatic cancer. Despite all these handicaps, she has risen inexorably in the opinion polls. This month she overhauled the opposition's standardbearer,Jose Serra, formerly the governor of Sao Paulo state, for the first time (see chart :I). The only other plausible candidate is Marina Silva, a long-time member of the PT who is standing for the small Green Party. Like Lula, she was born in poverty, but she fell out with him over what she sees as his government's failure to defend the environment. The election has now become Ms Rousseff's to lose. Her rise in the polls shows that Lula has been able to transfer his own extraordinary popularity to her. A former trade-union leader, Lula has a rapport with ordinary Brazilians that no other politician enjoys. But he can also point to solid accomplishments. He has presided over both a steady increase in economic growth which is now- conveniently-reaching new heights, and a sharp reduction in poverty. Even allowing for an expected slowdown, the economy will have grown by around 8% in the year before the vote. The polls show that roughly 75% of Brazilians approve of the job Lula has done. Alexandre Marinis,a political consultant in Sao Paulo, notes that recent elections show a close correlation between the president's popularity and his candidate's success. All this makes Mr Serra'sjob exceptionally hard. A minister in the government of Fernando Henrique Cardoso, Lula's predecessor, he trumps Ms Rousseff in political experience and has been an effective governor of Sao Paulo, the country's secondmost-powerful job. His supporters are counting on his opponent to make gaffes. But Ms Rousseff is looking increasingly assured. And he is struggling to make his experience count in an election where most Brazilians- especially in the country's poorer areas-want continuity. To see why, visit places likeJardim Iguatemi, a favela (a self-built settlement) straggling over steep hills on the eastern extremity of Sao Paulo. Bordered by forest, it is an hour and a half's drive from the city centre. Mr Serra's state government built a big new school and a health clinic there. But it is the president who commands the sympathy of many resi dents. They credit Lula with Bolsa Familia, a programme under which 12m of the poorest Brazilian families get a monthly stipend of up to 200 reais ($:w), paid to mothers provided they keep their children in school and take them for health checks. His government ~~

36 The Americas ~ also opened a free

technical college nearby in Itaquera . "He's made a big effort. He thought a lot about concrete problems," says Milene Ribeiro, a single parent of three children, whose ambition to be a teacher was frustrated when she had 10 drop out of university for lack of funds. "Living here so far from the world, we have to vote for someone who will do something for us," says Quiteria de Souza, a separated mother of three girls. The statistics of social progress in Brazil are remarkable. The number of people living in poverty has fallen by 20m under Lula, from 49.5m (or 2S.5% of the total) in 2003 to 29m (16% of the total) in 200S, according to calculations by Marcelo Neri, a social-policy expert at the Funda~ao Getulio Vargas, a university. Although the world recession and its brief impact in Brazil temporarily halted the progress, it did not reverse it. Using different criteria, Ricardo Paes de Barros of the Institute for Applied Economic Research, a government-linked body, paints a similar picture. He finds that the number of Brazilians too poor to feed themselves properly has fallen from 17% of the population in 2003 to S.S% in 200S. Levelling th e p laying fi eld At the same time Brazil's notoriously unequal distribution of income is becoming a bit less so (see chart 2). The Gini coefficient, a standard statistical measure of inequality, has fallen steadily since 2001 (though it remains very high by international standards). Over that period the income of the poorest 10% of the population has grown at S% a year, while that of the richest tenth has grown at only 1.5% a year, according to Mr Paes de Barros. In various ways Brazil is starting to become a more homogeneous society. Regional inequality has been diminishing, too: average income in the poor north-east has been growing faster than the national average. A majority of Brazilians (some 52%, up from 44% in 2002) now belong to what marketers call social class c, or the lower-middle class, meaning that they have a monthly household income of between 1,064 and 4,561 reais. This progress stems from a mixture of faster economic growth and government policies. Though there is debate about the details, around half of the fall in poverty comes from higher income from employment. Better social policy accounts for a big share of the fall in inequality-or at least of the narrowing of the bottom of the pyramid. Balsa Familia has been particularly effective in helping the poorest. How much of the credit does Lula deserve for all this? His government turned Balsa Familia from a small-scale experiment into the world's biggest conditional cash-transfer programme. He also raised the minimum wage by two-and-a-half times since 2003, taking its purchasing

The Economist July 3rd 2010

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power to its highest level since 1979. This has not destroye d jobs: some 13m new jobs in the formal (ie, legally registered) economy have been created since 2003. Lula is also proud of a government programme under which urn people in rural areas have gained access to electricity, and another programme tha t provides subsidised housing for the poor. Above all, the polls suggest, he has given poorer Brazilians a new sense both of self-esteem and that their government is not just for the rich. But faster economic growth and the social transformation are also the result of longer-term trends. Mr Cardoso's two governments tamed inflation, creating the stability that has allowed credit, investment and jobs to grow. And part of the fall in inequality (which began in 2001, before Lula took office) stems from a big effort over the past Quarter of a century to expand Brazil's previously woeful education. The average Brazilian worker now has 8.3 years of schooling, up from 6~in1995. Certainly Lula deserves praise for not imitating the economic populism of some of the other left-wing leaders who have come to power in Latin America over the past decade. Broadly speaking, his government has stuck to the responsible macroeconomic policies that have kept inflation low. After some procrastination, it has also continued the progress in education. His education minister, Fernando Haddad, has introduced standardised national tests of

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schoolchildren, for example. And as Ms Rousseff points out, the government has respected the contracts under which private companies, induding foreign ones, have invested in Brazil. The state and the n ation The question the candidates have to answer in the next three months is how to sustain Lula's legacy and build on it. There is broad political consensus about economic stability, the importance of education and, to a degree, on social policies (Mr Serra would maintain Bolsa Familia, for example). Apart from foreign policy (which matters to some Brazilians but not to the mass of voters), the differences between the two main candidates are sharpest over the role of the state in the economy. In many ways Lula has been a lucky president. Brazil has benefited hugely from China's industrialisation. China's appetite for foodstuffs and iron ore has boosted Brazil's exports, helping growth and eliminating the balance-of-payments troubles that so often dogged the country in the past. But this has masked some important weaknesses that Lula did not fix, and may even have exacerbated. Mr Serra likes to say that Brazil holds three negative world records: it has the highest interest rates in the world, the heaviest tax burden of any emerging country and one of the lowest rates of public investment. All of these, he has argued, stem from an "obese" federal government that is spending too much on public-sectorjobs for its supporters. He says he would slash wasteful public spending, leaving room for interest rates to fall (the Central Bank's benchmark rate is 10.25%). That in turn would allow the real, which is overvalue d, to weaken, helping manufacturers cope with competition from China. He would simplify and reform the labyrinthine tax system. The aim would be to boost investment, both public and private, so that Brazil could take greater advantage of the opportunity granted by its commodity boom, which will not last forever. The shortfall in investment means that, by common consent, Brazil cannot sustain this year's growth spurt. If the economy is to continue to expand at 5% a year, Brazil needs to double its annual investment in infrastructure, to 4% of GOP, according to Marcelo Carvalho of Morgan Stanley, an investment bank. The airports are dogged. Off Santos, Brazil's biggest port, a line of ships Queuing to load stretches to the horizon. The lack of good roads an d railways adds to the costs of business. This year soyabean-growers in Mato Grosso, an inland state, spent up to 38% of their revenues just on getting their crop from the farm to the docks, according to Jose Roberto Mendon~a de Barros, an economic consultant in Sao Paulo. Under Lula, the price of electricity for industrial ~~

38 The Americas ~

users has more than doubled. The government has cautiously allowed private investment in roads, rail· ways and ports. But airports are run by an inefficient state body. Such mismanagement is a luxury Brazil can ill afford- if only because it will need to handle visitors to the football World Cup, to be held in the country in 2014, and the Olympic games, in Rio deJaneiro two years later. Meanwhile, the government is spending more and more on pensions. Fabio Giambiagi, an economist at the National Development Bank (BNOES), notes that although only 6% of Brazilians are of pensionable age, the country spendsll3% of its GOP on them; in the United States, by con trast, the u% of the population who are pensioners receive around 6% of GOP. Spending on pensions for private-sector workers in the formal economy has tripled as a share of Brazil's GOP since 1988. This is partly because the economy grew quite slowly (until recently), but mainly because of the generosity of the pension regime. Many amuent Brazilians retire in their 50S, and many pensions have risen steeply because they are tied to the minimum wage. The result is that the federal government bails out the national pension sys' tern to the tune of L5% of GOP. Mr Giambiagi points out that the number of pensioners will grow by about 4% a year for the next ten years. Provided the economy grows at a similar rate and the next government slows the rise in the minimum wage, the pension burden will be just about manageable, But it reinforces Brazil's inequalities. Mr Paes de Barros notes that the government transfers ten times more money to pensioners than to children. He is advising the third candidate, Ms Silva, the only one who talks much about pension reform .

Banking on industrial policy The government's critics also worry about the implications of a big expansion of the role of state banks (Brazil has three large ones). This came about partly as a result of the world financial crisis, when private banks temporarily cut back their lending. But the BNOES, in particular, has become an important agent of industrial policy under Lula. Overthe past two years the federal government boosted the bank's capital base with two long-term loans worth 180 billion reais. Its annual lending has reached 4.5% of GOP, and should be double its 2008 level by year's end. Its loans are mainly long-term (for up to 30 years), with priority for infrastructure, investment in industry and services and seed money for innovation. They cost around half of the Central Bank's benchmark interest rate. The BNOES has given big loans to stateowned electricity companies (revived by Lula) and to Petro bras, the governmentcontrolled oil giant. But it has also financed

The Economist July 3rd 2010 takeovers by big private companies, both at home and abroad, creating national champions in businesses ranging from food to pulp and paper. EduardoGiannetti, an economist in Sao Paulo, worries that all this involves big, but opaque, subsidies (of perhaps 8 billion to u billion reais a year, he thinks) while extending government influence over business. Luciano Coutinho, the BNOES'S president (who is tipped to be finance minister if Ms Rousseff wins), insists that the bank deploys professional techniques of credit analysis and dismisses as a "conservative fiction" the notion that its loans are governed by political criteria. The bank's role is transitional, he says, until private capital markets develop long-term savings and lending instruments. Ms Rousseff champions industrial policy-indeed her critics see her as more dirigiste than Lula, whose instincts are pragmatic. But Mr Coutinho says that this does not involve a return to the big Brazilian state and the high tariff protection of the 1960s and 1970S, as the critics charge. Brazil's economy is more open today. Mr Coutinho says his inspiration comes from Asian countries such as South Korea and China (though average tariffs are still high· er in Brazil than in those countries). This debate is most intense over how to develop the vast new oil deposits found deep beneath the Atlantic in 2007. Their discovery followed Mr Cardoso's decision to open up the oil industry to competition and subject Petrobras to market discipline (though the company continues to be con' trolled by the government, a majority of its shares are publicly traded). Since Lula's administration thinks it clear that there is much more oil to be found, it wants to change the rules governing the industry. Instead of concessions under which oil companies pay royalties and taxes but keep the oil they extract, in any future fields the oil will belong to a new state company and Petrobras will be the sole operator (though it can team up with partners under production-sharing agree' ments). These changes are embodied in four laws, though only one- allowing the government to vest oil deposits in Petrobras as a way of increasing its capital-has so far been approved by Congress. The government also hopes to create a national oil-supply industry. It is drawing up re quirements that equipment, from tankers to service platforms and drilling rigs, shoul d be mainly locally produced. Already Petrobras is doing much of its procurement locally, and officials point to a revival in Brazil's ship building industry as an early success. Provided such restrictions are temporary, they may payoff for the oil industry. But there are risks. One is a repeat of the mistakes of the 1970S, when a government attempt to develop a computer industry by banning imports cut Brazil off

from new technology. Another is placing too much strain on Petro bras, which has also been required by the government to build four new refineries. This month Petrobras unveiled a huge increase in its five -year investment plan, to $224 billion (up from $187 billion). But the next day it abruptly postponed until Sep' tember a planned share offering expected to be worth up to $25 billion. The price of the company's bonds has fallen recently because of fears that the accident at a BP rig in the Gulf of Mexico will add tothe cost of deep-sea oil operations. Oil now accounts for u% of Brazil's GOP, a fourfold increase since 1997. It will climb as high as 20%, reckons Adrian Pires, an industry regulator under Mr Cardoso. The opposition's nightmare is that Ms Rousseff might use oil revenues to en' trench the PT in power and that Brazil might go the way of other oil-rich Latin American states, such as Hugo Chavez's Venezuela or Mexico under the Institutional Revolutionary Party. But officials have other models in mind, such as democratic Norway, which has save d much of its oil revenues. "We want to use the oil wealth in ways such that it doesn't contaminate the rest of the economy," says Marcio Zimmermann, the energy minister. Brazilians thus face a choice in October. Mr Serra would provide them with a strong but lean state, that would make room for more private investment and initiative and would tax its citizens less. Ms Rousseff's advisers think that Brazil has time to bring down interest rates and taxes gradually, and that the state should pro' mote industrial development and redistribute income. After 16 years of stability and policy continuity under Mr Cardoso and Lula, neither candidate offers a radical change of course. What is at stake is the speed of the country's progress. _

Serra ponders how he fell behind

3. Also in this section 40 Japan's sumo scandal 40 The Philippines changes president 41 BangLadesh and war crimes 42 A referendum in Kyrgyzstan 42 Pakistan's role in Afghanistan 43 Banyan: Asian urbanisation and carbon emissions

For daiLy anaLysis and debate On Asia. visit Economist.com! asia

China and Taiwan

The ties that bind? lA lNl

Worries in Taiwan that economic interdependence will succeed for China where sabre-rattling failed HANTING opposition to unification with China, tens of thousands of prot- I C esters massed on june 16th outside the office in Taipei of Taiwan's president, Ma Ying-jeou of the Nationalist party, or Kuomintang (KMT). Their target was the Economic Co-operation Framework Agreement (ECFA), one of the most significant agreements between China and Taiwan since 1949, when the Communists routed the KMT in the civil war. One placard, with a doctored image of Mr Ma kissing the cheek of China's president, Hu jintao, scolded: "Don't embrace the enemy." The main opposition Democratic Progressive Party (DPP) said 100,000 demonstrators took part; the police estimated just 31,000. The DPP denounces the agreement as a threattojobs on Taiwan. Worse, the independence-leaning party complains, it could be a step on the way to Taiwan's eventual incorporation into China. Both warnings are overblown. But Taiwan is entering a lengthy season of frantic politics in which a nuanced debate about trade will be an early casualty. In November mayoral elections will be held in Taiwan's five key municipalities. The DPP is hoping for a boost as it prepares for parliamentary and presidential polls in lOll. Taiwan's government says the ECFA, signed on june 19th in Chongqing, the KMT'S old civil-war headquarters, will

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prevent Taiwan's economic marginalisation. Because of Chinese pressure, Taiwan has been excluded from a recent spate of free-trade agreements (FTAS). This has worried the government, especially since an FTA between China and the ten-member Association of South-East Asian NationS(ASEAN) came into effect this year. China's prime minister, Wen Jiabao, has promised that Taiwan, which enjoys a big trade surplus with China (see chart), will "benefit more" from the ECFA than the mainland. Indeed, over the next two years China will lower tariffs for 539 categories of imports, worth $13.8 billion a year, and open u service categories, includ-

ing banking (see page 69). To appease an important lobby, the deal includes18 farm ingand fishery categories, with no reciprocal liberalisation in Taiwan. Overall, Taiwan will lift tariffs for only 267 categories of imports from China, worth $2.9 billion. Mr Ma hopes the pact will demonstrate the benefits of his pragmatism in dealings with China. Unlike his predecessor, the DPP'S Chen Shui-bian (now in jail for corruption), he has not trumpeted Taiwan's separate identity. Rather, the KMT has reached agreements allowing scheduled flights across the strait and Chin ese tourists to visit Taiwan. The DPP portrays the pact as a Trojan horse. Its leader, Tsai lng-wen, has rejected the government's assertion that there will be a net employment gain of 260,000. In a rare televised debate with Mr Ma, she said 5mjobs in Taiwan would be adversely "affected" by the pact. A DPP spokeswoman, Hsieh Huai -hui, says her party fears the ECFA will "strengthen interdependence". China, she says, will use it as a stepping stone toward political integration. The DPP gained some ammunition in early June when a Chinese spokesman gave a seemingly negative response to Mr Ma's oft-stated hope that the ECFA might encourage other countries to sign FTAS with Taiwan. They have hitherto held back so as not to upset China. The Chinese spokesman's remarks, though not explicitly ruling out such FTAS, drew a rare rebuke from Mr Ma'sgovernment. A government committee's rejection of proposals for a referendum on the ECF A has also galvanised opposition. China recoils at any hint of a plebiscite in Taiwan, fearing one might one day be used to justifya formal declaration of independence or to block reunification. Mr Ma has denied ~.

The Economist July 3rd 2010

40 Asia ~ opposing an OPF suggests

ECFA referendum, but the the committee's decision reflected Chinese pressure on the KMT. The OFF can still get thousands of people onto the streets, but it has struggled to expand its support beyond 30-40% of the electorate. It also lacks a convincing chal lenger to Mr Ma in the 2012 elections. Many analysts believe that Su Tseng-chang, its candidate in the Taipei mayoral election

later this year, would do better than Ms lSai. Mr Su is unlikely to win in Taipei, a KMT stronghold. But an honourable defeat might boost his presidential hopes. Devising a strategy for dealing with China will be hard forthe OPP. Harping on about the ECFA may not go down well with voters if the risks the opp stresses do not materialise. The government predicts GOP will grow by more than 6% this year

Japan' s sumo scandal

Caught off-balance TOKYO

Ye t another scandal, this time about gambling, prompts a clean-up of the sp ort UMO boasts 82 kimarite,or techniques, to take down an opponent. But the sport is most notable for pummelling itself. Its reputation has been scorched by scandals, from drug-use to accusations of match-fixing to the bullying to death of a young recruit. But recent revelations about gambling and ties to the yakuZQ, japan's mob, are the most serious yet. Onjune 28th the Japan Sumo Association USA), the governing body, moved to dismiss a top·ranke d wrestler, Kotomitsuki, and a "stablemaster", or coach, Otake, for betting on baseball, which is illegal in japan because of gambling's links with the yakuza. There followed news of other such cases, and of incidents where wrestlers paid blackmail to yakuza to keep their sins quiet Around 70peopJein sumo have so far been implicated in gambling on baseball and other things. Unlike in previous scandals, none is a foreigner. And the involvement of stablemasters suggests rot at the top. An independent panel has recommended that 12 wrestlers, almost one-third of the total in the professional ranks, be suspended from a tournament this month in Nagoya. Of the j SA'S "elders", or directors,ll face suspension, including the chairman and three other members of its executive board. A plethora of sponsors has pulled out. The police are preparing criminal charges. Polio ticians are clamouring for an overhaul of the powerful,secretivelSA, which initially turned a blind eye to this scandal, as it has to most in the past. Most national sports suffer scandals. But the respect held by thejapanese for sumo is different. It traces its lineage back nearly two millennia. II was long the sport of the emperor's court. Matches were held at Shinto shrines, whence sumo's elaborate pre·bout rituals de· scend. Today, wrestlers and stablemas· ters are held to high standards- and endure opprobrium when they fall short. The scandal says a lot about modern japan, a country undergoing a sweeping

S

transition from informal, implicit rules to formal, explicit ones. Institutions long closed to public scrutiny are becoming more accountable. In politics this is seen in the way that the Democratic Party of japan last year overturned more than 50 years of rule by the U beral Democracy Party, and now hopes to neuter the bureaucracy. In business it is visible in new rules requiring that public companies have independent directors and disclose executive pay over ¥lOom (aroun d Sun). Similarly, the gambling scandal is ultimately about professionalising and modernising thelSA, which has long resisted reform. The public is fed up with its closed culture, hypocrisy and apparent tolerance of wrongdoing. It was only in 2008 that two outside directors were brought in by the governmenl,following the death of the recruit. Now, the jSA 's chairman, Musashigawa, is expected to be suspended. One of those outside directors-a former prosecutor- is tipped to take his place as acting chairman. The symbolism of that,says a ministry official, is not accidental.

/

"--" A - -

Not as pretty as he looks

after contracting by nearly 2% in 2009. Merchandise exports to China, which account for almost 30%ofTaiwan's total, have been helping to power this recovery. China's backing for Mr Ma is clear_ It studiously avoided any criticism of Taiwan itself when America approved $6.4 billion-worth of arms sales to the island in january. But for all its efforts to show goodwill, it has made no attempt to scale down its military deployments on the coast fac· ing the island, where its missile build-up continues. A defence-ministry official in Taipei points to a map of the island and sweeps his arm around to its east to show where, in the past year or so, Chinese naval forces have begun to extend their wargaming reach. China is still, he says, a "clear and present danger". Greed for China's market is good for the KMT'S electoral prospects; but fear of its long·term inten· tionscan still boost the DPP . • The Philippines changes president

Sic transit Gloria "' ANIlA

Hope's six-yearly victory over th e Philippine exp erien ce HE inauguration of Benigno "Noynoy" Aquino as the Philippines' new president on June 30th looked less like a ceremony of state than the climax of a revolu· tion. Huge crowds, many of them dressed in yellow, chanting "Noynoy! Noynoy!", packed Manila's main park to hear Mr Aquino take his oath. It recalled the people-power revolution of 1986 when Mr Aquino'smother, Corazon "Cory" Aquino, became president with the help of yellowdad crowds, chanting"Cory! Cory!" Filipinos revered Mrs Aquino because she toppled a corrupt dictator, Ferdinand Marcos, and restored democracy. The assassination of her husband, Benigno "Ninoy" Aquino,Marcos's chief opponent, led eventually to the dictator's downfall. "My parents sought nothing less and died for nothing less than democracy, peace and prosperity," said Mr Aquino in an inauguration speech frequently punctuated by cheers and applause from the crowd. Mrs Aquino's death last year let loose a wave of nostalgic popular sentiment which swept herson (an otherwise unremarkable senator) to victory in the presidential election held in May. The echoes of 1986 were intentional. Mr Aquino has portrayed himself as the deliverer of the Philippines from what he regards as the corrupt regime of the outgoing president, Gloria Macapagal Arroyo. "If there's no corruption, there's no poverty;" was his campaign slogan. In his inaugura· tion speech,Mr Aquino promised "the end ~~

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The Economist July 3rd 2010 ~

of a leadership that has long been insensitive to the suffering of the people". The similarities, however, were superficial. Unlike his mother, Mr Aquino was elected in an indisputable election, and he took office in an orderly handover of power, all according to the constitution_ Mrs Arroyo was no dictator, although many of her opponents said she would have liked to have been one. Her administration was, however, beset by accusations, which she denies,of corruption- not least that she won the 2004 presidential election by cheating_ just as his mother set up a commission to try to recoup the fabulous fortune amassed by Mr Marcos, Mr Aquino is setting up a "truth commission"to investigate corruption during Mrs Arroyo's nine years in office. The precedent of his mother's commission is not encouraging, but he expects results, stridently warning "those who are talking about reconciliation" that past corruption cannot simply be forgot ten, because "there can be no reconcilia-

Asia 4 1

tion without justice." Mr Aquino's mother also failed to solve the many other problems that bedevil the country_ They include, in the economy, sluggish growth, widespread poverty and rapid population growth. The political culture remains fractious and often violent Communist and Muslim separatist insurgencies persist, and the security forces are often abusive and sometimes mutinous. Solutions to these problems also eluded Mrs Arroyo. Now Mr Aquino has six years in office to confront them . However, despite the pseudo-revolutionary fervour of his inauguration, he has come up with little, in his speech then or elsewhere, that smacks of revolutionary solutions. Filipinos have been disappointed before. Mrs Arroyo first took power in 2001 in a genuine people-power uprising, that succeeded in booting out another prodigiously corrupt president, Joseph Estrada. And yet the opinion polls suggest that Mrs Arroyo went on to become the most unpopularpresident since Marcos. _

Bangladesh and war crimes

Blighted at birth DH A KA

The odds are still stacked against an effective tribunal EARLY 40 years after perhaps 3m people died in Bangladesh's war of secesN sion from Pakistan, the government insists retribution is looming for those guilty of war crimes. Three months ago the government, led by the Awami League, of Sheikh Hasina, the prime minister, set up a warcrimes tribunal to try alleged perpetrators. This was one of the League's main promises in the campaign for the election that it won in a landslide in December 2008_ Many Bangladeshis, however, still doubt that the promise will be kept. Bangladesh, formerly East Pakistan, became independent in December 1971 after a nine-month war against West Pakistan. The West's army had the support of many of East Pakistan's Islamist parties. They included Jamaat-e-Islami, still Bangladesh's largest Islamist party, which has a student wing that manned a pro-army paramilitary body, called Al Badr.1t is these collaborators the government wants to try, not the main culprits in the former West Pakistan army. As far as the League and many citizens are concerned, this is a simple matter of validating the historical truth, which included appalling massacres and a concerted drive to wipe out the new nation's intelligentsia. In 1995 a self-appointed panel of eminent citizens, co-ordinated by the cur-

rent law minister, Shafique Ahmed, compiled "evidence" on individuals they accused of war crimes_ The list includes many of the most senior figures injamaate-Islami. So far, no one has been charged, but the government has banned roughly 50 suspects from leaving the country. This week three senior Jamaat leaders were ar-

How they deaLt with collabo rat o rs in 1971

rested on unrelated charges. To the opposition this smacked of petty harassment. The United Nations and Western governments are wary of lending support to a tribunal unless it conforms to international standards of due process. But without foreign funds and technical support, those standards are unlikely to be met. Technical disputes over the process, however, mask a more fundamental worry: that in hunting those with four-decade-old blood on their hands, Sheikh Hasina is conveniently hounding her enemies. If the trials confirm the conclusions ofthe1995 inquiry, the outcome might conceivably be the execution of nearly all ofjamaat's leaders. Posing perhaps an even bigger obstacle than Western scruples is Saudi Arabia, which sells its oil to Bangladesh at subsidised prices and employs more than 2m of its citizens_ It is concerned about plans to reinstate the country's 1972 constitution, with four "pillars" that include secularism (the others are nationalism, socialism and democracy). Saudi Arabia recognised Bangladesh as an independent country a few months after the assassination in 1975 of the country's first prime minister, Sheikh Hasina's father, Sheikh Mujibur Rahman_ That paved the way for a return of religionbased parties, banned by the 1972 constitution. So reinstating and enforcing that original constitution might amount to an outright ban onjamaat, the standard-bearer in Bangladesh for a conservative strain of Islam, and a staunch Saudi ally, As for war-crimes trials, Mr Ahmed says Saudi Arabia has given the "green light". Indeed, it has denied allegations that it opposes them. But the number of Bangladeshis taking up jobs in Saudi Arabia has dropped to under 800 a month, down from an average of 11,000 in 2008 and 17,000 in 2007. Not everyone blames the economic downturn _ _

42 Asia

The Economist July 3rd 2010

A referendum in Kyrgyzstan

Better than feared '"But the government is still struggling A SH still blows around this Silk Road l"\..trading hub, just two weeks after the worst violence in Central Asia's post-Soviet history. Yet on june 27th Kyrgyzstan's diverse ethnic groups turned out to vote peacefully, in a referendum on their future government. Almost 70% of those eligible voted, roughly 90% in favour. Foreign observers congratulated the country's interim leaders on ajob well done. This was a relief after the chaos that has engulfed Kyrgyzstan since April, when street violence drove out Kurmanbek Bakiyev, its despotic former president, and installed an interim government under Roza Otunbayeva. In early June ethnic violence swept the country's south, leaving perhaps thousands dead, mostly members of the Uzbek minority. Up to 400,000 were displaced. Human-rights watchdogs had pleaded with Ms Otunbayeva to postpone the vote, fearing a low turnout and violence. Yet, even in the charred south, say election officials, at least 50% voted. Despite a few blatant irregularities, voters decisively endorsed the new constitution, which establishes a parliamentary republic and takes power away from the presidency. Ms Otunbayeva will stay on as president for 18 months, but then be ineligible to stand for election next year. "The people have put a full stop to the epoch of authoritarian, nepotistic management,"she declared. Dmitry Medvedev, Russia's president, took a bleaker view, predicting the "collapse of the state". But Russia, for all its assertion of a sphere of "privileged interests" looks impotent in Kyrgyzstan after rejecting pleas to sen d troops to stop the carnage. Voters saw the referendum as a choice between parliamentary democracy with a maternal president, and further instability and violence. Most said they voted for "peace and stability." The details came second. "I came to vote for a better life," said 70-year-old Kymbat Doomotbekova at a polling station in a Bishkek schooL Yet the referendum may be a distraction. The new government is struggling to win credibility in the south-especially among ethnic Uzbeks, for whom it is unable to ensure security. Thousands continue to live in makeshift camps near the border with Uzbekistan. Ethnic Kyrgyz say the Uzbeks started the violence, and that Kyrgyz were killed in pogroms, too. Yet the vast majority of homes destroyed in Osh, the centre of the violence, are in Uzbek

Avote for " never again" neighbourhoods. Uzbeks complain Kyrgyz officials are persecuting them with mopping-up operations; that their sons are still disappearing only to reappear at the morgue. Kyrgyz officials are arresting prominent Uzbek political figures. Some Uzbeks discuss guerrilla resistance. In such an environment, the only hope for reconciliation may rest in an impartial investigation, says Nazira Satyvaldiyeva, an Osh-based expert.in conflict resolution. But the government is resisting calls for an independent inquiry. And as reports spread that some Kyrgyz army units took sides in the violence, and officials harass human-rights activists, harmony is elusive, Parliamentary elections scheduled for the autumn seem a long way off. And, on Afghanistan's heroin highway to Europe, guns are never hard to come by. •

Pakistan's roLe in Afg hanistan

Ganging up on India k A NDA HAR

Rumours fly as Kanai talks to Pakistan

HE view from Pranav Ganesh's office was never spectacular, even before a T very high wall started going up right through his garden. Behind it, another high wall protects India's consulate in Kandahar. Mr Ganesh's job, issuing Indian visas to Afghans, often for medical treatment, sounds humdrum. But an Indian diplomat could not work in a more dangerous spot. This tiny diplomatic mission in the heart of Kandahar sends Pakistani officials into paroxysms of rage. They see the consulate, and three others in jalalabad, Mazar-e-Sharif and Herat, as fronts for antiPakistani activities, including support for Baluch insurgents inside Pakistan. Mr Ga-

nesh scoffs at the suggestion that he is up to anything more than the day job. Pakistan's long-held ambition for Afghanistan has been for it to provide "strategic depth" in the event of all-out war with India. So it resents the presence of the historic foe in places such as Kandahar, as well as India's aid programme, which has included building a road towards the Iranian border, to weaken Pakistan's grip over landlocked Afghanistan'S trade. Pakistan, says Mr Ganesh, "won't be happy until we have no diplomatic presence, including in Kabul." A recent tilt to Pakistan by the Afghan government has sparked fears of just such an outcome. Mr Kanai seems to have stopped lambasting Pakistan for tolerating sanctuaries within its borders for Taliban insurgents. He refrained from doing so even when he was presented with strong evidence that an attack on a tribal gathering he convened in Kabul inJune was carried out by the Haqqani network, one of the three leading insurgent groups, which has close links to Pakistan's intelligence service. Even more surprising is an outbreak of shuttle diplomacy. Generals Ashfaq Kayani, the head of the Pakistani army, and Ahmed Pasha, the intelligence chief, pop in on Mr Kanai. They want Pakistan to be central to any peace deal Mr Kanai may strike with insurgent groups, including Hizb-e-Islami and the Haqqani network. One unconfirmed report even had the two generals on one visit bringing Sirajuddin Haqqani, one of the network's leaders, who is on America's most-wanted list. The Americans themselves do not believe the Pakistanis have as much control over the Haqqani network as they would like Afghanistan to believe. Nor do they set much store by a reported Haqqani-network promise to sever links with alQaeda. But,in the light of Mr Karzai's serial snubs to his American paymasters, some worry he might be preparing to ditch them for the sake of a deal with Islamabad. Even before the dismissal of Stanley McChrystal, the American commander in Afghanistan, intense gloom had set in about America's military strategy. So peace deals could be seen as goo d news. But the risks are great. Already the Northern Alliance, the main anti-Taliban force in the country, is alarmed. Pakistan has madedearthatit wants india out of Afghanistan, induding in a 56page document given earlier this year to senior American officials. Even those Western diplomats who are keenest on early talks with the Taliban balk at giving Pakistan all it wants. Other countries, too, if excluded from any deal, are just as capable of meddling in Afghanistan. A comprehensive solution that accommodates all theinterests of a complicated region, and keeps Mr Ganesh in his vista-less office in Kandahar,is hard to imagine . •

The Economist July 3rd 2010

Asia 43

Banyan I Asia's alarming cities How Asian cities are built w ill determine the prospects for globa l carbon emissions. Oh dear

YOU are the sort to worry at night about man-induced climate IingFchange, then book a stay at any of the new high-rise hotels goup on the edge of China's big cities- start looking for them around the third ring road. When you stagger red-eyed out of bed to peer into the murky dawn, you will see rank upon serried rank of raw "superblock" developments, a mile apart, marching into the distance. You think of the emissions involved in their carbonhungry construction, the traffic jams on the arteries tying them into the expanding city, and the new coal-fired power stations being built to light them up_ And you wonder how Asia can change its habits- energy consumption grew by 70% in the ten years to 200s- before it is too late for all of us. Yet the world's hopes of putting carbon emissions on a manageable path depend upon on how developing Asia urbanises in the coming decades. The scale is staggering. According to the Asian Development Bank, 44m people join city populations each year. Every day sees the construction of 20,000 new dwellings and 250km (160 miles) of new roads. In theory, urban living can be greener than other ways of life: people need to travel shorter distances, for instance. The practice is not so simple. Most poor people coming to the city aspire to higher standards of living and consumption. Ill-planned public transport reinforces car use. Most striking, putting up and using buildings accounts for a big part of developing Asia's carbon emissions- perhaps 30%in the case of China, where nearly half the world's new floor space is built each year. What's more, the buildings do not age well. Many thrown up in the 1990S are already being pulled down and replaced. Governments acknowledge the challenge. Green codes in China mandate energy-saving standards for heating, cooling and lighting new buildings. The aim is to cut new buildings' energy use by 65%. But many new buildings are designed first and greened later- a cheaper but less effective approach. As for the superblocks that exemplify China's urbanisation, a dozen new ones are built every day. Yet their conceptual design is flawed, however many low-energy light bulbs they boast. They get built after the city government lays out a system of arterial roads. State utility companies put down power, water and sewage mains_ Developers bid for the rights to build blocks with spec-

ified numbers of housing units, schools, offices, shops, green space and so on. The developer throws up the block and plugs it into the centralised utilities grid. Presto, people move in. Yet such hyper-development has unwelcome consequences. Not least, as Harrison Fraker, an architect at the University of California at Berkeley, argues, superblocks in effect become gated communities of privilege. The social consequences of such isolation (for those inside and out) may take time to make themselves felt: for almost all of China's history, neighbourhood streets and alleys have enriched urban life. The environmental impact, however, is already apparent. Gated blocks with a single entrance force not just residents to abandon cycling or walking for the motor car whenever they need to go anywhere. Outsiders, too, face a vast, fenced obstacle in the way of where they want to go. Congestion, pollution and traffic accidents rise. Time to build a fourth ring road_ Mr Fraker and his team devised a different approach for Tianjin in north China, by thinking of the development as a whole system in which high-density neighbourhoods would generate nearly all their energy and water needs. First, "greenways" were marked out that gave pedestrians and cyclists a way to get to the nearest mass-transit station without being run down or choked. Meanwhile, good use of sunlight, shading and ventilation would cut heating and cooling loads. Photovoltaic panels and windmills would provide four-fifths of electricity needs. The rest, as well as gas for cooking and hot water, would come from biogas generated from sewage, waste food and plant clippings. Rainwater would flush lavatories. Storm-waterrun-oif would be collected for irrigation, including for allotments and the trees that reduced the "heat-island" effect. Something of China's traditional urban scale would be echoed by community blocks within the greater scheme, accommodating 100-300 families. Yet in China the idea appears to have run into the sands because of the radical approach it requires. Developers are illversed in thinking about energy; water and sewage as a seamless whole. Utilities think like central planners. Government agencies struggle to operate beyond their traditional remits. What is more, the costs are up to a fifth higher for such developments, though they more than pay for themselves in the longrun_ In the short run, dim prospects Enlightened developers say that their kind should be putting up greener buildings without waiting for Asian governments to set the tone. Christine Loh of Civic Exchange, a Hong Kong thinktank, argues that large amounts of energy can be saved with little effort, dramatically improving efficiency. In the newish hotel by the Kunming ring road in which this column is being written, the bulbs that provide the light are not only electricity-guzzling incandescent ones, but dim and frosted at that But Yvo de Boer, the United Nations's outgoing senior climatechange official, argues that limits to what can be done are set by the perverse economic incentives that apply in most parts of Asia. Developers, a big part of the solution, will struggle to make a profitable fist of turning green when energy and the costs of pollution are grossly mispriced, favouring old-fashioned utilities. Putting an end to these subsidies would do wonders for bringing about a better night's sleep, and a crisper, more pleasing view in the morning. • Economist.com/b log s/banya n

Also in this section 45 Somaliland' s election 46 Business in Iraq 46 Jerusalem's settlements 47 Arow over Ira n's biggest university

Fordaily analysis and debate on the Middle East and Africa, visit Economist.com/ middLeeast Economist ,com/africa

The religious right in east Africa

Slain by the spirit NAIROBI

The rise of Christian fu ndamen talism in the Horn of Africa

AT A rally in Nairobi's Uhuru Park on a l"\..Sunday afternoon last month, Bishop Margaret Wanjiru, parliamentarian, assistant minister for housing and one of the country's foremost Pentecostal preachers, was passing around a paper bag for contributions from the crowd. Some tens of thousands of Kenyans had gathered 10 campaign against a proposed new constitution, which Ms Wanjiru and other preachers urged them to reject in a referendum to be held on August 4th. Two provisions, one allowing for Muslim courts to settle marriage and land disputes, the other to allow abortion where the life of the mother is in danger, were a direct threat 10 Christianity, they said. On the stage, people were being slain by the spirit; sometimes just a fingertip was enough to throw believers back across the boards. Then someone tossed two grenades into the crowd, killing six people and wounding many others. Almost immediately, there were accusations that government security agents had attacked the rally. That is evidence, for some, that the government is rattled by the vibrant opposition of the "new churches", mainly Pentecostal, to a new constitution that most members of the government support. Whatever the truth, there is no doubt that, as elsewhere, Kenya's politicians have underestimated the drawing power of a fresh generation of Protestant churches, most of which were

set up in the 1980s. Officially Pentecostals and other "charismatics" count for no more than 5% of the population. In reality, their ministers preach to about a third of the country every week. Their rise reflects an important trend across Africa. According to the World Christian Encyclopedia, about 17m Afri cans described themselves as born-again Christians in 1970. Today the figure has soared to more than 400m, which accounts for over a third of Africa's population . And as in Nigeria on the other side of the continent, they are now having a noticeable effect on public-policy debates in east Africa. Regardless of the outcome of the vote on the constitution in Kenya, for example, their interventions are likely to make abortion a defining political issue in the country. Similarly, the efforts of new churches in neighbouring Uganda have made political controversies out of homosexuality and the right of Muslims to convert to Christianity. MsWanjiru'sown church,JesusIs Alive Ministries, is a good example of the new genre. She can draw 100,000 worshippers to a meeting. Add in a visiting televangelist and the number can rise to as many as 500,000. Ms Wanjiru has lived the Pentecostal dream. She is from a poor family of casual labourers and eked out a life as a housemaid and toilet cleaner before working her way up to a marketingjob. She then

experienced a vision from God calling on her to save Africa. These days videos, CDS and other accessories can be bought from her website using credit cards or phone credit. She makes good use of Facebook, Twitter and other social media. She is not afraid to court controversy,last year baptising the boss of the Mungiki organisedcrime outfit, Maina Njenga. Mr Njenga's gang had been involved in extortion and had a history of hacking off the heads of its enemies. But the business of owner-operated churches is competitive. A few dud sermons and the crowd thins. That is one reason why they are so upbeat and aspirational. Indee d, their insistent calls for self-discipline and education, striving and victory prompt some people to say Pentecostalism should be encouraged in Africa as the new version of Max Weber's Protestant work ethic. The churches are certainly prominent in anti-corruption campaigns. However, there is also plenty of hucksterism. Vou will be blessed with health and wealth by God, congregants are told, especially if you give generously. As in other parts of the world, the new churches in Kenya and Uganda provide a place for the ambitious poor to get ahead . Yet the real competitive advantage of the new churches in east Africa seems to be their willingness to tap, at least subliminally; into traditional beliefs. "They give full play to the enchanted mentality, which holds the world to be inhabited with ghosts and spirits," explains Paul Gifford, a professor of African Christianity at the University of London. It makes economic sense: getting spells lifted and spirits cast out on a Sunday morning saves money on a visit to the witch doctor during the week. New churches are good at exploiting gaps in the market and profiting from ~~

The Economist July 3rd 2010 ~

them. A Ugandan Pentecostal preacher, Martin Ssempa, for instance, has mined a rich seam of homophobia in Uganda to help build up his standing. He and other Pentecostals pushed for the tabling of an anti-homosexuality bill in the Ugandan parliament, which advocates spying on gays and proscribes imprisonment for sodomy. Earlier versions of the law called for the death penalty in some instances. Mr Ssempa has in the past had ties with a prominent American evangelical, Rick Warren (who has condemned the anti-gay law), and with Uganda's born-again first lady, Janet Museveni. "In Africa sodomy is an abomination," he says. Some of his actions, such as screening gay pornography to his congregants, look clownish and selfpublicising, but Mr Ssempa has been astute in targeting students at Makere, Uganda's best university. Other Pentecostals have also had success in Uganda with missions to convert Muslims to Christianity. New churches are making headway in other parts of east Africa too. Despite threats of imprisonment from a repressive government they are enjoying success in Eritrea and have also built a large following in traditionally Coptic Christian Ethiopia, where all Protestants are simply known as "Pentay" for PentecostaL The largest denomination, Kale Heywet, which claims sm members, has been influenced by the new church movement, as has the 2.5m strong Evangelical Lutheran Church in Tanzania. It now says that it will reject money from Lutheran churches in richer countries to protest against their support for gay marriage. Returning refugees have intro duced Pentecostalism into Burundi and Rwanda. Burundi's president, Pierre Nkurunziza, is a born-again Christian. He holds prayer sessions and has overseen the introduction of new laws criminalising homosexuality in the country. However, the new churches maynol be able to translate today's assertiveness into permanent political power. There have been investments from Pat Robertson and others, but the influence of the American Christian right is often overstated. Nigerian Pentecostals are more important in establishing business models and preaching styles. Being independent has helped with growth, but it makes it harder to lobby governments. Then there is the question of class. Pentecostalism cannot quite shake off its impecunious roots. The cabal of civil servants, soldiers, and businessmen who dominate the golf and social clubs of Nairobi and Kampala, the capitals of Kenya and Uganda, are mostly Anglican and Roman Catholic and are unlikely to be swaye d by any casting out of demons. Likewise, the former Marxist rebels running Eritrea and Ethiopia probably won't be moved by speaking in tongues. Besides, the swagger of preachers like Mr Ssempa can backfire. Support for the

Middle East and Africa 45

anti-homosexuality bill in the Ugandan parliament has fallen away after Mr Ssempa and other preachers accused a rival Pentecostal, Robert Kayanja, of sodomy. Mr Kayanja, coincidentally a halfbrother of the Archbishop of York, John Sentamu, has himself been criticised in Uganda for milking the poor to live a luxury life. And the clear anti-Muslim sentiment scares politicians who want to win the sizeable Muslim vote. Even so, the emphasis on youth in new churches means they cannot be discounted. A new generation of born-again political leaders may seek to win power on Christian votes alone, even at the cost of division. _ Somali land 's elections

Not so failing HUGHS ...

A long-delayed presidential poll in a country that does not officially exist INCE 1991 Somalia has routinely been labelled "the world's most failed state". Yet its north-west bit, Somaliland, once a British protectorate that merged with italian Somalia to form unified Somalia in 1960, actually feels like a proper country. Although poor and underdeveloped, it is free of the south's scourges, such as piracy, warring militias and lslamist extremism. The streets of Hargeisa, the dusty and tumbledown capital, hum with construction work and mobile-phone chatter. Somaliland is pushing for international recognition and has been building a democratic state. In 2003 it held a presidential election, then a parliamentary one in 2005. On June 26th the 50th anniversary of the end of the British protectorate, a second presidential poll took place, marked with enthusiasm and little violence by its 1.07m registered voters (from a population of around 2.5m). It is hard to imagine that happening in Somalia.

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Not everything is rosy. The poll was originally scheduled for early 2008, but a dispute over voter registration saw it repeatedly delayed, before political parties grudgingly forged an agreement last September. There were a series of suicide attacks in Hargeisa in October 2008, including on the presidential compound, which killed 29 people. These sharpened fears that al-Shabab, south Somalia's Islamic militia, no fan of the idea of a democratic secessionist state, could kill Somaliland's democratic dream. In early June Somaliland's police foiled a similar plot in Burco, the region's second city. In the event, despite an election-eve warning by al-Shabab, the poll went ahead smoothly in most of the country. International election observers reported, with some qualifications, a well-organised and fair vote. There was, for example, the reported distribution of false voter ID cards and widespread underage voting around the town of Borama near the Ethiopian border, home territory of President Dahir Riyale Kahin. There were problems in the regions of Sool and eastern Sanaag, where some clan leaders are unenthusiastic about Somaliland and where Puntland, another part of Somalia that asserts its autonomy, lays claim to territory. The final result may be delayed by an investigation of these difficulties. However, early indications were that Mr Kahin, who became president in 2002 when his predecessor died and who once served in the regime of Siad Barre, Somalia's last military dictator, had lost to Ahmed Silanyo, Mr Silanyo, an ageing scion of the Somali National Movement, which fought the Barre regime, lost the 2003 vote to Mr Kahin by 80 votes amid suspicions of electoral fraud. whoever wins will have his work cut out if he wants to raise people's standard of living. Somali land's economy relies heavily on selling livestock to the Middle East and on remittances from the huge diaspora in Europe, America and the Gulf states. Import tariffs account for most government revenue, and subsistence and small trading-or migration-are the only options for many Somalilanders. Recognition, yearned for by virtually all Somalilanders, could help, as it would give the country access to multilateral assistance and encourage foreign investment. But some leading African Union members are fearful of encouraging secessionist sentiment across the continent. And the United Nations insists on African leadership. There are signs that America, fearful of growing al-Qaeda influence in Somalia, could become more willing to deal with Somaliland- and in March a report from the Council on Foreign Relations, a think-tank, called for an increase in donor assistance. But this is unlikely to mean recognition either. _

46 Middle East and Africa

The Economist July 3rd 2010

Iraq' s economy

Why business is still in the dumps BAG MDAO

Violence and a shortage of electricity hobble manufacturing

TANGY sweet smell wafts through a A factory south of Baghdad as 1 tonne of brown goo per hour is funnelled into glass bottles for transporting to local supermarkets. Hello is a best-selling barbecue sauce. It is made by Iraqis in a factory owned by Iraqis using Iraqi raw material, mostly dates, which are deemed the perfect culinary accompaniment for grilled lamb. Yet in Iraq itself Hello is still a rarity. On tightly packed shelves in Iraqi shops it is usually surrounded by rows of imports: Iranian noodles, Turkish milk, German detergent, and so on. With violence receding a bit (but by no means entirely) in the past two years, traders are finding a growing number of customers eager for foreign-made wares, especially without real competition from local ones. Hopes of a spurt in industrial growth rose a year ago when Americans stopped patrolling Iraqi streets, but the much-touted peace dividend has failed to materialise. Most Iraqi factories that functioned before the American invasion, albeit often badly, are still closed. The road to a durable peace and rising prosperity is still blocked. Adnan al-Reqabi, Hello's general man ager, complains he is pumping out only slightly more sauce now than last year and his staff of 90 has not grown. Production slowed but never stopped in the bad ol d days when looters and militias lurked outside the metal front gate, he says, "and we're still stuck." Iraq is an industrial pygmy if you exclude the oil sector, which provides 95% of government revenue, but employs only 1% of the workforce. Beyond oil, Iraq does not export much of anything. It ranks 175th out of 1.83 countries surveyed by the World Bank for ease of starting a business. The economy is growing by more than 7% this year, says the IMF, but that is mostly due to investment by foreign oil companies, and they have relatively few jobs to offer. Most Iraqis still have no full-time job. Businesses face so many obstacles in Iraq that you wonder how people like Mr Reqabi get by. For instance, bosses struggle with transport. Iraq has a good network of roads built for Saddam Hussein's tanks. Yet in order to thwart suicide car-bombers, the government lets lorries enter big cities such as Baghdad only between 4pm and midnight. Mr Reqabi says he may have to rename his barbecue sauce Good Night. On Iraq's big arterial roads lorries face even more problems. A few years ago po-

Goodbye electricity

licemen set up hundreds of checkpoints under American tutelage. On the 190km (uS miles) of road between Baghdad and Tikrit, to the north, there are more than 40. Once vital for fighting insurgents, they have turned into shady customs stations. Officers demand a $9 bribe if a lorry driver's papers are in order and multiples of that if not. The checkpoints have become so lucrative that officers buy and sell them, Some on the road north to Turkey go for $45,000. Others on the road west to Jordan fetch $20,000. Entrepreneurs say they would happily pay such "police taxes" if only they could borrow money to get their businesses to grow. But banks charge up to 20% in interest on small loans and sometimes demand 300 % in collateral should they need to recoup capital in a fire sale. Recent insurgent attacks are likely to make banks even more reticent. The central bank was bombed on June13th and the state nade Bank of Iraq a week later, killing a total of 44 people. But the biggest obstacle to doing business is a lack of electricity. Few areas across the country get more than three or four hours a day. Mr Reqahi gets just an hour or two, making it impossible to produce mayonnaise, as he has no reliable refrigeration, To make Hello sauce, which has to be stored at room temperature, he runs a set of generators, dwarfing all other machinery, for eight hours a day. Fuel is his single biggest expense: buying it takes up much of his time. He must get written permission from five different government departments to buy fuel in bulk, since Iraq's refining capacity is limited. Once procured and consumed, Mr Reqabi must then pay for eight hours of mains electricity, since the meter in his factory does not distinguish between different sources of power, Some firms have learnt to adapt. "Our engineers know how to work without electricity," says a national phone company's boss, with astra ight face. Many others businesses have no such pool of clever improvisers. Public anger boiled over in June when temperatures rose above 50°C

and air-conditioning was scarce. Protesters in Nasiriya, south of Baghdad, threw ston es at riot police. In Basra, the south's biggest city, they smashed government offices. Police opened fire, killing two. Fearing an uprising, the caretaker prime minister, Nuri al-Maliki, then pushed out his electricity minister. But few business' men expect a better service. The electrical network is in such bad shape that blackouts will persist for years, despite the huge amounts already being invested. The infrastructure under Saddam was already crumbling. But corruption in today's government, seven years of violence, fuel shortages at power stations and crim inal gangs that divert electricity supplies, have all made things even worse, The Americans have invested nearly $5 billion trying to improve electricity since their invasion. They have helped raise the number of high-voltage lines in use from 20 to 34. Iraqis nostalgic for Saddam refuse to believe that, overall, the supply of electricity has morethan doubledsince2oo3.1t has certainly been more widely distributed; previously, Baghdad took the lion's share, And demand has gone up, according to official sources, by u8%. Freed from the controls that prevailed under Saddam, Ira' qis have been buying power-hungry aircon ditioners, white goods and satellite television sets. Almost all of them were made abroad . _ Jerusalem's settle me nts

Permission granted SILWAN, JERUSALEM

Tensions flare again as Israel proposes to expand settlements

SOUNDS straightforward enough. In IforTtheJerusalem words of Stephan Miller, spokesman city: "Once any construction project in the city of Jerusalem has com' pleted the permit process ... it can begin construction, irrelevant of race, religion, creed and gender." But there is the rub. Race, religion, cree d and sometimes even gender are supremely relevant if the Holy City, a complex web of separate Jewish and Arab districts, is ever to be divided peaceably into the capitals of two states, Israel and Palestine. A series of Jewish settlement-projects inside Arab districts of East Jerusalem threaten to exacerbate tensions in the city. But the mayor, Nir Barkat, seems determined to push them forward regardless. The prime minister, Bi nyamin Netanyahu, due to meet President Barack Obama in Washington on July 6th, has been embarrassed by Jerusalem's building plans before. But his attempts to stop or at least de- ~~

The Economist July 3rd 2010

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fer them are sporadic. His critics say they are half-hearted, too, because ideologically the prime minister sympathises with the settlers. Indeed, Mr Netanyahu's aides point out that, though subscribing since last year to the "two-state solution", he has never accepted that jerusalem need be divided, or that pan of it should be the Palestinians' capital. Mr Miller was referring to the old Shepherd's Hotel in the Arab district of Sheikh jarrah, a long-empty building that a jewish-American developer has bought and proposes to turn into apartments for Jewish settlers. Work began at the site this week, under the protection of armed civilian guards. Another j ewish building project in the same district requires the eviction of 28 Palestinian families, many of whom have been living there for more than 50 years_ IsraeliJews and local Palestinians now protest there, relatively peacefully, each week_ However, bullet-marked walls and damaged cars attested this week to the much less peaceful activity around another chain of jewish settlement-sites, deep within the steep, winding lanes of the Arab district of Silwan which sprawls beneath the old City walls to the south. Pal estinian residents described how on june 27th police charged through Silwan's narrow thoroughfares firing tear-gas grenades through windows and doors, choking people inside their homes. They produced the spent canisters as evidence. Much more seriously, they exhibited cartridge cases of live ammunition, claiming that the civilian employees of private-guard companies fired in the air in response to stone-throwing by Palestinian youths. In the nights that followed, police raided the district and carted off teenagers, some as young asu, on suspicion of stonethrowing. Sucking ice-creams in the hot, dusty alleys in the morning, the youngsters looked no worse for their night inside, though some said they were slapped and all asserted proudly that they were shouted at and threatened by the policemen.

University challengers Th e battle to control a centre of opposition to the government

A ROW is brewing over control of Iran's r t biggest university. With l.sm students, campuses all over the country and tens of billions of dollars in assets, Azad University, a semi-private institution,is a rich prize. Since its establishment nearly 30 years ago, it has been a bastion of Akbar Hashemi Rafsanjani, a wealthy and influential form er president and bitter rival of the incumbent, Mahmoud Ahmadinejad. Mr Ahmadinejad's supporters claim thatMr Rafsanjani channelled money from Azad University to finance opposition candidates during last year's election campaign, charges the university denies. Since the election, it has been the site of continuing protests against Mr Ahmadinejad's government. Small wonder then that Mr Ahmadinejad is keen to get his hands on it. In June, anxious to prevent this, the university's board of trustees voted to turn its assets into religious endowments, which shields them from government interference. Angered, the president tried to push a bill through parliament that would The trouble-spots that sparked this week's violence are a u -flat settler apartment block called Beit Yonatan, which the Israeli Supreme Court has ordered evacuated and sealed off because it was built illegally; and, nearby, a Palestinian apartment block that was once a synagogue. jewish settlers are demanding that the Palestinian families leave, as the building is owned by Jews. Uri Ariel, a Knesset member, says if the police do not oust the fam ilies he will do so himself on july 4th. Police units are deploying around the district in preparation for what threatens to be another violent Sunday. Silwan is also the site of a large and controversial building plan adopted last week by the municipality's planning committee. Mr Barkat proposes a $som park-and-tourism complex for the valley of Silwan. It would be called the King's Garden, and would extend from a popular archaeological site known as the City of David, opposite the Old City walls, to form a national park in honour of the biblical king. The project will m ean demolishing 22 Palestinian homes, built illegally over the past two decades, and moving the residents to new homes nearby. In an effon, so far unsuccessful, to win local consent, the mayor is offering retroactive building licences for another 6o-odd homes in the area, also built illegally. But local people are not tempted. They say the illegal build-

have allowed him to replace the university's head and block it from transferring its assets. To Mr Ahmadinejad'schagrin, MPS voted down the proposed law and rushed through another letting universities endow their property to the public. The current president's supporters, including members of the baseej, a thuggish volunteer militia, responded with protests outside parliament, lambasting Mr Ahmadinejad's adversaries as traitors. Ali Larijani, the speaker and a conservative opponent of Mr Ahmadinejad, condemned the demonstrations. The president's supporters have since proposed another bill to give the government more control over the university. The quarrel has highlighted theopposition 10 Mr Ahmadinejad's hardline government from within Iran's conservative establishment. If the president comes out on top, it will be a blow to Mr Rafsanjani. It would also give the government and its security forces more control over Iran's universities, where until now opposition to the regime has flourished.

Staying putin Silwan ing is the result of decades of Israeli refusals to grant building licences to Palestinians. And they do not wish to celebrate King David's life and legend. The mayor holds out to them the prospect of a better, greener life in Silwan; but they see his scheme as yet more "Judaisation" of the Holy City. _

Also in this section 49 The Bettencourt affairin France 49 Hungary's worrying politics SO The limit of Spanish devolution 50 Austerity bites in Greece 51 Art, church and state in Russia 52 Charlemagne: Before the altar of Europe

For daily ana lysis and debate on Europe, visit Economist.com/e urope

German politics

Angela Merkel rebuked BHLlN

The arduous vote for a n ew president exposes th e acrimony w it h in h er coalition HE German custom, when electing a new president, has been to sprinkle the assembly of politicians that makes the choice with actors, sports stars and writers, This time the guest electors were fewer, Such non-political folk are unpredictable and the stakes were too high: defeat of the government's nominee would have been a body blow to Angela Merkel, the chan~ cell or, already beset by squabbling coalition partners and slumping ratings. On June 30th, after three rounds of voting, she avoided that disaster: her candidate, Christian Wulff, the premier of the state of Lower Saxony, was elected president a month after the sudden resignation of his predecessor, Horst Kohler. In the event, Mr Wulff eventually won the absolute majority that had eluded him in the first two rounds of balloting. But the result was a severe setback nonetheless. The election of a president- a job with little political weight but, in the right hands, perhaps the power to instruct and hearten the citizenry- is an unusual reason for a crisis. The three coalition parties- Mrs Merkel's Christian Democratic Union (cou), its Bavarian sibling, the Christian Social Union (csu) and the liberal Free Democratic Party (FDP)-commanded a majority of the 1,244-member assembly, which is made up of the entire Bundestag and an equal number of representatives of the 16 states. Mrs Merkel had hoped that a successful ballot would mark a new begin-

T

ning for her government; instead the grudging vote exposed the stubborn old problems she has yet to resolve. In choosing Mr Wulff, a mild-mannered career politician, Mrs Merkel made her job needlessly difficult. The choice was meant to soothe her party's bigwigs, with whom she has a sometimes testy relationship. But she paid too little hee d to the rank and file, and failed to campaign for him energetically enough once the decision had been made. Beyond governing circles, Mr Wulff stirred little enthusiasm. Against him the opposition Social Democratic and Green parties cleverly put up Joachim Gauck, a charismatic leader of East Germany's "peaceful revolution" in 1989 who became head of the Stasi archives and exposed the crimes of the com~ munist secret police. He was the popular favourite, in part because he seemed to rise above politics. A champion of "freedom" over "security", he is philosophically closer to Mrs Merkel's "Christian-liberal coalition" than to the left-leaning parties that nominated him. Even hardened government partisans were beguiled by his candi· dacy. In backing Mr Wulff, Mrs Merkel was opposing a symbol of democraticrenewal. It is the latest misadventure for a government that has been stumbling since its inception. Billed as a "dream coalition" before last September's federal election, the governing trio has bickered incessantly over such issues as whether tax cuts

should come before deficit reduction, how health care should be reformed and how much longer nuclear power plants should be allowed to operate. At the height of the global financial crisis, during Mrs Merkel's first term as chancellor (at the head of a "grand coalition" with the Social Democrats), she portrayed herself as a bulwark against economic chaos. With this year's euro crisis, and the colossal bail-outs required to contain it, she has struggled to keep chaos at bay. Her technocratic leadership style, once reassuring, looks out of touch now, She and her allies have paid a high po· litical price. A COU-FOP coalition was vot· ed out of office in North Rhine-Westphalia, the most populous state, in May. That erased the federal government's majority in the Bundesrat, the legislature's upper house. Support for coalition parties has fallen (see chartl. If opinion polls are right, the FOP might not re-enter the Bundestag, having fallen below the 5% minimum threshold. The next federal election is due in 2013 but the coalition's popularity, and thus its cohesiveness, will be tested in sev- ~~

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The Economist July 3rd 2010 ~

eral regional ballots next year. Mrs Merkel and her government allies still have a chance to regroup. The econ· amy is bouncing back and unemployment has fallen to nearly pre-recession levels. Even before the presidential vote,coalition leaders were vowing that they would be more civil to each other and readier to compromise. Demands by the FDP and csu for big tax cuts, despite rising deficits, were the biggest source of strife. Guido Westerwelle, who is both the FDP'S chairman and the foreign minister, now says that deficit reduction takes precedence. He and his fellow party leaders will have to show similar flexibility over such contentious issues as health reform, nuclear power and the details of a planned €80 billion ($97 billion) deficit reduction package if tensions are not to erupt again. The Bun' destag's summer break, which starts later this month, will offer a welcome respite from turmoil. The wobble over the presidency has done more damage to Mrs Merkel's position as leader of the CDU than as head of government, reckons Richard Stoss, a political scientist at Berlin's Free University. Even so, Mr Wulff's election neatly sidelines the chancellor's last serious rival within the party. Mrs Merkel's allies are not satisfied but, for now at least, are probably stuck with her. German voters may well feel the same. _

The Bettencourt affair in france

Sarkozy's cosmetic problem N WILL v- su ~· S€ I NE

The political impact of a high-society inheritance lawsu it ABULOUS wealth, secret Swiss bank accounts, an island in the Seychelles, a mansion in the swanky Paris suburb of Neuilly, an 87-year-old billionaire heiress, secretly taped conversations, a long-serving butler and the world's leading cosmet· ics company. France has been gripped over the past few weeks by an extraordinary tale that has all the ingredients of a Hollywood soap opera. Behind the glamour, recriminations and betrayal, however, lie political twists that are sapping the credibility of President Nicolas Sarkozy. The affair began when Fran~oise Bettencourt-Meyers, only child of Liliane Bettencourt, heiress to the L'Oreal cosmetics empire, filed a case against Fran~ois-Marie Banier, a French society photographer, for "abuse of frailty". Mr Banier had, according to a preliminary inquiry, extracted some €993m of gifts, including investments and works of art, from the billionaire. photos of Mrs Bettencourt and Mr Ba-

F

Europe 49

Woerthy of hi s job? nier, whose friendship goes back many years, were splashed across Paris -Match, a glossy magazine, this week. Although Mrs Bettencourt has transferred most of her €17 billion fortune to her daughter, the two have fallen out. "I don't see her any more, nor do I want to," the matriarch said in 2008. Her daughter calls the affair "tragic", saying that, if she won, she would give any money returned to public causes and wants only to be reunited with her mother. The case is closely watched politically, as Nestle, a Swiss food giant, has a 30% stake in L'Oreal, and the internal row could lead to Nestle winning control of the cosmetics firm. As the court case approached- it was due to start on July lSt- recordings were leaked of over 20 hours of conversations between Mrs Bettencourt and her advisers. They were secretly taped by her butler, and delivered to Mrs Bettencourt-Meyers, who says that she did not order them, but handed them on to the police "to protect my mother from all these manipulations". What emerged, among other details, was that Mrs Bettencourt had failed to declare assets to the French tax authorities (France levies an annual wealth tax on most assets over the value of €790,00, or $964,000). These include two Swiss bank accounts containing€68m, and an island in the Seychelles of murky ownership. Mrs Bettencourt hastily issued a statement saying that she would "regularise" her assets abroad. All of this would be troubling enough, but there is another twist. A financial adviser employed to invest Mrs Bettencourt's dividends, Florence Woerth, is married to Eric Woerth, Mr Sarkozy's work and pensions minister. He is currently trying to push through a rise in France's legal retirement age from 60 years to 62. But in his previousjob as budget minister, he led a high-

profile clampdown on tax evasion. To top it all, Mr Woerth is also treasurer and chief fund-raiser for Mr Sarkozy's UMP party. Both he and the party received donations from her, according to Patrice de Maistre, Mrs Bettencourt's financial adviser. Mr Woerth denies any wrongdoing. He knew nothing, he said, about his wife's activities, and she knew nothing about the tax evasion; she has now stopped working for Mrs Bettencourt. As budget minister, Mr Woerth says he neither ordered nor was aware of any individual tax investigations. The political donations were legal, and commonplace for big business. The left has delighted in the affair, as have unions seeking to wreck pension reform. It was "further proof of the unsustainable collusion between certain political elites and the milieu of money", said Arnaud Montebourg, a Socialist deputy. The Bettencourt affair comes after a string of scandals touching government ministers: one hired a private jet, another enjoys two official apartments, and a third charged vast cigar bills to the taxpayer. Mr Sarkozy has told deputies that his cabinet reshuffle in the autumn would take account of irresponsible behaviour. For now, though, nobody has been censured. The air of impunity risks spreading further disillusion among Mr Sarkozy's supporters. But he also dare not- not yet, anyway- make an example of Mr Woerth for fear of undermining the flagship pension bill. Thatisa crucial test of whether he can still modernise France. _

Hungarian politics

Orban flexes his muscle B UDA PES T

Worries about Hungary's n ew government OALITIONS are the norm in most of Europe and especially in its ex-comC munist half (a three'party government is taking shape in the Czech Republic, a four' party one in Slovakia). But in Hungary, the centre-right Fidesz party has more than two-thirds of the seats in parliament. Viktor Orban, its leader and the country's prime minister, has promised a "new system" of power. For those who think Hungary needs a radical break with the sleaze and statism of the past eight years, change is welcome. But others worry about MrOrban's impul' sive and headstrong habits. His first month in power suggests concern is justified. One row is about a hastily conceived bank tax, intended to raise up to 200 billion forints ($86om).1t is the centrepiece of the government's plans to get the deficit ~.

50 Europe ~

down to 3.8% of GDP this year and restore lenders' confidence. But the five biggest for· eign banks in Hungary, which played a big role in stabilising the economy last year, say it will hurt lending and growth. They have gained one concession: the tax will now hit insurance companies too. Other countries such as Romania (and Britain) have similar plans: banks, espe~ cially foreign-owned ones, are easy targets for cash·strapped governments, especially given their reckless lending in the bubble years. But a member of the European Cen· tral Bank board, Ewald Nowotny, has sin · gled out Hungary's levy as "way out of proportion". A broader worry is Hungary's democ·

The Economist July 3rd 2010 racy. Freedom House. an American watch· dog, has just published its annual ran kings of political systems in the eX'communist world. Hungary is nowhere near the lows of ex·Soviet states. But its score (on a sevenpoint scale) has dropped steadily over the past five years, from 2.00 to 2.39. (Estonia did best with L96.) Admittedly; that bad rating is not Mr Orban's fault. But many of the reasons for it, such as polarised politics and meddling with state institutions, look unlikely to improve under his rule. A new media law Oike the bank levy; produced hastily and with no consultation) was particularly alarming. It originally extended the broadcast media's regulatory regime to print and

Devolution in Spain

A nationality, not a nation MAORID

Th e constitutional cou rt lim its Catalonia's powers OR a decision that took four years to reach, the rewriting of Catalonia's Fcontroversial autonomy charter ordered by Spain's constitutional court onJune 28th was surprisingly light-handed. The judges struck out parts of just 14 of the charter's 223 articles. A further 27 will be constrained by still-unpublished written interpretations. The court reined in attempts to pro' mote Catalan as the senior of the region's two official languages, above Castilian Spanish,and took away powers over local judges. A hairsplitting decision allowed Catalans to continue claiming they belonged to a nation, while stating that the claim had no legal worth. The constitution ambiguously labels regions like Catalonia as "nationalities". but it still recognises only one nation, Spain. Catalonia's politicians had stored away so much pent·up fury at the court's long·awaited decision, however, that they duly exploded. "The constitutional pact has reached its limits," blasted Artur Mas, of Convergence and Union, a nationalist coalition. Separatists predicted a surge in support for an independent Catalonia. Jose Montilla, the Socialist who runs a three·way coalition government in Catalonia, called for street prot· estson julY1oth. There is much hot air in such outrage. Catalonia, which already enjoysa large dose of devolution, has an election in the autumn. Nationalists and separatists in the populous and wealthy region typically seek votes by casting themselves as victims of the central government and courts in Madrid. That said, there are some grounds for justified complaintprincipally that Catalans approved the charter in a referendum, and the court

has overturned their vote. Even before the sentence was passed, however, Spain appeared to have reached the high·watermark of devolution. The centre-right opposition People's Party, which challenged the Catalan charter in court, has long felt so. Even j ose Luis RodriguezZapatero, the Socialist prime minister, who backed the charter and won the grateful support of Catalan voters in the 2008 general election,has signalled that the latest phase of devolu' tion is drawing to a close, Spain, he says, has "concluded the phase of self-govern · ment" and should devise ways for its 17 regions to cO'operate better. Recentralising some functions might be a way to control Spain's soaring budget deficit, 11.2% of GOP in 2009. Regional governments' debts grew by 28%, yearon· year,in the first quarter. Some regions, including Catalonia, will raise income tax. Come the autumn, Catalan poli o ticians may find voters more worried about taxes and public services than about the trimming of their still-gener· ous charter on autonomy.

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online outlets, including a statutory rightof-reply clause, regardless of merit. It created mandatory registration for blogs, and banned "offensive" coverage of a "minority or majority". The chairman of the new regulatory body, appointed by the prime minister for a nine-year term, would personally nominate the directors of pub' lic radio and television stations. Bits of the law have now been dropped or postponed. But critics see it as part of a heavy-handed pattern.Mr Orban wants to fire the central bank chief, Andras Simor, or at least cut his salary (an admittedly generOUS$425,000). He has replaced the well-regarded head of the public-spending watchdog with a party ally involved in an expenses scandal. A new bill also gives the majority party (ie, Fidesz) a decisive say in choosing the constitutional court's judges. One check on an overmighty executive is for the president to wield his veto. But the incumbent, Laszlo Solyom, steps down on August 5th. His replacement will be Pal Schmitt, another party chum of Mr Orban's (and a communist-era government minister). Even those who want change in Hungary's public life say that the prime minister needs to do more to soothe nerves and less to jangle them. _

The Greek economy

Protesting, wearily AT MENS

Grim resign ation as austerity bites REEK trade unionists have smartened up in response to global television coverage of anti-austerity protests in the capital. Members of communist unions now march in brand-new red-and-white caps; unionists at DEH, the electricity utility; favour bright orange T-shirts. Yet the new look cannot disguise the shrinking numbers of demonstrators turning out to resist the reforms and austerity measures being pursued by George Papan' dreou's Socialist (Pasok) government as part of a €no billion ($134 billion) bail-out by the European Union and International Monetary Fund. Fewer than 20,000 people took to the streets in the latest general strike on june 29th, compared with more than 50,000 on May 5th- the biggest and most violent protest to date, in which three bank employees were killed in a fire started by a petrol·bomb. The latest walkout was called to protest against an overhaul of the state pension system and labour-market reforms, due to be approved this month by parliament. From 2013, the retirement age for public workers will rise to 65 for both men and ~~

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Europe 51

The Economist July 3rd 2010

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Church and state in Russia Coming unstuck

Art under arrest

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women, up from about 57 and 52 respectively. Pension payments will be cut. The government has also threatened to impose by law a three-year pay freeze for privatesector workers if it is not agreed in wage talks between unions and employers. The impact of job losses at private companies and wage cuts for civil servants is starting to be felt more widely. Although the IMF hopes that the recession will be less deep than forecast, GOP is still expected to shrink by more than 3% this year. Annual inflation is already at a 13-year high of 5.4%. It is set to jump again this month after VAT rates are increased by another two percentage points, to 23%. Black-market cigarettes and fuel are in high demand. The summer tourist season is off to a poor start, with visitor numbers expected to fall by at least 8%. Cancellations followed wildcat strikes last month by a breakaway seamen's union that blocked ferry sailings from Piraeus port to the islands. By contrast, air-traffic controllers have refused to join recent walkouts to ensure that flights keep arriving. Between foreign trips and weekends on the islands, Mr Papandreou spends time soothing angry party members who fear Pasok's 2s-year effort to build a welfare state is threatened. Under pressure, he is overseeing a campaign to curb corruption. A group of wealthy doctors is being investigated for alleged tax evasion after highprofile raids on their offices by the financial police. Akis Tsochatzopoulos, a former Socialist deputy prime minister who owns a lot of property, has had his party membership suspended. Owners of popular nightclubs are likewise under scrutiny. Greece is also seeking investments from large sovereign -wealth funds. Mr Papandreou visited Libya, winning a promise from Muammar Qaddafi to support projects in Greece. Cabinet ministers have travelled to the Gulf states and China. Ambitious projects worth billions of eurosnatural gas pipelines, port expansion and giant wind parks-are on the agenda. Mr Papandreou is hoping that a vision of fu ture prosperity will offset the misery of today's austerity. •

artistic merit. In Russja it can also herald a change in the course of history. In 1962 the then Soviet leader Nikita Khrushchev fam ously denounced and banned an exhibition of avant-garde artists in Moscow, saying his grandson could paint better. This marked the end of the short post-Stalinist thaw and ushered in the period of "stagnation". Khrushchev himself was deposed two years later. Nearly 50 years on, Russian prosecutors are demanding a three-year jail sentence for the organisers of a contemporary-art exhibition in Moscow. The verdict, expected on July 12th, could have an impact far greater than the exhibition itself and determine the balance of power between ultranationalist religious radicals and secular pragmatists in Russia. The exhibition, called "Forbidden Art", was organised three years ago by Andrei Yerofeev, a contemporary-art curator, who put together works barred in recent years from other exhibitions. Symbolically, it was shown at the Sakharov museum and centre, a bastion of human rights named after the late Russian physicist and dissident, Andrei Sakharov. Its director, Yuri Samodurov; is a co-defendant. To highlight the censored nature of the show, the works were concealed from public view by a fake wall and could be seen

Avant-garde Samodu rov under guard

only by climbing onto a stool and peering through small holes. Photography was banned to prevent the dissemination of the images and people under the age of 16 were warned to stay away. One picture showed a Russian general raping a soldier with the caption "Glory 10 Russia"; another placed an Order of Lenin medal in place of Christ's head. A group of militant religious radicals, who claim to have the support of the Russian Orthodox Church, overcame all the obstacles. They were duly offended, and started a vitriolic campaign against the organisers. Moretroubling,however, was the response of the state prosecution service, which took up their case and charged the organisers with "debasing the religious beliefs of citizens and inciting religious hatred". The exhibition, the prosecution alleged, was a continuation of the museum's "anti-state" and "anti-Orthodox" activity; equating the two. A church representative endorsed the prosecution and condemned the exhibition as blasphemous. In a letter to Kiri11, the patriarch of the Russian Orthodox Church, Mr Yerofeev apologised for inadvertently hurting the feeling of believers, but blasted the church for siding with a group of anti-Semitic, militant radicals. Gleb Yakunin, a liberal cleric, says the campaign against the exhibition is driven by fanatics akin to the revolutionary guards that preserve Iran's Islamic regime. They are seeking to push Kirill into a corner, he says. It was not the first time that Mr Samodurov's work has got him into trouble. Five years ago he was fined 100,000 Roubles ($3,200) for organising an exhibition called "Caution, Religion". This time, however, the prosecution is demanding a jail sentence. If the judge grants it, Mr Yerofeev and Mr Samodurov will become the first people since the end of Communism to be jailed for artistic expression. But they may not be the last. A guilty verdict, says Andrei Zorin, an historian of Russian culture at Oxford University; would send a powerful signal to the ultraOrthodox radicals and nationalists, who will inevitably seek more repression and control over people's lives. "It is as naive to assume that it would not touch on everyone's lives, as it was naive seven years ago to think that the jailing of Mikhail Khodorkovsky [a former business tycoonl would have no impact on business and politics in Russia," he argues. A conviction will hurt Russia's international reputation and undermine any talk of modernisation. This may be why Alexander Avdeev, Russia's minister of culture, has criticised the criminal proceedings. Kirill has not spoken against the prosecution being carried out in the name of the church- even though a conviction could harm its reputation more than any exhibition could ever do . •

52 Europe

The Economist July 3rd 2010

Charlemagne I Before the altar of Europe Som e parting reflections from this columnist on the faith and folly of the Brussels elite

IGEL FAR AGE, a British politician with a knack for synthetic outrage, was appalled to learn recently that over 1,000 EuroN pean Union officials earn more than Britain's prime minister. The EU is a "racket", thundered Mr Farage, who sits in the European Parliament for the United Kingdom Independence Party (UKIP). No wonder Brussels bureaucrats demand "more Europe", he declared. What they really want is "more money" for themselves. The truth is even worse, at least for UKIP voters. Brussels officials call for "more Europe" because they really want more Europe. Yes, some are overpaid, notably old-timers hired before a staff reform in 2004. Highly educated and often a bit bored, Euroerats can also sound spoiled: moaning about their conditions while enjoying some of the safest jobs in the world. Yet the average Eurocrat is not primarily in it for the money. The European quarter of Brussels is an odd place. It is less Sodom and Gomorrah than the Vatican. Europe is a faith-based projectforits bureaucrats, or at least it was when they took the EU entrance exams. Even as Eurocrats become more cynical with age, learning that promotion has less to do with merit than with politics, most retain a spark of faith. Put simply, they believe that nationalism is the greatest of evils. As articles of faith go, this is not a terrible one. Nationalism has indeed been a European curse. Today, the existence of the EU is a bulwark against fresh horrors. Take the recent tensions between Slovaks and Hungarians, whipped up by cynical populists in both countries. Such ugliness can only go so far: local politicians cannot close the border to traders from the wrong nationality, for example, or sack workers with the wrong background: it would be against EU law. Brussels officials are often thoughtful, clever and good company. They speak lots of languages. Many are married to partners from another country (and divorced from a spouse from still another country, come to that). They have multilingual, multicultural children who think of Europe as their nationality. Strikingly often, they come from regions with strongly independent identities, such as Catalonia or Wales. Unwilling to seek a career in a hated national capital like Madrid or London, they instead latched onto the dream of a united Europe. Like priest-confessors, Eurocrats are well-placed to see the grubby deals done in the name of national interests. At the annu-

al fish council, they watch ministers seeking over-large quotas for "their" fishermen, driving prized species into extinction. They see supposedly pro-European governments lobbying so that new laws will favour "their" farmers or car workers. All of this buttresses their faith in Europe as a higher ideal. Yet their credo of anti-nationalism carries risks too. At best, EU bureaucrats can be naive about how much integration ordinary voters will bear. At worst, they sound hostile to democracy. Like any priestly caste, Eurocrats display a streak of authoritarianism and obscurantism. When the French and Dutch voted against the EU constitution in 2005, Brussels officials muttered that it was nonsense to put the complex legalese of an EU treaty to ordinary people. The bolder among them argued that the EU had always been an elitist project, with good reason. Why, they said, if German voters had been asked, they would never have given up the Deutschmark for the euro. Nor would French voters have approved EU enlargement. Hardline Eurosceptics accuse European officials of plotting a dictatorship. That is cheap demagoguery. The EU is a club of democracies, albeit one with unelected referees. The Brussels bubble- a cosy world of officials, Eu-funded think-tankers and a good chunk of the press corps- is not full of people who hate democracy. rhe problem is that it is full of people who equate national democracy with selfishness and populism. An irresponsible parliament One solution to this problem is proposed endlessly: pan-European democracy, built around cross-border parties and the huge new powers handed by the Lisbon neaty to the European Parliament. Such enthusiasm requires another act of faith, The European Parliament is the great disappointment of the European project. It is the revenge of the B-team: an assembly led by posturing second-raters dedicated, in their every waking moment, to grabbing new powers at the expense of national governments. The parliament is electe d but not truly accountable. Members can vote down any law without risking the fall of a government and snap elections: that is power without consequences. Ordinary voters have no idea who represents them in the parliament, or even whether the left or right dominates there. In fact, Europe's diversity means that the left-right labels used by the parliament's big blocks mean very little: on free trade, for example, Swedish left-wingers are more enlightened than French conservatives. Business is advanced by stitch-ups between party barons, not the open clash of ideas. As a result, the parliament has utterly faile d to capture the public's imagination. Brussels insiders are convinced that critics of the EU are nationalists. They are wrong. As he ends his Brussels posting, this critic accepts that many of Europe's worst follies can be blamed on the selfishness and cynicism of governments, not Brussels bureaucrats. The EU holds nationalism in check, and that is a high calling. Charlemagne believes in the EU. On balance it has swept away barriers to internal trade and the free movement of people. It has modernised poor regions. It has anchored southern and eastern Europe in the free world: an historic achievement. But Charlemagne's is a low-church sort of Euro-faith. And it does not run to believing in miracles like pan-European democracy.In the real world when democracy gets much beyond the nation-state, it stumbles . • £conomist.com/btogs/chartemagne

53

Also in this section 54 The budget wars 55 CriminaL-justice reform 55 Outsourdng torture 56 8agehot: The time of the three kings

For daily analysis and debate on Britain, visit Economist.com/ britain

Poverty in austerity

Still with us

Whatever the coalition's intentions. the coming years w ill be painful for the poor HOPPING with coupons and jars of loose change. Watering down milk to make it go further. Using washing up liquid instead of shampoo. Inventing excuses for skipping lunch. Having to walk everywhere. Sharing beds and baths. Mending clothes that are themselves second-hand. Reviving old newspapers as makeshift lampshades. Always being tired. Whether the observer is a down-andout George Orwell or a modern writer such as Polly Toynbee, Victorians in the mould of William Wilberforce or contemporary politicians like lain Duncan Smith, it is the banality of poverty, its little indignities and survival tactics, that strike British elites who have immersed themselves in the lives of their country's poor. Informed by the nitty-gritty of deprivation, rather than by the loftier socialist abstractions it had ditched years earlier, the previous labour government fought a kind of covert war on poverty. It redistributed billions to the poor in the form of generous tax credits but did not talk about it within earshot of richer voters. Poor children and pensioners benefited in particular (childless adults got less help). A mini mum wage was introduced.Sowas a Child Trust Fund, in order to boost the wealth of the poor an d not just their income. In the end, these efforts struggled to overcome low pay, runaway salaries at the top, single-parent households and other real-world trends that kept poverty and inequality stubbornly high. Britain has more

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of its people living in househol ds of relative poverty (ie, with income below 60%of the national median) than all but six of the 27 members of the European Union (EU). According to the Institute for Fiscal Studies (IFS), a think-tank, the proportion of the population in relative poverty fell only slightly, from 19.4% to 18.)%, between 1996-97 and 2007-08. (The drop is a bit more impressive when housing costs are taken into account.) There is also some evidence that severe poverty (measured as income below 40% of the median) actually rose, though this is more contested. This modest progress came before the recession, and the era of fiscal austerity that Britain is now entering. The coalition government promises that it will not "balance the budget on th e backs of the poor". Indeed, it wants to take low-earners out of income tax altogether. Many Conservatives are genuinely moved by poverty; some (such as David Cameron, the prime minister) through a very Tory sense of noblesse oblige, others out of Christian conscience (most obviously Mr Duncan Smith, the work and pensions secretary)_ These sentiments run deeper in the party than outsiders are willing to credit; the biggest applause line in Mr Cameron's speech to the Tory conference last year was his claim that Labour had not done enough to improve the lot of the poor. Many Liberal Democrats, too, are effectively social democrats and must be heeded lest they leave the coalition.

Regardless of their ideals, the government does not have the money to make the fight against poverty its central mission, as Gordon Brown did for a decade as chancellor of the exchequer_ Indeed, it was only tenacious resistance from Mr Duncan Smith that saw off an across-the-board freeze on benefits in the budget on June 22nd. VAT,a sales tax that hits the poor hardest, went up. The IFS points out that many of the budget's more progressive measures, such as the new 50% top rate of income tax, were left over from the last Labour budget. It also warns that the poor will probably suffer disproportionately from the publicspending cuts to be detailed in the autumn. The current chancellor, George Osborne, interprets "fairness" as ensuring that "everyone will pay something but the people at the bottom of the income scale will pay proportionately less". His critics (including many Lib Dems) take fairness to mean exempting the poor from austerity measures as far as possible. The distinction is philosophical; its implications brutally politicaL Labour politicians will seize on any cuts that ostensibly harm the poor in order to divide the coalition partners. They tried it when the end of the Child Trust Fund was announced in May, and again after the budget. Disquiet within the coalition is still mute d; when the cuts begin to be really felt, and Labour has a proper leader in place, it may not remain so. A decade ago, the prospect of the Conservatives accepting the idea of relative poverty- rather than an absolute measure of want, such as a basket of goods that every household should be able to affordwould have been fanciful. Nowadays, it is a reality. The government has retained labour's goal of ending relative child poverty by 2020. Labour now admits that the target, which is unlikely to be met, was aimed at cutting inequality and not just deprivation. A welfare state invented,in the words ~~

54 Britain

The Economist July 3rd 2010

~ of

Gordon Brown's maiden speech as an to "take the shame out of need", now has a more ambitious equalising mission that commands the support of the three main parties. If the ultimate victory in politics is changing your opponents, this was among Labour's biggest wins. There is also growing agreement that work is the route out of poverty; and that ending perverse incentives in the welfare system is the route into work. But one big fault -line remains. The Tories accuse Labour of a narrow focus on money that ignores family breakdown, addiction, eduMP,

cational failure and other "pathways to poverty". Mr Cameron's narrat ive of social breakdown, and Mr Duncan Smith's accounts of the desperate council estates where he educated himself in poverty after losing the Tory leadership in 2003, emphasise the cultural and the moral as much as the strictly economic. In truth, Labour did not ignore problems such as drugs and woeful schooling. After all, it unified policy on children, schools and families in one mega-department.1t just found it hellishly difficult to do anything about these blights, as the co-

alition government surely will too. That the government's flagsh ip idea for mending family breakdown is to tinker with the benefits system, which currently imposes what Mr Cameron calls a "couples penalty", is a sign of how few policy levers ministers have, apart from money. And even if they evolve a way of tackling such deeprooted pathologies, the results will take a long time to show. Meanwhile there is only the grim imperative to save money. The past decade made a disappointingly small dent in poverty, but it may be the best time the poor will know for many years. _

The budget wars

Once more unto the breach Public reaction to the tough bu dget is surprisingly favourable_But many are w aiting to see the fine p rint HE political battle of the budget has been waged ferociou sly since George Osborne, Conservative chancellor of the exchequer, pledged on June 22nd to wipe out Britain's huge structural deficit over five years. It is billed as the toughest budget in a generation, with the longest, deepest spending cuts since the second world war. Some of the Tories' Liberal Democrat coalition partners are no less appalled than their Labour opponents. The public, by contrast, seems surprisingly resigned to it, according to polling at over the weekend by Ipsos MORT for The Economist. This is one of the six most popular budgets the pollsters have measured since the late 1970S, as far as its likely impact on the country is concerned (see chart U. nue, more people than not think the budget will hurt them personally. And there are reservations about specifics.

The move to freeze payments to the royal family is overwhelmingly well received (see chart 2). So are making single parents look for work when their youngest child goes to school, and freezing public-sector pay. Raising the age of the statepension, though, is supported by only two in five people, and raiSing consumption taxes (VAT) by fewer than one in three. Overall,just32% think the government was right to protect spending on health care and foreign aid but not spending on things such as defence and benefits. These priorities aTe wrong, according t042%, not far off the 45%who said in response to a separate question that the budget would make Iherich richer and the poor poorer. Underpinning the broadly positive view of the budget is a broadly positive view of a government still on its honeymoon . There is also a growing belief-

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perhaps influenced by relentlesssemaphoring of fiscal meltdown in the euro area- that cutting the deficit quickly matters more than maintaining spending to protect economic recovery (see chart 3).11 is worth noting, though, that the gap between those who thought government policies would help the economy in the long run and those who did not- 32 percentage points before the budget, a better score than Labour received from 1998 on- shrank 10 23 points after it. For Mr Osborne himself, the budget has been a mixed blessing. More people than before think he is doing agoodjob - 44%, up from 40%-but the increase in those who think he isn't is greater- 30%, up from 23%(see chart 4). He is better known, but not entirely better liked. For full detail5 of the po ll. see economist.com/wo.ld/britain

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The Econ omist July 3rd 2010 Criminal-justice reform

The rattling of keys A bid to cut crime while cutting costs

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ALF of all crime in England and Wales is committed by previous offenders. Nearly half of those released from jailand 60% of those who serve short sentences- are reconvicted within a year. State intervention has so far failed to tackle serial criminals, while pointlessly and expensively locking up too many petty ones. So suggested Ken Clarke, the justice secretary, on june 30th, when he announced a review of sentencing policy. Fear of crime is a British preoccupation, even if economic worries have recently overtaken it. Yet over the past decade crime has fallen, as the number of people in jail has soared. The latter trend began in 1993, after Michael Howard, then home secretary in the previous Conservative government, declared that "prison works", a creed retained by his Labour successors. By European standards, England and Wales imprison a large proportion of their population (Scotland and Northern Ireland report their data separatelyl:154 per 100,000 people, compared with just 87 in Germany and 96in France.(Americajailsthegreatest proportion of its people of any country in the world, on figures from Kings College London: 753 penoo,ooo.) Mr Howard's predecessor as home secretary was none other than Mr Clarke. He says that the current prison population of 85,000 would have seemed "impossible and ridiculous" if that number had been predicted in 1992, when he was in the job. Mr Clarke disputes the simplistic link between rising incarceration and falling crime. "It is virtually impossible to do anything productive with offenders on short sentences," he said. These sentiments represent a philosophical break with recent official thinking, and with the views of many Tories, for whom toughness on crime is a basic political tenet-though they will gladden the hearts of Mr Clarke's Liberal Democrat coalition partners, who have long championed penal reform. But Mr Clarke's motives are practical, too, Prison is expensive, costing about £100 ($150) per prisoner per day. As the justice secretary summarised, "It costs more to put someone in prison for a year than it does to send a boy to Eton-on average £38,000." His notion of "intelligent sentencing" appears to involve more community punishments for less serious offenders, such as debtors and errant motorists. That would not only save money in the short term but also, Mr Clarke hopes, less-

Britain 55 en the likelihood that people would reoffend by making it more likely that they would keep their jobs and homes and the support of their families. Such an approach would in theory leave prisons free to concentrate on reforming the most dangerous miscreants. Unfortunately the rehabilitation of released prisoners can also be expensive, So Mr Clarke proposes to ask charities to help with the work, and to pay for it only when it succeeds. He wants voluntary groups and private companies to help reduce reoffending by assisting former prisoners in finding homes and jobs, just as hospitals will not receive funding for patients read-

mitted within a month of their discharge, these providers will be rewarded for keepingex-cons on the straight and narrow. Short prison sentences will also be restricted in Scotland, where on june 30th MSPS passed proposals to reduce the number of sentences of three months or less. Such moves would gratify at least one former Tory home secretary-Robert Peel, who founded modern policing in the 19th century. He argued that the effectiveness of policing could be demonstrated not by the number of arrests made or prisoners taken but rather by a lack of crime. l\vo centuries later, Mr Clarke appears to have come to more or less the same conclusion . •

Outsourcing torture

Back in court Th e fac ts, like the policy, rem ain obscure NjUNE30th Rangzieb Ahmed, a Briton convicted of terrorist offences in 2008, won the right to appeal. The judge said his allegation that, rather than arresting him, British intelligence agents had let Mr Ahmed go to Pakistan in 2006 so that he could be interrogated on their behalf-and tortured-by their Pakistani counterparts should be looked into. Mr Ahmed's claim echoes those of several once-suspected terrorists that agents of the British government "outsourced" torture to other jurisdictions, sometimes providing lists of questions. A notable case is that of Binyam Mohamed, a British resident, who claims Britons colluded in his maltreatment by American captors. Exactly what guidance was given to British agen ts regarding torture after Septemberuth 2001 is still unclear. Politicians of all parties have insisted that torture plays no part in British security policy. When it comes to demonstrating that beyond doubt, however, the state's own security machine has intervened. Pressure has been mounting for the coalition government to launch a full judicial inquiry into Britain's recent record on torture. Gordon Brown, then prime minister, promised such an inquiry back in March 2009.l n july 2009 David Davis, a back bench Conservative MP, used parliamentary privilege to air Mr Ahmed's case; he received noresponse from ministers, who said the case was sub judice. Before the general election in May, Conservative and Liberal Democrat leaders both called for an inquiry. Soon after it William Hague, now the foreign secretary; pledged a judicial review but set no date. On june 28th, at another court hearing relating to the disclosure of torture policy; a government barrister insisted that details of the

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Ahmed get s a hearing government's guidance on torture would be published "very shortly". If and when an inquiry is convened, there will be a battle over public disclosure of documents, Another case, brought by Bisher Al Rawi and five other former terrorist suspects claiming they were victims of torture "outsourcing", is mired in concerns about disclosure and the public interest. On june 21St the judge gave the defendants, who include the Secret Intelligence Service (better known as MI6), the Foreign Office and the Home Office, until july 9th to provide a list of documents which, among a potential 250,000 or so, they think should remain protected on public-interest grounds. The defendants had argued that some could not be made available until 2014. We cannot learn from history, argues Clive Stafford Smith of Reprieve, a charity that helps alleged victims of torture, "until we know what that history is." It seems there are powerful people keen to ensure that it remains opaque.

56 Britain

The Economist July 3rd 2010

Bagehot I The time of the three kings Our outgoing columnist reflects on the ends of political commentators, and their beginnings

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, ' • A BALMY June day in the corner of a medieval churchyard in ..t"\.Langport, Somerset. Birds chirp, butterflies float across the mottled headstones-and, under an ancient yew tree, Bagehot sees his own grave: "Sacred to the memory of Walter Bagehot MA, Author Economist Critic", and the Victorian editor of The Economist for whom this column is named. Above the inscrip· tion, a hound bestrides a stag's antlers in the family crest. Beyond the wall stretch the Somerset Levels, where the original Bagehot used to enjoy hare coursing. Woodrow Wilson visited this place in 1896, and plucked an ivy leaf from Walter's grave. Everyone is mortal; yea, even political commentators. The current Bagehot's number is up, too. He has no immediate plans to join the author of "The English Constitution" and "Lombard Street" in eternity'S embrace; but after a three-year stint he must now bequeath his pseudonym and this column to a new writer. He retreated to this lovely spot to ponder his brief tenure of this page. It has been an eventful period, both in the world of British politics and in political journalism. This has been the time of the three kings. When the outgoing Bagehot arrived, a worn Tony Blair was preparing to make way for Gordon Brown. Mr Brown clung on in Number 10 for longer than often seemed plausible, yet somehow only barely and rarely seemed to make the top job his own. It wasn't just the serial cock-ups and calamities: the office never seemed really to fit him_ His government and the country were shaken, of course, by the financial crash and the parliamentary-expenses scandal, both of which still reverberate. Then came the inconclusive general election in May and the coalition led by bouncy David Cameron_ Political commentary, meanwhile, has been dominated by three kinds of writing. First, prediction-about whether Mr Brown would be ousted, when an election would be held, who would win, and so on. Unfortunately, predictions have proved even more perilous than normal in the era of the three kings. Most have been wrong-because of the political volatility that followed Mr Blair's departure, those economic and parliamentary convulsions and Mr Brown's surprising indestructibility. The second main sort of political comment has been interpre· tation: explaining what it meant when, say, Lord Mandelson reo turned to government or James Purnell resigned from il. This

kind of journalism relies on politicians' rivalries and their fondness for gossip. The dangers are that journalists become captives of their sources, and-an especially big risk in times as chaotic as the past few years have been-that those sources, even very senior ones, don't actually know what is going on themselves_ A third category of comment is the advisory piece, in which the journalist, armed with his notebook, presumes to tell political parties, with all their resources of private polling and focus groups, what they ought to do to get elected. Political commentators, in other words, have concerned themselves with what will happen; what has happened; an d what should happen. Few have addressed what is happeningthat is, whether policies work and how the country is changing. The commentariat is mostly too cocooned to ask. Bagehot has sometimes been guilty of this myopia himself. One reason for it is that the British newspaper business culti· vates provocation rather than consideration . The crowdedness of the market means people feel a need to yell to be heard; for all their virtues, political blogs an d the internet have intensified the competition and the shrillness, making analysis ever more instant and intrusive. The results were especially stark and cruel during Mr Brown's premiership, when it became routine to cast aspersions on the prime m inister'ssanity. In truth, Mr Brown helped to bring down the wrath of the press on his own head: the vehemence of political journalism in recent years has been fuelled by the cack·handedness of politi· cians, and in some cases their greed and depravity. But the vitriol· ic tone also reflects the mood of the politicians' and journalists' audience. British voters seem increasingly inclined to think of their politicians as either heroes or(more oftenl villains, There is little room for honest mistakes or good intentions gone awry, and little sympathy for the challenges of reconciling competing public priorities. The puerile simplicity of some political coverage, Bagehot submits, reflects a broader and worrying immaturity in the way the country thinks about politics and government. In my beginning is my end The next Bagehot will make his own negotiations with these difficulties and demands. His tenure, too, is set to be dramatic. It is testimony to the adaptability of human nature- and to the voracious 24-hour news cycle, in which almost nothing stays news for long- that the coalition government, which seemed novel, even amazing, when it was first formed, quickly became a settled fact. How long will it last-as, quite probably. public-sector strikes erupt, queasy MPS rebel and the Labour Party, under new leadership, sharpens its opposition? Some people expected the new government to fall apart immediately; some insi ders insist it will run until 2015. This time, this Bagehot makes no prediction. An end is always a beginning. As a boy, the original Bagehot lived above the Langport branch of a bank in which his father was a partner, later working there himself. The rooms in which he was born an d studied are now inhabited by a Polish family, part of an immigrant workforce drawn to this part of Somerset by the opening of a meat-packing plant. A nearby warehouse on the River Parrett that the Bagehots and their partners owned. to and from which horse-drawn barges once brought salt and corn, has been converted into a cafe, office and eco-housing complex. Behind the building, the river still winds away among the reeds. • Thanks to John and Janet Ara m, curators of Bagehot's grave, friends of The Economist

57

Wheat rust and world fa rming

Also in this section

Rust in the bread basket

58 Ira n: nuclear but cash-strapped

A crop-killing fungus is spreading out of Africa towards the world's great wheat-growing areas

T IS sometimes called the "polio of agriculture": a terrifying but almost forgotten Idisease. Wheat rust is not just back after a 50-year absence, but spreading in new and scary forms. In some ways it is worse than child-crippling polio, still lingering in parts of Nigeria. Wheat rust has spread silently and speedily by 5,000 miles in a decade. It is now camped at the gates of one of the world's breadbaskets, Punjab. In June scientists announced the discovery of two new strains in South Africa, the most important food producer yet infected. Wheat rust is a fungal infection. Its most devastating form (Puccinia gramil1is) attacks the plant's stem, forming lethal, scaly red pustules. It has plagued crops for centuries. The Romans deified it, and believed that sacrificing dogs warded it off. It was the worst wheat disease of the first half of the 20th century, killing about a fifth of America's harvest in periodic epidemics. Wheat rust once spurred the Green Revolution, the huge increase in crop yields that started in the 1940S. Now it could threaten those great gains. Norman Borlaug, the great American agronomist who died last year, conducted his original research into wheat rust. After ten years of painstaking crossbreeding, he isolated a gene, Sr31 (Sr for stem rust) that resisted P. graminis. By wonderful good fortune, Sr31 also boosted yields (and not only because plants were impervious to rust). Farmers everywhere adopted his seeds enthusiastically, saving millions of lives. So fast did his new varieties spread that by the 1970S, stem rust seemed to have been wiped out. But in 1998 William Wagoire, a pupil of Borlaug's, was in south-western Uganda researching stripe rust, a less-deadly form of the disease that remains endemic there. While testing a new variety'S resistance, he was alarmed to find stems scarred not by the yellow streaks of stripe rust but the angry pustules of stem rust. At first neither he nor BorIaug's International Maize and Wheat Improvement Centre (C IMMYT) in Mexico could believe their eyes: stem rust could not have survived all those years. rhe awful truth dawned only after a second opinion, by Zak Pretorius of the University of the Free State in South Africa): stem rust had not only lived on in a remote corner of Africa's Great Lakes. It had evolved to overcome the previously unconquered Sr)l. After decades without infection, most of the

world's wheat crop was defenceless. Wheat rusts spread as billions of spores in the wind. They usually move incrementally, from field to adjoining field, needing wet weather to thrive. But they can make larger leaps. They also mutate as they go. Rust, Borlaug once said, "never sleeps." The new variant is calle d Ug99: Ug for its country of origin; 99 for the year it was confirmed. It soon spread to Kenya and Ethiopia. In 2006 it made a leap over the Red Sea into Yemen, where it appeared in a more deadly form . In 2007 it showed up in Iran, apparently blown from Yemen. In June scientists announced they had found four new mutations of rust (making seven in all) and Mr Pretorius confirmed its presence in a harmful form in South Africa. This coul d mark a final stage before disaster strikes. Rust's appearance in South Africa means the disease has pushed deep into the southern hemisphere for the first time. Mr Pretorius worries that westerly winds might blow spores as far as Australia, which is one of the world's top five wheat exporters. Iran borders Pakistan,

which is among the top ten wheat producers and where roughly 100m people depend on the cereal to survive. David Hodson of the U N Food and Agriculture Organisation's Wheat Rust Disease Global Programme thinks it is only a matter of time before Ug99 appears in Pakistan. To make matters worse, the threat from stripe rust (Puccinia striiformis) has also been worsening. Scientists at the International Centre for Agricultural Research in the Dry Areas (I C ARDA) reckon it could affect sam hectares and that some farmers could lose a third of their crops. Both fig ures are far worse than previously thought. So far, wheat rust has not caused the disaster that scientists fear. But that, says Ronnie Coffman of Cornell University, has been mainly a matter of luck. So far, no giant producer (China, India, America, Russia) has been infected. The humid conditions that spread rust most readily have recently been lacking in most places. But where the weather was to its liking- Kenya in 2007, for instance- rust destroyed a quarter of the crop and affected fou r-fifths of all ~.

58 International ~ farms.

Fungicides afford some protection but huge quantities of chemicals are an expensive and limited answer. Most small farmers in poor regions, including Punjab, cannot afford them anyway. When the good luck runs out, stem rust can destroy the entire harvest in an infected area. A full-blown epidemic in a big wheat-growing area could therefore be catastrophic. Only a handful of wheat varieties have any resistance to Ug99, implying that harvests could fail even more completely than during earlier epidemics. Such a failure would be felt on a vast scale. Wheat is the world's most widely planted crop and accounts for a fifth of humanity's calorie intake (rice has a similar share; aU other foods combined account for the rest). Since its discovery, Ug99 and its descendants have shown up in eight countries ranging from South Africa to the Middle East; 26 others are on the FAO'S danger list, accounting for about a third of wheat production. Kathy Kahn of the Gates Foundation says the disease is poten tia lly "devastating". Scientists such as Mr Coffman say they know how to attack stem rust. The question is how fast and how completely they can do it, and at what cost. Borlaug used a mighty rust-resisting gene that lasted 40 years. The new approach uses four or five weaker defences, for example reducing the area of the wheat plant that Ug99 destroys, or slowing down the spread of the fungus. Each would be inadequate on its own. But put together, they achieve something close to full resistance. Multiple barriers also make it harder for Ug99 10 overcome them all. A single gene will eventually be defeated- as SrJ1 was. Knocking down a series of obstacles is much harder. So far, researchers have developed about 60 experimental wheat varieties with multiple low-resistance genes. CIMMYT sent out a first batch of 15 for development and nine have made it into production and distribution on a wide scale. ICARDA has sent out two more seed lines and India and Pakistan have released rustresistant seeds of their own. Scientists are also investigating how rust secretes the substances that enable it to break into the plant's cells. If the wheat can learn to recognise this as it is happening, it might also be engineered to generate its own Ug99resistant proteins. Separately, researchers have cracked the mystery of how stripe rust is able to overcome resistance in wheat so quickly. Until recently it was thought that stripe rust reproduces asexually. But new research found that, like stem rust,stripe rust increases its genetic variability by reproducing sexually on the leaves of another host plant (the barberry), making itself more adaptable- and more deadly. Advances like these suggest the march of wheat rust can be halted, though at a

The Economist July 3rd 2010 cost. That is not just money, but a trade-off of lower yields for more resistance (ie, the opposite of what Borlaug achieved). But if the signs in the laboratory look propitious, out in the fields the distribution problems are formidable. Over 47,000 hectares have been planted with the new seeds. But that is only o~% of the total area planted to wheat in the countries on the FAO'S danger list. The astonishing spread of wheat rust makes quick containment impossible. In some places stem rust may become endemic before the outside world even spots it. The high-yield seeds of the Green Revolution were not only developed but often marketed by state-financed agricultural institutions. in many poor African countries such institutions barely exist, whereas in wealthier ones spending on them has fallen over the years. Worst of all, farmers in earlier generations had a big incentive to get their hands on high-yielding seeds. Now, the vast majority have no experience of wheat rust. They may therefore see no reason for sowing rust-resistant seeds when they first appear- until the disease destroys their harvest. By then it will be too late. •

Sanctions on Iran

Anything to declare? The squeeze gets tighter ONEY may be the weakest point for M Iran's nuclear ayatollahs. America's Congress has just voted to force banks, insurers, energy firms and others to choose: trade with Iran and you will be barred from business with the United States. The UN Security Council had already slapped new sanctions on Iran for refusing to suspend its suspect nuclear work. That put once-friendly Russia and China in Iran's bad books too, for going along with the vote. Even Brazil and Turkey, clumsily trying to get some nuclear talks going, tell Iran it must show that its nuclear work is peaceful, as claimed. Trade credits are drying up too. Even before the vote in Congress on June 24th, reputation-conscious banks accounting firms, insurers (crucial for freight) and others had been pulling out of Iran or scaling down their business. Now France's Total has joined BP, India's Reliance, Malaysia's Petronas, Russia's lukoil and others in stopping gasoline sales to Iran (which imports 30-40% of its petrol). Spain's Repsol is just the latest energy firm to junk contracts in Iran's gas or oil fields. Spearheading this is the United States

Ireasury Department, under a vigorous official called Stuart Levey. Since 2007 financial intelligence on the deceptions practised by Iran's banks and firms has helped officials convince private companies around the world of the growing risk of finding they have inadvertently supported Iran's blacklisted nuclear or missile programmes. Some fear that Chinese and other firms will snap up the lost business. But America's new legislation (if full use is made of it) would hit them too. Moreover, dwindling trade and the legal cover of UN sanctions have helped persuade even once-reluctant governments in Europe and Asia to stiffen their own trade restrictions. Iran says no sanctions, however harsh, will dent its nuclear effort. And though this tightening squeeze drives up the cost of doing business, to the grumbles of the country's bazaaris, it has hit on several dodges to evade the Treasury enforcers: repeatedly renaming ships to evade port authorities' scrutiny, or bribing middlemen to route illicit shipments in roundabout ways to disguise their destination. Iran has also setup its own shell companies from the Caribbean to the Isle of Man. Dubai, in the United Arab Emirates, was once the hub of Pakistan's Abdul Qadeer Khan black market (which first got Iran started in secret uranium enrichmentl. The UAE authorities recently let it be known that they had closed some 40 Iranian companies suspected of funnel ling embargoed goods to Iran from around the world. Good news: but many hundreds more are believed to be at it too. Iran has friends, not least fellow nuclear rule-breakers North Korea, Syria and Myanmar. Its president, Mahmoud Ahmadinejad, hobnobs with Venezuela's Hugo Chavez and Zimbabwe's Robert Mugabe. But there is little profit for Iran's merchants in such places. They operate in an increasingly friendless world where business is done clandestinely or for cash on the nai1. Both are painfully costly. •

Stuart Levey: in sight of Iran's money

59

Also in this section 60 Industrial biotech's quiet lift-off 61 Asetback for TeLef6nica 61 Why Peter Drucker is big in Japan 62 Pro· business Supreme Court rulings 62 Nike eyes the deveLoping worLd 63 Scale v premium pridng in media 64 Schumpeter: Two cheers for Sarbanes-Oxley

For daiLy anaLysis and debate on business, visit £collomist.com/ bu.si ness-finance

Oil companies' dash for gas

Vapour trails

In hot pursuit of a fuel that is less risky and more accessible "THE bad newsis we didn't hit oil," ran the old wildcatter's joke. "The good news is we didn't find gas." Potentially dangerous and always more difficult to manage than pouring liquid into a barrel, natural gas used to give oil companies a headache. Now gas is dominating the thoughts of Western oil bosses and, increasingly, their firms' portfolios. Seven of the eight projects Exxon Mobil completed last year were for natural-gas developments."TWo of the three it has scheduled for this year are also gas-related. Royal Dutch Shell says that by 2012 half of its output will come from gas. The current high oil price still makes crude the prize for any self·respectingmajor. But the West's big oil companies are growing gassier. In part this is because oil is getting harder to find, for geological and political reasons. Global oil production will peak within a few decades, if not before. And the remaining "easy oil"- which can be extractedwithoutfussorexpense- isincreasingly out of bounds for Western firms. AImost 90% of it is in the hands of national oil companies which have, with few exceptions, blocked Western giants from their riches. This is forcing Big Oil into trickier and pricier areas, notably deepwater fields, such as those in the Gulf of Mexi co and off Africa's west coast, and unconventional reserves. such as Canada's tar

sands. Hence the appeal of gas,anda string of deals in Australia and America, Tn March Shell joined PetroChina to buy the Australian assets of a gas specialist, Arrow Energy, for A$J.S billion ($3.2 bi!lion). ConocoPhillips paid $5 billion in 2008 for another Australian gas firm, Origin Energy. Chevron is spending almost $40 billion to build a liquefied natural gas (LNG) plant off the coast of Australia- one of more than a dozen such projects in the country. Almost all of them include a Western major asa leading shareholder. In America, meanwhile, the majors are being lured by the opening of vast new "unconventional" gas reserves, which have scarcely begun to be tapped. In May Shell said it would pay $4.7 billion to buy East Resources, a shale-gas firm with access to the Marcellus shale, a large deposit of gas close to the markets of the country's east coast. Total and BP have joined projects started by Chesapeake Energy, a shale-gas producer long on expertise and short on cash. And in December Exxon Mobil offere d $41 billion for XTO Energy; another shale-gas specialist. That deal, approved on June2sth, will give rise toanother wave of asset-buying in the sector, says Ernst & Young,an accountancy firm . Gas is also getting cheaper to develop. The cost of gas developments has come down-that of an offshore "floating" LNG

terminal has fallen by half in the past two years, for example- while the growing inaccessibility of easy oil has made oil projects more expensive. Some of the majors' biggest oil developments look frighteningly complex. The Kashagan oilfield in the Caspian Sea, one of the biggest discoveries in decades, was due to enter production in 2005. Now the target is 2012, and the costs could exceed $100 billion. The disaster at BP'S well in the Gulf of Mexico may increase costs as regulations are tightened. And although the national oil companies have mostly excluded the majors from their oil projects, foreign expertise and capital is needed for complex natural-gas projects. Qatar is now the world's dominant LNG exporter, but it got there through partnerships with the majors. Iran, by contrast, has failed to make a viable export business out of its reserves, the second-largest in the world. thanks to withdrawal of Western money and know-how. Russia's Gazprom needed Shell to get its LNG business started on Sakhalin Island. It selected Total, another LNG expert, to help develop the huge Shtokman fie ld in the Barents Sea. We're not in Texas any more The costs of natural-gas developments vary wildly. An LNG export plant can cost tens of billions of dollars, rivalling oil projects in expense and complexity. Eni, an Italian oil giant, has joine d Russia's Gazprom in a project to pipe gas from Russia to central Europe. Their investment could exceed $20 billion. At the other end of the scale. new shale-gas fie lds expand incrementally, with the addition of small wells costing as little as $sm each. But both kinds of investment are far less exposed to the vagaries of the commodity markets than big oil projects. LNG plants go ahead only ~~

60 Business ~ after

the developer secures enough longterm contracts, some lasting 20 years or more, to underpin the project. The gas market is still dominated by such arrangements: the most liquid form of trading is in LNG, but it accounts for only about 8% of the global market. An oil firm, by contrast, cannot tell if crude will sell for $150 a barrel five years hence, or for a fraction of that. But the move to gas, and to shale-gas in particular, demands a shift in the majors' business models_ To keep the gas flowing from shale requires the rapid and repeated drilling of many small wells- quite a change for firms accustomed to making "binary" decisions, as one executive puts it, about whether to spend $1 billion over a decade developing a field. Depending on market conditions, shale drillers can speed up production or wind it down,just as an electricity supplier does to meet changes in demand. Indeed, the gas business is really an infrastructure business: drill wells, build gas plants, install pipelines and accrue profits. The gassier the majors get, the more they will look like utilities_ That might be no bad thing. In the panic after the crash in oil prices in 2008, companies quickly scrapped oil projects around the world. In Canada's tar sands alone, some $90 billion of projects were shelved_ Oil projects look increasingly pricey and risky- and they will always depend on a volatile oil market. Natural gas offers longterm reserves growth, relatively stable returns and lower risk (though there are, 10 be fair, environmental concerns about possible contamination of water sources as a result of shale-gas extraction). Most of all, however, the majors' dash for gas is a bet on demand and c1imatechange policy. The International Energy Agency says oil consumption has peaked in the West and could rise globally by just 005% a year to 2030. But Exxon Mobil expects gas consumption to be 55% higher in 2030 than it was in 2005. Even this could be conservative. Philippe Boisseau, head of Total's gas and power division, says the potential for gas consumption in China, for example, is much bigger than assumed. Only a lack of import infrastructure is constraining demand growth there, he argues_ Industrialisation and electrification in the developing world will require a lot of new power stations. If governments begin to punish the fuels that emit most carbon dioxide, a good portion of that electricity will come from gas. A $JQ-a-tonne carbon tax would make gas- which is about half as polluting as coal when burnt- the preferred fuel for new power stations. Double the tax, and gas would remain competitive with nuclear and wind power, too, says Exxon Mobil. Efforts by the world's governments to cut carbon emissions have stalled, but the oil majors are voting with their drill bits. The future, they believe, will be less oily and a lot gassier. •

The Economist July 3rd 2010 Biotechnology

Chemistry goes green WA SHI NGTON. DC

Behind the scenes, ind ustrial biotechnology is getting going at last GREEN chemistry ready for take-off? at a big conference on "indusItrialsDelegates biotechnology" held near Washington, DC, this week by Bio, the industry's umbrella organisation, seemed to think so. Industrial biotech uses agricultural feed stocks, rather than petroleum-based ones, to produce chemicals, plastics and fuels. McKinsey, a consultancy, says global industry revenues will grow from €l16 billion ($170 billion) in 2008 to as much as €450 billion by 2020. The World Economic Forum reckons the coming boom in "biorefineries" will create new markets worth almost $300 billion by 2020. Industrial biotech seems to have been relatively unscathed by the financial crisis. Codexis, an American start-up backed by Royal Dutch Shell, an Anglo-Dutch oil giant, pulle d off a stockmarket flotation in April. Amyris, another American start-up, secured an investment of around $130m from Total, a French oil firm, this week and is likely to go public soon too. In part, this is because big companies are embracing the technology_ Frito-Lay, a maker of snacks controlled by PepsiCo, is adopting compostable crisp packets, WalMart, the world's biggest retailer, is expanding its use of bioplastics. Procter & Gamble, a consumer-products giant, recently agreed to use some biochemicals made by Amyris in its products. Craig Binetti of DuPont, a chemicals colossus, says his firm's industrial-biotech sales soared from $50m in 2007 to $200m last yearand will grow to $lbillion by 2015. Another reason industrial biotech is taking off, after several false starts, is that the technologies involved are now mature enough to be scaled up from laboratory curiosities to full commercialisation. "We're

I

Bio boom Industrial biotech sales. €bn _ _ _

500

Food/nutrition Chemica ls and pharmaceutica ls Biofuels

'00 300 200 100

o 2008 Soo rce: /
2020' ' /
not just dealing with vats any more," insists Volkert Claassen of Royal DSM, a Dutch maker of food enzymes_ This week the firm announced a joint venture with Roquette Freres, a French chemicals firm, to build a factory to produce a bio-based version of succinic acid, which is used in paints, textiles and coatings. Similarly, Metabolix, an American firm, has set up a $300m facility in Iowa with Archer Daniels Midland, an agribusiness giant. DuPont has teamed up with Tate & Lyle, a British sugar firm, to build the first commercial factory to make propanediol (a chemical used in cosmetics, among other things) from corn instead of petroleum. And on June 28th Elevance, an American firm, announced ajoint venture with wilmar International, an Asian agribusiness giant, to build the worl d's largest chemicals biorefinery in Indonesia by 20lL Developing countries are emerging as major markets and sources of innovation for industrial biotech . Braskem, a Brazilian chemicals firm, has commercialised polyethylene- a commonly used plastic resinmade from sugarcane. It is now working with Novozymes, a pioneering Danish biotech firm, to repeat the trick forpolypropylene, another common plastic. And Brazil's ethanol industry, already the world's biggest, wants to move from first-generation ethanol (made from sugarcane) to the next-generation cellulosic variety. That Brazilian edge worries the American biofuels industry, and highlights the fi nal factor now boosting industrial biotech: government support. At this week's conference, for example, America's Department of Energy announce d $24m in funding for algae-based biofuels (on top of an existing $146m). But bureaucrats can beton the wrong technologies. Brent Erickson of Bio observes that although governments are keenly promoting biofuels, most private investment in industrial biotech is going into other, less prominent areas. And governments are too easily pushed into protectionism. An egregious example is America's tariff ($0.54 per gallon) on imported ethanol, to protect domestic producers of corn-based ethanoL Marcos Jank, head of Brazil's sugarcane association, took to the conference stage in a yellow, green and blue shirt. Asked if this was to show support for his country's footbal1 team, he turned around 10 reveal the back of his shirt. It bore the number 54 and the message "cutthetariff.com ". •

Business 6 1

The Econ omist July 3rd 2010 Spai n v Portugal

Overruled

A management cult in Japan

Drucker in the dug-out TO~VO

AJapan ese book about Peter Drucker and baseb all is an unlikely h it PARIS

Portugal's government blocks a Spanish bid for a strategic telecoms asset

1:1. l ATCHING Spain penetrate the Por-

VV tuguese defence for a 1-0 victory in the World Cup this week was clearly too much to bear_ On June ]oth, to prevent Spain's Telefonica seizing full control of Vivo, a valuable Brazilian mobile asset it jointly owns with Portugal Telecom, Portugal's government used its golden share in the national telecoms operator to block the Spaniards' attack. For shareholders in Portugal Telecom, the government has now become their archenemy. Just before the shareholder meeting Telefonica had offered a crazily high, revised price of €7_15 billion ($8-77 billion) for Portugal Telecom's share of Vivo. Of the Portuguese firm's shareholders who voted, three-quarters had just opted to accept the Spanish bid. "The government is protecting the interests of the country," explained Jose Socrates, Portugal's prime minister. Ever since Telefonica made its first offer of €5.7 billion some weeks ago, Mr Socrates had left no doubt that the government regard· ed the stake in Vivo as strategic_ Portugal Telecom derives 46% of its revenues from the fast -growing Brazilian unit and its fu lure growth depends on it. The govern ment instructed Caixa Geral de Depositos, a state-owned bank, to vote against the sale to Telefonica. But Portugal Telecom's board told investors this month that the government could not legally block the bid for Vivo using its golden share. "All our lawyers told us this was not possible," says a person close to the company. Telefonica could still prevail. On July 8th the European Court of Justice will say whether or not Portugal's golden share breaks European Union rules on the free movement of capital. If, as expected, the court decides that it is illegal, Telefonica could renew its bid for Vivo, confident in the knowledge that both Portuguese and foreign investors voted for its offer. The unexpectedly strong shareholder support for Telefonica's bid suggests that the Spanish firm is offering far too much. Its latest offer, 25% higher than its initial bid, represents almost the whole market value of Portugal Telecom. Markets in Latin America, especially Brazil, are becoming more important for the Spanish firm as growth at home stalls. For years Telefonica enjoyed a robust home market, with relatively high prices and a benign tax and regulatory environ ment. It used its strong base to turn itself into a global champion. Now, however,

Z

OFF, a maker of cheap, chic glasses in Tokyo's trendy Harajuku district, is hardly a place you would expect to find dedicated followers of management theory. But one day its boss, ]8-year-old Takeshi UenO,came into a staff meeting waving a book about baseball with the picture of a gamine schoolgirl on the cover. It had the clunky title: "What if the Female Managerof a High-School BasebaH Team read Drucker's 'Management"'. Mr Ueno told his staff to read it. Satoko Osanai, his sales manager, did. Like many young businesswomen across Japan this year, Ms Osanai became an instant fan - not of baseball, but of the late management guru, Peter Drucker. After reading the book,she says, she started treating colleagues and customers differently. As news of the novel travelled from office to cafe to home, its sales topped 1m. According to the publisher, the cutesy manga cover was aimed more

An unexpe cted ma na ge ment blockbust e r says Robin Bienenstock, a telecoms analyst at Sanford C. Bernstein, Telefonica is suffering along with Spain's economy: the volume of voice traffic declined last year for the first time in decades, as people chose to save money by talking less on the phone. The government is newly focused on the price of telephony as unemployment soars, and the regulatory and tax environment is getting tougher. Nor are things straightforward in Latin America. Telesp, a Brazilian fixed-line op-

at attractingsalarymen than women. Yet almost half of the buyers have been female. What's more, sales for Drucker's original works, such as "Management: Tasks, Responsibilities, Practices", published in 1973, have soared. Some ]00,000 copies of the book have sold in the past six months, compared with 100,000 copies in the previous 26 years. The unlikely catalyst for this cultish enthusiasm is a fictional teenager called Minami. Like many high-school girls in Japan, she becomes the gofer forthe baseball team's male coach. Unlike many of her compatriots, she is the kind of girl, as the book says, who leaps before she looks. Horrified by the team's lack of ambition,she sets it the goal of reaching the high-school championships. She stumbles upon Drucker's 197] book, and it helps her turn the rabble into a team. Drucker's advice to focus on clear and measurable goals has resonated deeply in a country where the most common management injunction is gambare, which loosely (and unhelpfully) means "push yourselP'. Drucker, who loved Japan as much as he was confounded by it, would have been thri11ed. A year before his death in 2005, he gave prophetic warning that Japanese firms mighl soon be overtaken by rivals from South Korea, China and India. He urged them to brace for competition by working out what they were good at, what they should not do and what their values were. Not much of his advice has been heeded. Though some young outfits such as Zoff are razor-sharp, others remain corporate octopuses squeezing the life out of Japanese business. Women remain an underused asset: only 61% of them work, their average income is less than half that of men and they occupy barelYl% of boardroom seats. If Drucker, with the help of a headstrong teenager, can posthumously change that, it would be his greatest gift to Japan.

erator in which Telefonica holds an 88% stake, is losing business as people switch to mobile phones. Telefonica's second-biggest market in the region, Venezuela, has proved more risky than expected, with the devaluation of the bolivar this year taking a toll on the group's earnings. "The level of the bid for Portugal Telecom's share of Vivo says more about the desperation of Telefonica than about the real value of the asset," says Ms Bienenstock. This match, at least, is not over yet. _

62 Business Corporate crime

Not guilty? NEW VORK

The Supreme Court favours three jailed bosses in a crop of pro-business rulings HREE of America's most notorious forT mer company bosses received good news as the Supreme Court issued its final rulings before the summer recess. On June 24th Jeffrey Skilling, the former chief executive of Enron, and Conrad Black, the former boss of the Hollinger media empire, heard that the court had upheld their appeals against their convictions for failing to provide "honest services" to the shareholders of their firms. Then on June 29th, in the light of its ruling in the Skilling case, the Supreme Court ordered a lower court to review its conviction of Richard Scrushy, once the boss of HealthSouth, along with Don Siegelman, an ex-governor of Alabama who was initially judged to have been bribed by Mr Scrushy. These rulings will confirm the Supreme Court's reputation as being increasingly sympathetic to big business interests, by striking down what had been a successful new prosecutorial strategy for jailing bosses of firms caught up in scandals. So will two other rulings just released by the court, one striking down part of the Sarbanes-Oxley Act, which is loathed by many company bosses (see Schumpeter), and another upholding the legality of socalled business-method patents-though in each of these cases, the rulings were actually rather narrow and technicaL In the case of Sarbox, the court merely ruled that changes are needed in the way members are appointed to the Public Company Accounting Oversight Board, an agency established by the act. Likewise, the court ruled that business processes coul d be patented legitimately, but it rejected the specific appeal before it against a decision by the Patent Office not to grant a patent on a process for hedging the risk of price changes in commodity markets. Nor were the court's rulings unambiguously favourable to Messrs Skilling and Scrushy and Lord Black, all of whom must now make their cases again in a lower court, rather than enjoying the release from jail that the Supreme Court could have granted them. In upholding the appeals by Mr Skilling and Lord Black, the court found that the law requiring "honest services" from employees to employers had been interpreted too broadly, and in future should be used only where there is explicit evidence of bribery or kickbacks. Lower courts must now decide whether the misuse of the honest-services law was "harmless". The government believes

The Economist July 3rd 2010 that it presented more than enough evidence against Mr Skilling on other counts for his conviction to be upheld. But Tom Kirkendall, a lawyer and an expert on the prosecution of former Enron executives, reckons Mr Skilling has a good chance because the prosecutors relied overwhelm ingly on the honest-services charges in their closing remarks to the jury. Mr Kirkendall notes the striking difference between the government's aggressive prosecution of bosses after the corporate collapses at the start of the century and the lack so far of any charges being brought against former bosses of Wall Street firms that turned out, like Enron, 10 be houses of cards once their clients lost trust in them. One difference is that the collapse of Wall Street firms was "systematic, rather than massive fraud within one company", says Leslie Caldwell, a former member of the Department of Justice's Enron task-force. Another possibility, suggests Mr Kirkendall, is that federal prosecutors have looked at the large number of successful appeals against the convictions they won injury trials of executives from Enron and other firms, of which Mr Skilling's and Lord Black's are the latest, and have coneluded that going after Wall Street executives is not worth the career risk. • Sportswear

The swoosh heard around the world NEWVOR K

Nike's strong presen ce at the World Cup highlights its strategy for growth T IS hard to rival the excitement of footItheir ball fans at the Wo rld Cup. They paint faces, scream and wave flags. But sportswear firms, which stand to make billions from the football tournament, are just as enthusiastic. Sales of football -related products at Nike, the world's largest sportswear-maker, increased by 39% in the three months to the end of May; before the tournament in South Africa even began. Adidas, its German rival, predicts sales of football items worth more than €L5 billion ($L8 billion) this year, up 25% from 2006, the year of the previous World Cup. Adidas is an official sponsor of the world Cup, so its logo appears on the field. But Nike has invested millions in getting fans' attention in less predictable ways. It has launched a marketing campaign featuring several football stars, installed a giant screen on one of Johannesburg's largest buildings and opened a centre in Soweto, a poor township in Johannesburg, that doubles as a facility for football training and AIDS testing. The firm also sponsored ten teams, and even more players are

Blowing Nike's trumpet in Soweto sprinting across the field in Nike's orange boots. Mark Parker, Nike's chief executive, says it has been "the biggest and most successful World Cup in our history". But Nike's presence at the World Cup is not just about winning a greater share of the $11 billion global football apparel, shoe and equipment markeLlts wider aim is to raise its profile in emerging markets. Last year more than 25% of Nike's sales, worth some $4.8 billion, were in developing countries, with about 9%of revenues coming from China. Nike has ambitious plans to increase sales in these markets by an additional $3 bil1ion-3.5 billion by the end of 2015. "Nike is using the football category to penetrate those markets," says Eric Tracy. an analyst at FBR Capital Markets, an investment bank. It seems to be working. Orders for Nike products over the next few months are up by 7% globally, and by 30% in emerging markets. The firm has weathered the recession well: sales fell by juStl% in the year to the end of May, compared with the previous year. Nike cut costs aggressively and laid off around 5% of its workforce. It also rolled out products with new features, such as lighter shoes with better cushioning, to try to retain consumers. Executives at Nike, in the language of their trade, like to talk about playing "offence" when it comes to corporate strategy. In May the company laid out its plans for the next five years. It wants to expand its other brands, such as Converse sneakers and Umbro sportswear, and will continue to invest in technology. It already makes a line of shoes, called Nike+, with built-in sensors that can communicate with a runner's iPod to track calorie consumption and so forth. And NikeiD, a service which allows buyers to design their own customised shoes, has generated around $lOom in sales so far. ~~

The Economist July 3rd 2010

which makes most of its money •fromNike,wholesale trade, also wants to boost its presence as a retailer. This wUl involve increasing its store count by nearly 50% with more than 250 new shops over the next five years, and increasing online sales, which now account for an estimated 5% of the total. Selling directly to consumers im· proves margins, though it also carries the risk of alienating Nike's retail partners,

Business 63

such as Foot Locker. Whether Nike can achieve all these goals by 2015 remains to be seen. But the company can at least be certain of some things in the coming years. Brazil, a growth market for sportswear companies, will host both the 2014 World Cup and the 2016 Olympics. "I don't think there's anyone more excited about th at than Mark Parker of Nike," says one analyst. _

Charging for content

Media's two tribes

Some media outfits chase sca1e. while others pursue premium pricing IT betterto take a little money from a lot IInsofBritain people, or a lot of money from a few? and the the Times

Sunday Times

newspapers are about to take the latter course by asking people to pay for news online. It is a bold move: the Times, which is owne d by News Corporation, is a main· stream paper in a fiercely competitive na· tional market. And the paywall it is build· ing is a mighty one that is impervious even to Google's web crawlers. Paywalls are rising across the me dia landscape as many firms conclude that revenue from online advertising alone is not enough to make ends meet. The Tallahassee Democrat, a newspaper owned by Gannett, starts chargingfrom }uIYlSt. Hulu, a free video website that was launched in America in 2008, said this week that it would begin selling subscriptions. Yet there is a strong drift in the opposite direction, too. For every outfit that is trying to build a premium subscription service, another is becoming more convinced of the virtues of giving away free content. Britain's Daily Mail newspaper, for example, is something of an anti·Times. Its website, which is heavy on pictures and celebrity news, has grown rapidly in the past two years, bothat home and abroad. It had 42m unique monthly visitors in May, according to the Audit Bureau of Circula· tions-more than any other British news· paper website. Martin Clarke, who runs the Mail's website, reckons people simply will not pay for general news on the web, and is happy to maximise viewers and advertising. The model of giving away can· tent is not broken, he says: "It's only broken if you are not big enough." This is not merely a difference of opinion over whether to charge for online can· tent. II is a divide between a strategy based on "up-selling" people to premium sub· scriptions, and a strategy based on scale and market·share. More fundamentally, it reflects different views about the extent to

which consumers can be steered towards the most profitable products. This crack stretches all the way from newspapers to the fi lm business. The hot issue in Hollywood these days is whether the studios should sell DVDS to cheap rental services on the same day they put them on sale to the public. Netflix, which sends discs through the post, and Redbox, which rents them from kiosks for $1 a day, have grown quickly. Fox, Time Warner and Universal believe such outfits undermine more profitable DVD sales and video-on· demand rentals. They have "windowed" Redbox,making it wait 28 days for popular films. Disney, Paramount and Sony dis· agree: a person who wants to rent a film cannot be strong-armed into buying it. Television is no closer to consensus. Hulu's decision to charge $9.99 amonth for full seasons of TV shows and access to the service from smartphones and games cansales is a victory for the premium camp. News Corporation, a part·owner of Hulu, had publicly argued that it should become a subscription service. But cheapskates can take heart. In Britain, Channel 4 and Five have put their programmes on You· Tube. Disney. which also owns part of Hulu, now offers many of its broadcast TV

shows free on the iPad (Steve]obs, Apple's boss, sits on Disney's board). The big media firms are not wholly con· sistent. Although News Corporation champions subscriptions, it is not yet erect· ing paywalls around its tabloid newspa· pers. Disney makes its broadcast TV shows available free but does not do the same for ESPN, its lucrative sports network. Other outfits are fence·sitters that believe they can both take a little money from a lot of people and a lot of money from a few pea· pie. But the drift is towards the extremes. Few believe the future lies in premium·ish products and middling scale. The two camps are likely to grow fur· ther apart. Online advertising is picking up, encouraging firms that have hitched their fortunes to it. As others erect pay· walls, the audiences for free sites will probably grow. The Times wUl surely lose on· line readers when it begins charging. The mere act of asking people to register caused its market share to drop by half, ac· cording 10 Hitwise, a market·research firm. In film, similarly, the Redbox·friendly stu· dios benefit from the reluctance of others to supply DVDS to kiosks, argues Richard Greenfield, an analyst at BTI G Research. Apple'siPad appears to be speeding the separation. The scale outfits have seized on the iPad as a means of reaching more pea· pie and charging high rates to put adver· tisements in front of them. Although the premium folks appreciate those ads, they view the iPad mostly as an opportunity to sell more subscriptions. At somemagazine firms, such as Time Inc, building a paid iPad app is the first step towards withhold· ing some free content from the web. This lack of consensus worries many in the media industry. Those who pursue scale (and their many allies in the blog· osphere) claim that premium strategies are doomed . The other side retorts that the practice of giving stuff away undermines the value of all content. But it is likely that winners will emerge on both sides. Some will find a way of profiting from scale, while others wUl carve out dedicated audio ences and lucrative niches. There need not be a single right way to do things. _

64 Business

The Economist July 3rd 2010

Schumpeter I Two cheers for Sarbanes-Oxley The Supreme Court gets it right by tweaking, but not overturning, the controversial legislation

A MERICAN business people of a conservative nature have f i been dreaming about driving a stake through the heart of the Sarbanes-Oxley act ever since the legislation was passed, back in 2002, in the wake of the Enron, lYco, WorldCom and Global Crossing scandals. George Bush rightly described the legislation as "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt". But to its critics it is farreaching in the wrong direction. The American Enterprise Institute, a right-wing think-tank, has dismissed Sarbox as a "colossal failure". Ron Paul, a Texan libertarian, has argued that it puts America at a competitive disadvantage. The Wall Street Joumal thunders that it has "imposed hundreds of billions of dollars in costs on business with no noticeable decline in financial scandals". Newt Gingrich has urged Congress, the body that he once dominated, to repeal the act. But how could it be killed? A few years ago a conservative group called the Free Enterprise Fund thought that it had found the answer. The heart of Sarbox is a body called the Public Company Accounting Oversight Board. The board's job is to regulate the accounting industry- in effect, to audit the auditors. The Free Enterprise Fund argued that the board violated the separationof-powers clause of the constitution, because its members are hired by the Securities and Exchange Commission (SEC), rather than by the president. They also argued that, because the legislation has no "severability clause", a problem with just one part of the legislation invalidates the whole thing. In its end-of-term rulings on June 28th the Supreme Court neatly sidestepped this objection. The court accepted that the members of the board should be appointed by and accountable to the president. But it also insisted that Sarbox should remain "fully operative as a law". The Supremes turned a stake aimed at the heart of the regulatory monster into a blunt matchstick.

Mend it, don't end it Was this a missed opportunity to rid America of a piece of job-destroying over-regulation, or was it an exercise in judicial prudence? Your columnist is all in favour of animal spirits. But he nevertheless inclines to the second view. Sarbox has certainly imposed heavy burdens on companies, particularly small ones. But

it has also increased accountability and transparency, helped restore investors' confidence in the market and reinforced the allimportant principle that companies are owned by their shareholders,ratherthan their managers. The best solution to Sarbox's problems is to mend it rather than end it- to borrow Bill Clinton's phrase about affirmative action- and there are encouraging signs that some mending will be done. The most obvious case for keeping Sarbox is that companies have got used to it. They have spent millions of dollars installing Sarbox-friendly computer systems and training Sarbox-aware lawyers and accountants. Life is complicated enough for companies at the moment without creating more regulatory uncertainty. And striking down Sarbox might well have opened the door to even more burdensome regulation. The legislation, remember, was passed by huge majorities- 42J-3 in the House and 99-0 in the Senate-during a period of Republican ascendancy. There are also positive reasons to defend Sarbanes-Oxley. Conservatives are clearly right to argue that the legislation failed to prevent the financial meltdown of 2007-08, or to smoke out a fraud like Bernie Madoff. And in the months before its implosion, Lehman Broth ers used accounting tricks of the sort that Sarbox was supposed to stamp out to shift about $50 billion off its balance-sheet. But it seems perverse to treat the failure of financial rules as an excuse to reduce rather than tighten regulation. Michael Oxley argues that the real lesson from the financial crisis is that other countries, not just the United States, need to adopt Sarbox-style legislation. He celebrates the fact that Japan, Canada, Israel and the European Union have done just that. Nor is the story entirely over: there is a chance that Richard Fuld, Lehman's boss, will pay a high price thanks to Sarbox's insistence that senior corporate officers must take personal responsibility for corporate accounts. The Valukas report on the Lehman debacle accused the firm of "actionable balance-sheet manipulation". Fram,:ois Brochet of the Harvard Business School also points out that Sarbox has a good record in protecting corporate investors from insider shenanigans. The legislation forces executives and big shareholders to report changes in the ownership of company stock to the SEC within two business days of their transactions. This makes it easier for small investors to respond to insider purchases quickly and discourages the Martha Stewarts of this world from selling stock in anticipation of bad news. What about the worry that Sarbox is dulling America's animal spirits- discouraging companies from going public and smothering small companies in red tape? Conservatives have exaggerated the damage that Sarbox has done to the IPO market. America's share of the global I PO market began to decline in 1996, hit rock bottom in 2001 and has risen again thereafter. But they are right that Sarbox takes a toll on smaller public companies. Legi slation that was provoked by the misbehaviour of giants such as Enron imposes its heaviest burdens on Main Street fir ms that know nothing about the wonders of off-balance-sheet trickery. The number of companies deregistering from American stock exchanges tripled in the year after the law was introduced. There are signs that Congress is waking up to the case for reform. The financial-reform bill that is currently in the works contains a proviSion to exempt smaller public companies from some of Sarbox's rules. Conservatives have clearly failed in their attempt to kill off Sarbox. But if their continued criticism persuades Congress to lift some of the burdens from smaller companies, then they will have done some good . •

Not all on the same page LONDON AN D N£WYORK

America's Congress nears agTeement on a financi al-reform bill, but the final shape of the new regime is unclear. The international picture is murkier still

HERE were amendments to this, amendments to thai, even amendT ments to amendments. Negotiators and aides seemed to be drowning in paper. But a marathon session of bleary-eyed horsetrading between Democrats and Republicans yielded, al 5.39am on June 25th, an agreed text of what supporters portray as America's most important package of ftnanciallaw since the Depression- and opponents decry as a 2,]19-page cop-out. Before becoming law as the Wall Street Reform and Consumer Protection Act (known as Dodd-Frank after its architects, Chris Dodd and Barney Frank- pictured above, showing the strain), the bill must be approved by both houses of Congress. On june 30th the Houseof Representatives obliged by passing it by 237 votes to 192. The Senate is proving less easy. Democratic leaders were scrambling to secure the 60 votes needed to avoid a filibuster after Robert Byrd, the longest-serving of the 57 Democrats, died (see page 82), and a Republican whose support was crucial, Scott Brown, refused to vote for a bill that raised taxes. He objected to a $19 billion levy on large banks, insurers and hedge funds to cover the costs of implementing the lawsetting up new regulators, paying for studies and so forth - which had been slipped in at the last minute.

Messrs Dodd and Frank took the unusual step of reopening the conference that had thrashed out the bill, and stripped out the bank levy. They proposed instead that only $6 billion come from banks (from higher deposit-insurance fees) and the rest from winding down the lToubled Asset Relief Programme (TA RP ) early_ Mr Brown said he would mull it over. The Senate's vote has now been postponed until after the week-long july 4th recess. If there are no more hiccups, DoddFrank will give Barack Obama his second domestic triumph of the year, after health care. The president has wasted no time in touting it: indeed, he had pushed for a deal before the meeting of the Group of IWenty (G20) countries in Toronto on june 26th and 27th so that officials could parade it there as a model for others to follow. Some European countries are keen on tighter fi nancial regulation, and various proposals from the European Commission are in the works. Onjune 30th the European Union's member states and parliament proposed limits to the share of bonuses paid at once and in cash. But the pace in Europe is likely to be slower, and deep international disagreements remain. It takes thick rose-tinted glasses to accept Mr Obama's assertion that the new law will ensure an end to bank bail-outs.

Moreover, there are some glaring omissions. The bill's authors ducked big decisions on the future status of Fannie Mae and Freddie Mac, to the chagrin of Republicans, who rightly view the mortgage agencies as having been instrumental in causing the financial crisis. Nor is there a meaningful tidying-up of the tangle of federal regulatory agencies. On both counts, an excuse for doing nothing was the concern that political opposition would have jeopardised the whole bill . Still, the document covers a lot of ground in its effort to replace the pv c in the financia l plumbing with copper pipe, as one official put it. It creates a new consumer financial -protection bureau. It empowers regulators to dismantle any failing fi nancial firm, not just banks, and pushes more of the clean-up costs onto surviving competitors, rather than the taxpayer. Those who securitise loans will have to retain more of the risk. The so-called Volcker rule will limit banks' proprietary trading and investment in hedge funds and private equity. Derivatives markets will no longer be left to their own devices. The pendulum swings The package is part of a global- though uneven-shift towards more government intrusion in finance after the meltdown of 2008. Starting in the late1970s, America began a process of deregulation that accelerated in the 1980s and 1990S, culminating in a law that left fast-growing swaps markets largely unregulated and the repeal of Glass-Steagall, the 1933 act that had segregated commercial banking and investment banking (see table on the next page). The re-regulation of corporate America be- ~~

66 Briefing Finandal regulation ~ gan

with the Sarbanes-Oxley act of 2002, which was designed to tighten companies' governance after the dotcom bust and Enron's bankruptcy. But in finance the deregulatory mood carried on until the bust. Dodd-Frankisriddled with messy compromises. The Volcker rule was watered down to let banks invest up to 3% of tierone capital in hedge and private-equity funds-implying $) billion-4 billion for the largest banks.JPMorgan Chase can keep its giant Highbridge hedge fund, because it invests only clients' money. Morgan Stanley must offload its proprietary-trading operation, PDT, which accounts for less than 2% of group revenue. Goldman Sachs will be hardest hit: it derives at leastl0%of its revenue from proprietary trading. The proptrading ban is subject to approval by a new Treasury-led council of regulators, which will study its impact. And firms will get at least seven years to divest assets_ The deal on banks' swaps desks was grubbier still: a nonsensical compromise to allow Senator Blanche Lincoln, author of a proposal to force banks to spin these off, to save face. Interest-rate, foreign exchange and high-quality credit swaps can be retained; supposedly riskier commodity; equity and non-investment·grade credit contracts must go into separate affiliates with higher capital costs. Interest-rate swaps may be more germane to banking than commodity swaps, but the idea that they are inherentlysaferis laughable: poorly chosen rate contracts have caused countless losses for banks, companies and municipalities over the years. But because rate and foreign -exchange swaps make up the bulk of the market, American banks will have to move only 10% or less of their $218 trillion (notional) combined derivatives holdings. Ta lk of an exodus of derivatives operations to London has receded. Though Volcker and the Lincoln amendment have attracted most of the recent headlines, the meat of the bill lies else' where: in the consumer bureau, which will have broad powers to write rules and ban financial products; in the resolution mechanism that extends regulators' powers to force losses on creditors as well as shareholders and requires healthy financial firms to cover the cost of winding up collapsed rivals; in the requirement that "standardised" derivatives be routed through clearing houses and traded on exchanges, with higher capital charges for customised contracts; and in the require' ment that hedge funds and private·equity firms overseeing $150m or more in capital to register with the Securities and Exchange Commission (SEC) and give information about their trades and portfolios. These have won praise and condemnation in roughly equal measure. Some con sider the resolution authority a big improvement on the current non-regime for

The Economist July 3rd 2010

dealing with non-bank financial firms. Others fear it does as much to enshrine bail-outs as to prevent them. Bank regulators have long neglected consumer protection . But some worry that the new agency may be a bureaucratic monster- and that in the interests of "improved access" and "fairness" it may promote rather than curb reckless lending. Putting routine derivatives on exchanges makes sense, but too many restrictions might sacrifice liquidity. Shed no tears for bankers Unhappy though they are with much of the bill, bankers know it could have been a lot worse. There is no return of Glass-Steagall; no forced break-ups. The biggest banks are still huge (see chart 1 on the next page) and will remain so even if Congress passes Mr Obama's proposed $90 billion tax, over ten years, on their liabilities, which is designe d to discourage bigness as well as to recoup the costs of the TARP . Dodd-Frank will, though, take a bite out of banks' profits through fee reductions, higher compliance costs, the tying-up of more capital in trading, and so forth. Analysts expect the impact to be anywhere from 5% to 20% of the largest banks' total profits by 201). The hit to regional banks will be at the low end of that range, though that could still be enough to drive some of them into each other'sarms, further reducing the number of lenders (see chart 2). Some of the biggest hits could come in derivatives, an area dominated by a cosy club of big global banks. KinnerLakh ani of Citigroup thinks theh average return on equitY(ROE) in this business, which brings in $100 billion of revenue a year, could fall

I

from 25% to 15%. This leaves some wondering if the top 50 American banks can sustain anything like the 16% average ROE they enjoyed in 1997-2006. There will, though, be offsetting factors. Banks will seek to pass costs on to custom' ers in higher fees and spreads on loans. This is already happening: they have not passed on the full benefit of the low mort· gage rates engineered by the Fed's purchases of mortgage-backed securities, points out Richard Ramsden of Goldman Sachs. In derivatives, increased standardisation should lead to higher volumes, offsetting the reduction in dealers' profit margins. Moreover, they will enjoy some capital relief as more contracts are cleared centrally, freeing some of the buffer needed to back over-the'counter trades. Bank of America alone could benefit to the tune of nearly $5 billion, according to Betsy Graseck of Morgan Stanley. The precise impact is hard to gauge, not least because the new law hands a lot of discretion to regulators. Much of the text is little more than a template, which regulators are expected to flesh out. It may take them more than two years. They have been told to conduct 150 studies and write 350 detailed rules that could run to 15,000' 20,000 pages, reckons Barclays Capital. Banks will hope that, as in the past, regulators are more sympathetic than lawmakers to their claim that tough rules will harm their competitiveness and stunt economic growth. "Frankly, it's an enormous relief to be dealing with [regulators] again rather than Congress," says a Wall Street executive. Take the provision that would regulate ~~

A century of change American financial-regulation laws

1913 1933

Legislation Federal ReseJVe Act

Descri ption Created centlal bank

Ba nki ng Act (G!~.ss-Steaga~l)

1933

Securities Act

1934 1940

Securities hchange Act Investment (om pa ny Act

1970

Securities Investor Protection Act Commodi ty Futures Trading Commi ssio n Act

1974 "8<)

1999

Depository Institutions Dereg ula ti on and Monetary Control Act Fina ncial Servi ces Modernisation Act (Gramm-leach-Bliley)

Created th e Securitiesand Exchange Commissio n Passed in response to wave of Ponn schemes, gave SEC authority over mutual funds Created a body to safeguard investor accoun ts and establish fina ncial-respo nsibility rules at securities firms Created CFTC to regulate futures markets Deregulated savings-accou nt interest rates. enforced minim um capital requirements for banks Repealed Gla,,-Steagall. allowi ng commercial ba nks, investment ba nks and insurers to merge hempted OTCderivatives from gover nment oversight

Commodity Futures Modernisatio n Act 2002 Public Company Accounting Reform Passed in response to Enron's ba nkruptcy, overhauled corporate and Investor Protectio n Act governance, strengthening role of auditors in overseeing . ....... (~.r.~.~~:~~.I~I., ....... " .... " ...... ,... ?7~~~.~~~.~. P.~o.c.e~u.r.~................. ' ..................... ,......... " 2010 Wall Street Reform and Consumer See main text Protection Act (Dodd-Fra nk)

2000

s.oorces: N~ti on . l S()urees; The Economist

The Economist July 3rd 2010

I

Big, bigger, biggest

Briefing Financial regulation 67

II

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Bank of America JPMorgan Chase (it i 9r oUP

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State Street Regions Sou rce: rm, Banker

~

for the first time the "interchange" fees that banks charge merchants on debit-card transactions. A 50%cutin those fees would reduce big card issuers' pre-tax income by 2-3-4%, estimates Moody's, a ratings agency. But the actual effect will depend on what the Fed, which will do the regulating, deems "reasonable and proportional", as the bill puts it. Watchdogs will also have the task of defining proprietary trading (as opposed to hedging or marketmaking)which many view as impossible. In another section of the Volcker rule, lawmakers kindly left it to regulators to work out the meaning of "high-risk assets". Another mind-bender will be to sort standardised and customised derivatives. of particular concern to capital-markets firms is a provision- inserted late, after the SEC had filed fraud charges against Goldman over its marketing of a collateralised-debt obligation- which bans banks that package together asset-backed securities from any related transaction that causes a "material conflict of interest". The precise definition of this will be crucial in setting the bounds of marketmakers' activities, says Anna Pinedo of Morrison & Foerster, a law firm. On top of all this,Dodd-Frank gives regulators another new job, of identifying and responding to emerging threats to financial stability, particularly asset bubbles. It establishes a systemic-risk oversight council, comprising the Treasury, federal regulatory agencies and an independent member. A multilateral mess The bill's authors have not only outsourced much of the definition of the new order to domestic regulators; much of the most important business, notably on bank capital, has been cast even farther afield, to international rulemakers. If reform in

America is hard, managing the process across dozens of countries is akin to herding cats. At a recent meeting in Vienna of the Institute of International Finance (nF), an industry lobbying group, a fair crosssection of the world's top bankers agreed behind the scenes that the task of building global rules is getting harder the closer it gets to decision time. The 020'S latest meeting did yield the usual communiques about global co-ordination, but there was open disagreement too. The idea of a global bank levy, which America and some European countries are keen on, has been dropped. Hardly surprisingly, countries that did not have a crisis, including Australia, Canada and most of the emerging world, view the idea as somewhere between unnecessary and nuts. Disagreement is growing, too, over new global rules on capital and liquidity, which most countries are relying on to make fi· nance safer. For a start, the widening split between accounting standard-setters is a huge difficulty. American rule-makers have signalled they would like to extend "mark-to-market" accounting to loan books as well as securities, whereas the standard-setting body that decides the rules in most other countries is moving in the other direction. Since accounting largely defines what capital is, it is ludicrous to attempt a common capital standard without fairly homogenous book-keeping standards. Bill Rhodes, a vice-chairman of the IlF and a former vice-chairman of Citigroup, says agreement here is so important that politicians should bang standard-setters' heads together to get progress, even if that undermines their independence. "This is a 020 issue. The 020 has to say, 'Look, you've got to come to some kind of convergence.''' This lack of progress compounds the fault -lines over the proposed "Basel 3" rules on capital and liquidity. For all the rhetoric of togetherness, most countries are lobbying for carve-outs. America talks tough but is keen to allow banks to include future mortgage·related fees as capital, for example. Almost every big European country also has some kind of quirk for

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18

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500

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400

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300

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which it wants special dispensation. In isolation, many of these are reasonable. ln combination, they represent death by a thousand cuts. Most countries outside America, which rely much more on banking than on capital markets to fund their economies, are also jittery about the impact of tighter rules on economic growth. Bankers have fuelle d such fears: a study by the IIF concluded that the Basel 3 standards as proposed could knock 3% off cumulative ODP in America, the euro zone and]apan by 2015 (it did not attempt to capture the benefits that a more stable regime might bring by making crises rarer). Global regulators say that they retain political support for tough action and that the rules will be phased in by the end of 2012, to minimise economic disruption. The potential seriousness of that disruption is hotly debated. In contrast to the IIF, Swiss regulators argue that the dramatic rise in capital levels at their two big banks has had little impact on the economy. The Basel club of regulators is undertaking its own study, which is likely to conclude that its proposals are far less costly than the IlF'S estimate- perhaps 005% of cumulative ODP (again excluding the benefits of having fewer crises). About the only bits the club is prepared to concede are too fierce are the rules that would force banks to raise more long-term funding quickly, which look unrealistic given the degree of disruption in debt markets. Are national regulators right to put so much faith in global bodies? International regulators remain defiant. The odds are that they will muddle through, hammering out a compromise on accounting and forcing through capital and liquidity rules that represent a modest strengthening of the already much improved buffers that banks have. But the worry is that thepolitical capital expended on this quite basic task means other priorities get sidelined. That is particularly so with resolution regimes for failing banks. Here most countries are doing their best to provide regulators with the legal tools to put losses onto cre ditors. But legal tools alone may be insufficient given the financial realities of bank balance-sheets, where the fear of potentialloss causes the vast bulk of counterparties and creditors to consider running. What is needed is a clearer line between creditors who would bear loss when a bank fails and those who would be protected. This, in turn, might require arejigging of creditors, or the creation of a new type of debt that would convert into equity in certain circumstances. Although Basel continues to consider such measures, much of its energy has been sapped by the supposedly straightforward question of building up banks' safety buffers. Whether the international process can deliver anything more than a lowest common denominator remains to be seen. •

Also in this section 69 Klaus Regling, bail-out boss 69 China and Taiwan mend some fences 70 Joe Cassano speaks 70 The rise of iron-ore derivatives 72 Buttonwood: Anaemic equities 74 Economics focu s: E-commerce

I For daily analysis and debate on economics, visit Economist,com/economics

Companies' cash piles

Show us the money

For the recovery to proceed smoothly, firms must stop hoarding cash sector continues to save Iless,FhardTHEtheevenprivate as governments try to borrow risks of a double-dip recession rise. A long period of high household saving seems assured in rich countries whose consumers lived off credit and have heavy debt burdens to show for it. But much of the recent increase in private-sector savings comes not from consumers but from businesses. Profits have been more than enough to cover corporate spending in many parts of the rich world, leaving an excess of funds for firms to squirrel away. A lot depends on whether this continues. If cautious firms pile up more savings, the prospects for recovery are poor. Econo-

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mies will be stuck in the current- and odd- configuration where corporate surpluses fund government deficits, If firms loosen their purse-strings to hire workers and to invest, that w ill allow governments to scale back their borrowing. The degree of corporate saving varies from country to country. British businesses are among the biggest savers. Last year they produced a net financial surplus of 8% of Go p- most of it by non-bank firms (see chart :I). That surplus went a long way to of'fsettingthe government's u% deficit; a 1% current-account deficit and a 2% household-sector surplus did the rest. Firms in America have been saving, too, even if they have not been Quite as thrifty as British ones. The Federal Reserve's measure of the "financing gap", the shortfall of corporate income relative to spending, was minus 0_8%of GOP (ie, a surplus) last year, though the gap closed in the first Quarter of 2010. The surplus is bigger if the retained earnings of foreign su bsidiaries are included, as they are in European measures. The corporate-saving rate has also increased sharply in the euro zone: a deficit of 4% of GOP in 2008 had all but gone by 2009 (see chart 2). That change came largely from big cuts in spending by firms in France and Spain. German firms have been running cash surpluses since 2004, when profits began to rise as a share of national income as real wages stagnated.

On the face of it firms are in a position to spend more and aid the recovery. After all, businesses are supposed to be repositories for saving, not a source of it. Optimists point to the record $1.6 trillion that American firms have on deposit, in money-market funds, and in bonds and bills. With interest rates so low, this cash might be put to work more profitably. Firms may well have cut their spending 100 much in the rush to conserve cash during the darkest period of the crisis. Consumer spending has turned out 10 be stronger than had been feared, says David Bowers of Absolute Strategy Research. "Capital spending, inventories and jobs are too low given the level of consumption," he argues. Even so businesses may not feel it is safe losplash out on new machines,stocks and employees. America's corporate cash pile looks less impressive when set against its debts. Firms need to keep more cash in the kitty if they have large debts because these are raised and repaid in lumps, says Andrew Smithers of Smithers & Co, a research firm. America's non-bank compa- ~~

I

German thriftiness NF(s" financia t balance, %ofGOP _

Germany

1999

2001

_

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s.:..,rces: Eu ro~n C!11tr"l e"nk; o."tsd1~ Bund esbank; Thomson R..,Ie"

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The Economist July 3rd 2010 ~

Finance and economics 69

nies held liquid assets worth around 23% of debt in the first quarter- a bit higher than the average of the past 40 years but still below the levels in 2006. Many corporate treasurers will want to hold more cash than normal given the size of their firms' debt and the frailties of the fi nancial system. Before recession struck firms in America and Britain had not need· ed to borrow much, if at all, to finance new offices, factories and plant. But their debts increased all the same. American companies used debt to buy back their own shares; British businesses used it to purchase stakes in foreign firms. High debt is a legacy of those deals and makes firms nervous about running down cash or spending more of their profits. It will take time for businesses to be confident that banks will be there should they run short of cash. Corporate spending is dogged by other uncertainties. Few rich-world businesses can feel confident about expanding capacity when the outlook for consumer spending is so cloudy. Fiscal stimulus has helped shore up aggregate demand. Now the worry is that corporate taxes may rise as governments try to fill the hole in their finances, and that non-bank firms will get caught up in a regulatory backlash. Busi' nesses seem short of ideas about how to grow. Technology is not the must-have item it was during the last big investment boom in the late 1990S. SO firms may well want to sit on their existing cash piles. But the case forgenerating further surpluses seems less compelling. Business investment is as low as it has ever been as a share of GOP (see chart 3). Firms run the risk that their stock of capital is too depleted to meet even sluggish growth in demand. The likeliest outcome is ahesitant recovery in business spending as firms balance the risks of inadequate investment and insufficient cash. If banks continue to be a blockage, firm s may look for a way around them. This week Siemens, a big German engineering firm, said it would apply for a banking licence so that it can use its cash reserves to lend to cus' tamers. Fine, but for the sake of the economy, better a borrower than a lender be. _

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Klaus Regling

Chief bail-out officer BERLIN

The new head of the euro-zone SPV IS registered in Luxembourg, the "offdomicile of many hedge funds . IhasTshore" hundreds of billions of euros with It

which to place macroeconomic bets. And from July lSt the newly formed European Financial Stability Facility, the special'pur' pose vehicle (spv) set up to support ailing euro-zone countries, is even being run by a former hedgie. But this is one fund that will never short its investments. Klaus Regling owes his appointment as the spv's chief executive to his nationality as well as his expertise. The fund will be able to borrow as much as €440 billion ($537 billion) to lend to struggling countries. Its borrowing will be guaranteed by euro-zone countries, and Mr Regling's native Germany could be on the hook for €148 billion of those guarantees. Sut his past experience also recommends Mr Regling for the job. The 59-yearold has spent the better part of four decades flitting between the I MF, Germany's finance ministry and Brussels. He played a key role in drawing up the Stability and Growth Pact in the1990s while based atthe German finance ministry. The pact, which was a condition Germany insisted on be' fore agreeing to give up its precious D-mark, was intended to rein in profligacy among countries using the euro and prevent the mess that they are now in. Mr Regling then spent much of the past decade trying to enforce it as the director-general for economic and financial affairs at the European Commission. He also did a stint working at Moore Capital, a big hedge fund that specialises in macro strategies such as bets that currencies or commodities will rise or faiL Mr Regling faces lo ts of questions in his

new role. For such a large fund using public money, there remains a remarkable lack of transparency about how it plans to go about its business. Economists are still unsure whether it will be used tolenddirectly to struggling governments, buy their bonds, set up a European "bad bank" to take over bad loans or even to invest directly in banks that fall short of capital. That it is so uncommunicative may simply be due tothe fact that it is so new. Grit may be no accident. Slightly more than a decade ago Mr Regling told a conference on reforming the IMF that there was a tradeoff between transparency and efficiency. In an emergency, he said, the fund had to be able to act quickly even if that reduced the understanding of outsiders. Today's environment is less forgiving of opacity. It is still not clear at what interest rate the spv will lend, which removes one source of downward pressure on government-bond yields. Countries backing the SPV have agreed to guarantee 120% of its total borrowings in order to ensure the fund gets an AAA credit rating. In selling such gold-plated bonds the spv may cause investors to cut purchases of sovereign bonds. Some creditors fret that the facili ty's loans will be repaid first in the event of a sovereign default. That could make ordinary government bonds even less attrac' tive. Europe's banks remain under close scrutiny: the expiry this week of €442 billion in one-year loans from the European Central Sank to banks caused market wobbles. If the spv was designed to calm nerves, it hasn't worked yet. _ China and Taiwan

Branching in HONG ~ O N G

After 61 years of forced separation, a slow restoration of financial ties HE Economic CO'operation FrameT work Agreement signed by Taiwan and China on June 29th encompasses hundreds of categories in goods and services (see page 39). Negotiations were particularly wrenching for agriculture and financial services because each, in its own way, raises security concerns. The risks that come from the loss of contral over food supplies are obvious. The link between financial services and securi" ty is more subtle. China's banks, insurers and brokerages are all, to at least some extent,state-controlled. Nosurprise then that Taiwan, if it hopes to remain politically independent, fears having its companies nourished by credit that is run by Beijing. Anyone doubting the intensity of these concerns need look only at the American ~.

70 Finance and economics ~

government's efforts to sell AIG'S Taiwanese life-insurance operations to a Hong Kong partnership that is suspected of being backed by mainland money. The deal, announced last year, is still stuck in regulatory purgatory in Taipei. To address these concerns, the finan cial-services section of the agreement seemingly favours Taiwan. Taiwanese banks will be able to buy up to 20% of mainland institutions, whereas mainland institutions will be limited to only 5% of Taiwanese banks. China's snail-like approval process, which forces a foreign bank to spend years before doing local-currency business, will be relaxed for Taiwanese firms. Getting these details nailed down helped push the date of the signing back from as long ago as 2001, when many thought an agreement was close. Much has changed since then. For decades, as China's economy slept, Taiwan's banks were better off than their mainland peers. No longer. Taiwan'sfinancial system is fragmented and highly competitive. One consequence of this is low profit margins (the average net interest margin for Taiwan's big banks is roughly half that of China's) and low growth rates. Mainland institutions have the wherewithal to dominate Taiwan, but the vastness of the Chinese market is also the reason why the Taiwanese banks have more to gain. Many of the largest Taiwanese companies already have big mainland operations, among them Hon Hai Precision Industry Company, a now-infamous contract manufacturer for Apple and others, and Vue Yuen, which makes innumerable brands of shoes. In the past Taiwan~ ese banks were blocked from following their clients into China. Peter Kurz, head of research in Taiwan for Citigroup, says his scepticism about the value of the deal ebbed considerably after hearing from local banks that they believe half of their loan books could be drawn from the mainland within a decade. Tie-ups are likely to start slowly, and will probably grow out of existing relation' ships. One rumour is that the first deal may be an investment by Far East National Bank, whose corporate parent, $inoPac, has property and cement businesses in Chongqing and, it is believed, a good relationship with a local bank. Deals in the other direction will be rarer. Mainland institutions have little financial incentive to push into Taiwan's saturated market. Poli· tics, too, argues for caution. This week's agreement may have been carefully drafted but sensitivities between the two countries still run high. _ Clarification: In "Spiwy" (June 12t h) we said that the euro zone's special·purpose vehicle WOlS "bdcked by the credit of its 16 members, plus P(}land and Sweden. which said th ey would join in .· If the SPV does lend money, Sweden and Poland will decide on a case-by-case basis whether to make bilateral loans of their own.

The Economist July 3rd 2010 Joe (assano at the FCI(

No ordinary Joe ~ EWYORK

A credit-crunch legend has his say INANCIAL hearings can be dull, but Feymen they spring to life when shadowy monare dragged into the spotlight. This week it was the turn of Joseph Cassano, one of the most elusive protagonists of the crisis, who broke his silence before America's Financial Crisis Inquiry Commission. The financial -products (FP) division that Mr Cassano ran was the epicentre of the earthquake at AIG. After insuring $70 billion of dodgy mortgage debt, the firm was caught in an almighty liquidity squeeze when the debt's market value fell. Outrage over the resulting government rescue was compounded by news that Mr Cassano had earned $315m on his watch and secured a $1ffi-a-month consultancy with the firm after being pushed out. In his testimony Mr Cassano hardly oozed contrition. He highlighted AIG'S "prudent" decision to exit sub prime underwriting earlier than some of Wall Street's banks, its "rigorous" risk reviews and his apparently selfless offer to waive his bonus for 2007. He claimed A I G would have realised few losses if its trades had not been unwound in the bail-out. And he suggested he could havegota better deal in negotiations with derivatives counterparties if he'd been allowed to stay on. He was less keen to highlight that, under him, FP had become Wall Street's "perfect customer", as Michael Lewis put it in "The Man who Crashed the World", a riveting investigative article in Vanity Fair.

Should have spLit Cassano and the utility

Banks used A IG as a dumping-ground for derivatives risks they didn't want to hold. Mr Cassano, like others, seemed convinced that house prices could never fall nationwide. He clung to the assumption that A I G trades were safe because they mainly related to mortgages from 2005, not the most tOXle vintage from 2006'07. In August 2007 he said it was hard to see a sce' nario "within any kind of realm of reason" in which A I G would lose a single dollar. That the company was not looking hard for such threats may owe something to Mr Cassano's dictatorial style. Subordinates report that he was better at bullying than managing risk, often verbally abusing those who challenged him. The Department of Justice and the Securities and Exchange Commission have both dropped probes of Mr Cassano, but as Mr Lewis's article pointed out, his ex-colleagues believe his crime was "not mere legal fraudulence but the deeper kind: a need for subservience in others and an unwillingness to acknowledge his own weaknesses." _ Iron -ore derivatives

Fixed ore floating Steelmakers hold the key to a fast-growing market OR decades the system for setting the price of the iron are that feeds the F world's steel mills was as inflexible as the girders it was turned into. Annual negotiations between the world's three biggest miners- Rio Tinto, BHP Silliton and Valeand steelmakers set a benchmark price for are delivered under long-term contracts. But the emergence of China as a big buyer, which felt it should have more control over prices, helped precipHate that system's demise earlier this year. That was a blow to steel makers accustomed to predictable prices for their most important ingre dient. Others are happier, however. Miners now sell their wares on the spot market or on three-month contracts linked to spot prices, avoiding frac' tious negotiations and enabling them to take spee dier advantage of fast-rising prices. And the shift has also been a boon to traders in the rapidly growing market for iron-ore derivatives. Many mills still supply their steel on long-term contracts. They are increasingly worried about awkward swings in the price of their main input. A couple of months ago, for instance, spot prices went over $190 a tonne; they have now settled at around $140. A 15% rise in quarterly contract prices is expected in July. In an effort to offer Japanese steelmakers a way to pro- ~~

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72 Finance and economics ~

teet themselves from such volatility, Mitsui, a trading house that acts as a middleman between miners and steel mills, said on June 28th it had inked the country's first iron-ore swap deal with Credit Suisse. Along with Deutsche Bank, the Swiss bank was a pioneer of iron-ore derivatives, launching the commodity's first over-thecounter cash-settled swaps in May 2008 in the expectation that the benchmark would go. Derivatives trading could account for 60m tonnes of ore, some 7%of the internationally traded market, by the end of 2010. Credit Suisse reckons that if iron are fol lows the same path as coal, which was un-

The Economist July 3rd 2010 shackled from a benchmark system some years ago, then swap volumes could hit 700m tonnes a year by 201). Others also sniff bumper profits. Morgan Stanley is now offering swaps. Brokers such as ICAP and Freight Investor Services are piling in, too. On July 11th Chicagobased CME, the world's biggest derivatives exchange, will join LCH.Clearnet in London, Singapore Exchange and New York's Intercontinenta lExchange in offering cleared iron-ore swaps. But for the market to take off in earnest steelmakers,a conservative bunch, need to be convinced of their usefulness. When

iron-ore derivatives were first launched business came from investors such as pension funds and hedge funds who were looking for exposure to commodities that were not traded on exchanges. Big trading houses also use derivatives to manage risk in a business where margins are slender. ThyssenKrupp, one of Europe's biggest steelmakers, said in April that it was considering using derivatives. Japanese and Chinese mills may soon take the plunge. A recent threat by Rio Tinto that it could give up quarterly pricing and leave steel makers at the mercy of the spot market may persuade them to lose their inhibitions. _

Buttonwood Equities are still suffe l"ing from a valuation hangovel"

HE best bet for the long term is to buy shares and hold on to them. That was T the lesson hammered into the headsofinvestors in the 1990S when the "cult of the equity" was at its peak. Unfortunately, they absorbed the message at precisely the wrong time. The past decade has been disastrous for equities. Over the ten years to June 18th 2010 investors in developed-market equities earned a cumulative total return of minus 7.9%. By contrast medium-dated Treasury bonds returned 95.)% and highyield American bonds 102.2%. Richard Cookson, the chief investment officer at Citi Private Bank (and a former journalist at The Economist), points out that the cum· ulative outperformance of high-yield bonds over equities dates back to 1995. At first glance this seems rather odd. Bondholders have first claim on the corporate sector's cashflow and shareholders take what is left. In theory, shareholders should earn the best returns over the long term provided profits keep growing. After slumping in 2008 profits have recently rebounded and, in the case of America, are close to a post'war high as a proportion of GOP. Even if profits had been terrible, owners of high-yield bonds would have suffered too because of a likelyjump in corporate defaults. The answer to the conundrum is valuation . As the cult of equity gained more and more adherents in the 1990S share prices were bid to stratospheric levels. On the best long-term measure, Robert Shiller's cyclically adjusted price'earn' ings ratio (which averages profits over ten years), valuations in 1999 were more than a third higher than their previous peak, just before the great crash of 1929.11 was a nice irony. Investors bought shares because they desired high returns but their enthusiasm pushed prices to a level from

which high returns became impossible. Exactly the same thing happened in the American housing market. A naive belief that house prices could never fall at the nationallevel encouraged excessive speculation and lax lending, thereby precipitating an eventual collapse. It is tempting to assume that because equities have performed so badly over the past decade, they must be a sure thing to perform well over the next ten years. But that argument failed in Japan. By the time the market there peaked in the late 1980s, historic price-earnings ratios were in the 50-100 range. Western valuation measures, sceptics were told, were irrelevant in the Tokyo market. The result of that bubble was a bear market that is already into its third decade. Wall Street never quite matched Tokyo's valuation excesses. Nevertheless, although the cyclically adjusted ratio has fallen from a heady 44 in 1999, it is still around 20, a level well above the historical average of 15. So future returns are likely to be lower than the previous norm. A higher-than· average valuation im· plies that investors expect belter·than-av·

erage profits growth. But this week's equity-market wobbles illustrate that investors are unconvinced that the global economy can manage a V-shape d recov' ery, especially now that fiscal stimulus is being withdrawn in Europe and elsewhere. The commitment to continued monetary stimulus, in the form of nearzero interest rates, is a double-edged sword. It may drive investors out of cash in search of higher returns but it also indicates how anxious central banks continue to be about the economic outlook. Despite these worries, there may still be some segments of the stockmarket that perform well. According to Dhaval Joshi of RAB Capital, pharmaceutical firms' dividends have grown at an average of 12% a year over the past 40 years, five percentage points above general dividend growth rates and eight percentage points above inflation. Total dividend income from the industry has fallen very rarely, even in recessions. That remarkable performance reflects a rising share of health'care spending within GOP, particularly in America, where a wealthier and greying population places a high value on access to health care. Pharmaceutical shares have underperformed the global market this year. The industry's giants trade on a discounted price-earnings multiple, reflecting fears that the days of blockbuster drugs are over. Globally the sector yields 3%, higher than the yield on inflation-linked Treasury bonds, despite its history of offering real income growth. Reliable sources of dividend income are becom' ing scarce (shareholders were let down first by the banks, then by BP). SO it is surprising that pharmaceutical stocks are so little cherished. Economi st ,com/blogs!buttonwood

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74 Finance and economics

The Economist July 3rd 2010

Economics focus I The click and the dead E-comm erce favours large companies but only because that is w hat people want

OR as long as anyone can recall, chess enthusiasts in Cambridge, Massachusetts, have played on large streetside chessboards in the shadows of the stately buildings of Harvard Yard. But even in a place that seems impervious to the passage of time, there is change. One example is an empty space where a muchloved local institution, an independent bookshop called WordsWorth, stood for]o years. Like small-business owners in other industries, its proprietors held the internet, of which the studentheavy populace of Cambridge were early adopters, responsible for having to shut up shop in 2004. Everywhere people bemoan the replacement of the local and the quaint by outposts of big, homogeneous chains. But how true is the notion that the internet in particular has hastened the demise of some retailers, and that those it hurt were overwhelmingly small? A new study· on this subject by four economists at the University of Chicago looks at three industries-bookshops, travel agencies and new-car dealerships-for answers. They find much truth in the conventional wisdom, but also some solace for those who believe small is beautiful. In the past economists have paid most attention to the effects of the internet on prices. These fit snugly into a standard economic model of competition. The internet acts mainly as a mechanism that reduces consumers' costs of acquiring information about products and prices. Before the online age, someone looking to buy a fridge, say, might have gone into one or two local shops, and perhaps rung a few more, to compare prices. The web, however, made it easy to gather more information. Theory suggested that as more and more retailers and customers went online, customers would become pickier. It would become more difficult for a retailer to continue to sell overpriced goods beca use people would have more knowledge about other options. E-commerce ought therefore to lead to intensified price competition and through it to lower variation, or "dispersion", in prices. A large scholarly literature has found that this is true. For a real-world example of the effect of lower search costs, think of today's e-reader price wars. On June 21St Barnes & Noble, a bookseller, dropped the price of its Nook e-reader to $199 in America. Within hours, Amazon cut the price of its Kindle product to $189. The new study tests another expected consequence of e-com-

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merce. Intensifying competition shoul d lead not just to price convergence but also to a round of creative destruction. Companies that are unable to cope with the demands of consumers in the internet age should be wiped out. Those who can, ought to thrive. Efficient firms should enter the market. Using data on internet usage from a representative survey of Americans, as well as data on the size of firms in each of the three industries in each county in the continental United States, the Chicago economists are able to tease out the impact of the internet on firms in the ten years to 2004, when online shopping first gained a foothold in American life . They can also see whether the effects were larger where more people w ent online, as one might expect if internet use were the main driver of change. In all three cases the growth of internet traffic and online shopping affected the structure of the industry, not just prices. In general larger firms grew at the expense of smaller ones. Much as the owners of WordsWorth had surmised, the effect was greatest where online shopping became most popular. The shakeout in travel agencies was particularly vicious. After years of holding steady, the total number of agencies fell precipitously, almost exactly mirroring the growth of online shopping. Within the industry large agencies gained at the expense of smaller ones. In the ten years to 200] the num ber of travel agencies that employed more than 100 people grew by 60%, from 109 t0174, and the number of tiny ones fell by a third, from 18,186 t012,865. What of the effect on jobs? Officially overall employment in the travel-agency and bookshop industries fell as a result of ecommerce. In fact, some of the slack will have been made up by the growth of online-only companies such as Amazon and Orbitz. But it is impossible to tell how much of the employment growth at these kinds of firms relates to a particular industry. The car-dealership industry, where online-only retailing was prohibited by law, did not lose jobs. Evidence from other studies suggests that customers gathered more quotes than before and got lower prices, but did not buy fewer cars. The same is probably true of books and airline tickets. Niche work if you can get it Big firms are not predestined to hoover up all the benefits from ecommerce. The theory suggests that as people become better informed thanks to the web, the businesses that cater most to their desires will thrive. If people want lower prices, then bigger shops and chains, with their economies of scale, may be the ones that do best. But it is equally possible that a small shop meeting a very specific nee d might see its market share expand because more people who want what it provides (cult records or fan fiction, for instance) learn of its existence. The study finds evidence for this, too. Among booksellers, all the smaller categories withered in the internet age-save one. The lone exception was the very smallest, shops with between one and four employees. These appeared to have weathered the storm unscathed: in Harvard Square itself, Curious George, a children's bookshop run by the same people who owned WordsWorth, flourishes to this day. The internet allows customers to see businesses' true colours. The adjustment that follows may be wrenching. But the net effect is one that conforms to what consumers want, whether they admit it to themselves or not. • ' E-commerce and the Market Structure of Retail Industries", by Maris Gold manis, Ali Horta.;;su, Chad Syverson and Onsel Emre. Economic Joumal, June 1010

75 Also in this section 76 Ocean addification 77 The genetics of ageing

For daily analysis and debate on science and technoiogy, visit Economist.com/science

Disease and inteHigence

Mens sana in corpore sano Parasites and pathogens may explain why people in some parts of the world are cleverer than those in others

H

UMAN intelligence is puzzling. It is higher, on average, in some places than in others. And it seems to have been rising in recent decades. Why these two things should be true is controversiaL This week, though, a group of researchers at the University of New Mexico propose the same explanation for both: the effect of in· fectious disease. If they are right, it suggests that the control of such diseases is crucial to a country's development in a way that had not been appreciated before. places that harbour a lot of parasites and pathogens not only suffer the debilitating effects of disease on their workforces, but also have their human capital eroded, child by child, from birth. Christopher Eppig and his colleagues make their suggestion in the Proceedings of the Royal Society. They note that the brains of newly born children require 87% of those children's metabolic energy. In fiveyear-aIds the figure is still 44% and even in adults the brain- a mere 2% of the body's weight-consumes about a quarter of the body's energy. Any competition for this en' ergy is likely to damage the brain's devel· opment, and parasites and pathogens compete for it in several ways. Some feed on the host's tissue directly, or hijack its molecular machinery to reproduce. Some, particularly those that live in the gut, stop their host absorbing food . And all provoke the host's immune system into activity,

which diverts resources from other things. The inverse correlation that the group calculated between a country's disease burden and the average intelligence of its people is impressive. They estimated the disease burden from World Health Organisation data on DALYS (disability-adjusted life years) lost caused by 28 infectious diseases. These data exist for 192 countries. The intelligence scores came from work carried out earlier this decade by Richard Lynn, a British psychologist, and Tatu Van· han en, a Finnish political scientist, who analysed IQ studies from113 countries, and from subsequent work by Jelte Wicherts, a Dutch psychologist. At the bottom of the average·intelli-

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gence list is Equatorial Guinea, followed by 5t Lucia. Cameroon, Mozambique and Gabon tie at third from bottom. These countries also have among the highest burden of infectious diseases. At the top of the list of countries with the highest average intelligence is Singapore, followed by South Korea. China and Japan tie in third place. These countries all have relatively low levels of disease. America, Britain and a number of European countries, follow behind the leaders. A list of the countries included in the study can be found at: www.economist.com/science-technology. The consequence of illness The correlation is about 67%, and the chance that it might have come about at random is less than one in 10,000. But correlation is not causation, so Mr Eppig and his colleagues tried to eliminate other pos· sible explanations. Previous work has of· fered income, education, low levels of agricultural labour (which is replaced by more mentally stimulating jobs), climate (the challenge of surviving cold weather might provoke the evolution of intelligence) and even distance from humanity's African homeland (novel environments could encourage greater intelligence) as explanations for national differences in TQ. However, all of these, except perhaps the last, are also likely to be linked to disease and, by careful statistical analysis,MrEppigand his colleagues show that all of them either disappear or are reduced to a small effect when the consequences of disease are taken into account. There is, moreover, direct evidence that infections and parasites affect cognition . Intestinal worms have been shown to do so on many occasions. Malaria, too, is bad for the brain . A study of children in Kenya who survived the cerebral version of the ~~

76 Sdence and technology ~

disease suggests that an eighth of them suffer long-term cognitive damage. In the view of Mr Eppig and his colleagues, however, it is the various bugs that cause diarrhoea which are the biggest threat. Diar' rhoea strikes chil dren hard. It accounts for a sixth of infant deaths, and even in those it does not kill it prevents the absorption of foo d at a time when the brain is growing and developing rapidly. The researchers predict that one type of health problem will increase with rising intelligence. Asthma and other allergies are thought by many experts to be rising in frequency because infantile immune systems, unchallenged by infection, are turn' ing against the cells of the body they are supposed to protect. Some studies already suggest a correlation between a country's allergy levels and its average IQ. Mr Eppig and his colleagues predict that future work will confirm this relationship. The other prediction, of course, is that as countries conquer disease, the intelligence of their citizens will rise. A rise in intelligence over the decades has already been noticed in rich countries. It is called

The Economist July 3rd 2010

the Flynn effect after James Flynn, who discovered it. Its cause, however, has been mysterious- until now. If Mr Eppig is right, the near-abolition of serious infections in these countries, by vaccination, clean water and proper sewerage, may explain much if not all of the Flynn effect. When Dr Lynn and Dr Vanhanen originally published their IQ data, they used them to advance the theory that national differences in intelligence were the main reason for different levels of economic development. This study turns that reasoning on its head. It is lack of development, and the many health problems this brings, which explains the difference in levels of intelligence. No doubt, in a vicious circle, those differences help keep poor countries poor. But the new theory offers a way to break the circle. If further work by researchers supports the ideas of Mr Eppig and his colleagues, they will have done the world a good turn by providing policymakers with yet another reason why the elimination of disease should be one of the main aims of development, rather than a desirable afterthought. •

Ocean addification

The other carbon-dioxide problem NY ALES UNO . SPITSBERGEN

Acidifi catio n threatens the world's oceans, but quan tifying the risks is hard N THE waters of Kongsfjord, an inlet on Itions the coast of Spitsbergen, sit nine contrap' that bring nothing to mind as much as monster condoms. Each is a transparent sheath of plastic 17-metres long, mostly un' derwater, held in place by a floating collar. The seawater sealed within them is being mixed with different levelsof carbon dioxide to see what will happen to the ecology of the Arctic waters. As carbon dioxide levels go up, pH levels come down. Acidity depends on the

presence of hydrogen ions (the H in pH) and more hydrogen ions mean, counterintuitively, a lower pH. Expose the surface of the ocean to an atmosphere with ever more carbon dioxi de, and the gas and waters will produce carbonic acid, lowering pH on a planetary scale. The declining pH does not actually make the waters acidic (they started off mildly alkaline). But it makes them more acidic, just as turning up the light makes a dark room brighter. Ocean acidification has further chemi-

cal implications: more hydrogen ions mean more bicarbonate ions, and fewer carbonate ions. Carbonate is what corals, the shells of shellfish and the outer layers of many photosynthesising plankton and other microbes are made of. If the level of carbonate ions falls too low the shells can dissolve or might never be made at alL There is evidence that the amount of carbonate in the shellsofforaminifera, microplankton that are crucial to ocean ecology, has recently dropped by as muchasa third. Since becoming a topic of widespread worry about five years ago, the changing pH of the oceans has been added to the litany of environmental woes. Richard Feely, a researcher at the Pacific Marine Environmental Laboratory in Seattle, provide d a gift to headline writers when he dubbed acidification "global warming's evil twin". Nowadays Or Feely prefers to call it "the other carbon-dioxide problem". But for all this concern, how bad the change in pH will be for oceans is not yet clear. Indeed, such are the complexities of studying ocean life that the true risk may become apparent only in retrospect. There is no doubt that a pH drop is under way. For example, as the atmospheric carbon-dioxide level in Hawaii goes up, the pH at a mid-ocean mooring about 450km to the north-west goes down (see chart). But the decline is a lot bumpier than the rise: the pH difference from one year to the next is frequently greater than the change in averagep H levels over 20 years. This is because the atmosphere does not have an iron grip on the carbon·dioxide level in surface waters. Increase d photosynthesis will use up carbon dioxide; in' creased respiration produces more of it. Water coming up from below will often have a lower pH than the surface water, because at depth there is no photosynthesis but plenty of respiration. In many places, natural variations in pH will be larger than long-term changes in its mean. This is not to say that such changes have no effect. If peak acidities rather than long· term averages are what matters most, natu' ral variability could make things worse. ~~ Testing the oceans Carbon dioxide and ocean pH

Atmospheric carbon dioxide" 390

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The Economist July 3rd 2010 ~

But it does suggest that the effects will be far from uniform. So, too, does research on how organisms respond to lower pH. Iris Hendriks of the Mediterranean Institute for Advanced Studies recently analysed data from a wide sample of research into how individual organisms respond to increased carbon dioxide in their seawater. She found that the range of responses was wide, with some seeming to prefer the lowered pH. She also found that the effects to be expected in the 21St century were on average comparativelymodest. Some researchers feel the way her study lumps things together plays down the more damaging effects. Even if that is so, there is a fair chance that the literature surveye d was biased the other way. Data showing a deleterious effect might well be more likely to be written up and published than data showing nothing much. If some creatures can tolerate lower pHs and others cannot, you might expect things to average out: the tolerant and adaptable prosper, the more pernickety perish. For the "primary producers" in the ocean-the mostly single-celled creatures that photosynthesise-this will probably be the case. But changes in the relative prevalence of different photosynthesisers could still matter. The ecology of the oceans is all about who eats what, and small changes in the population of certain creatures near the bottom of the web could have large effects on larger ones that eat them. Some creatures may be doublewhammied by having less of what they like to eat and by the pH itself, amplifying the disruption. And adaptation is not without costs: dealing with lower pH may divert a creature's resources from other ends. This is where the condoms- or mesocosms, as their scientific caretakers woul d prefer it- come in. They are part of the European Project on Ocean Acidification (EPOCA), an initiative employing over 100 researchers, more than )0 currently in the Arctic. EPOCA is the most thorough investigation so far attempted of the effect of pH changes atthe level of a whole ecology. By looking at which creatures flourish in their mesocosms, Ulf Riebesell of the Leibniz Institute for Marine Studies in Kiel and his colleagues hope to see changes as they take place by keeping an eye on the water chemistry and nutrient levels. Dr Riebesell is particularly interested in the ecosystem role of pteropods, also called sea butterflies. These elegant micro-molluscs are a vital food for some fish. In the first year of their life, pink salmon eat more pteropods than anything else. If reshaping food webs marginalises the pteropods, the salmon will have to adapt or die. But though the mesocosms may shed light on the fate of the pteropods, the outlook for the salmon will remain conjectural. Though EPOCA is ambitious,

Science and technology 77 The genetics of ageing

Methuselah decoded A new test can forecast extreme longevity N PURSUIT of a longlife,expect the dismal prescriptions of clean living: Iexercise, moderation and a healthy diet. Indeed, such choices may help people exceed average lifespans by up to a decade. But when it comes to the oldest of the old, new research emphasises the biological rather than environmental factors behind longevity, suggesting that distinct genetic characteristics animate most centenarians. The study by Paola Sebastiani, of the Boston University School of Public Health in Massachusetts, and her colleagues is the largest investigation conducted into the genetics of extreme old age. The team analysed DNA from more than 1,000 people aged between 95 and 119 to look forgeneticmarkers which were not present in those who live an average span. The study, published in Science, yielded150 markers correlated with long life. Many sequences were associated with mental alertness, insulin regulation and DNA stability, confirming results from smaller studie s and suggesting areas for Iife-pro tonging research. The researchers also developed a statistical model to forecast longevity. After determining which genetic markers were most strongly associated with lifespan, they applied that knowledge to O N A samples from another set of individuals. Using their model, they were able to predict with 77% accuracy which of these people had lived for more than 100 years and which had shuffled off at a more modest age. There was no single, winning combination of genes unique to healthy ageing. Rather,19 distinct cohorts emerged, each and expensive, the mesocosms are too small to contain fish, and the experiments far too short to show what sort of adaptation might be possible over many years, and what its costs might be. This is one of the reasons why the fate of coral reefs may be more easily assessed than open-water ecosystems. The thing that provides structure in open-water ecosystems is the food -web, which is hard to observe and malleable. In reefs, the structure is big lumps of calcium carbonate on which things grow and around which they graze and hunt. Studies of Australia's Great Barrier Reef show that levels of calcification are down, though it is not yet possible to say changes in chemistry are a reason for this. Current research comparing chem-

bearing different combinations of genetic markers-and equally distinct patterns of disease onset and physical decline. This suggests that the cumulative interactions of many genes orchestrate both overall lifespan and patterns of healthy ageing. Despite this strong genetic evi dence, ceding longevity entirely to biology would be premature. Even among the very old Dr Sebastiani found)o centenarians who possessed almost none of the expected genetic markers. Some had a family history of prodigious old age-a pattern of heritability indicating that the study may have missed rare genetic variants. The rest, however, had no such ancestry. It seems that good luck and healthy living can sometimes overcome a lacklustre pedigree.

And then she scored a century ical data taken in the 1960s and 1970S with the situation today may clarify things. But singling out the role of acidification will be hard. Ocean ecosystems are beset by changes in nutrient levels due to run off near the coasts and by overfishing, which plays havoc with food webs nearly everywhere. And the effects of global warming need to be included, 100. Surface waters are expected to form more stable layers as the oceans warm, which will affect the availability of nutrients and, it is increasingly feared, of oxygen. Some, including Dr Riebesell, suspect that these physical and chemical effects of warming may prove a greater driver of productivity change in the ocean than altered pH. Wherever you look, there is always another other problem . •

Also in this section 79 Nakedness in history 79 Caravaggio 80 Joys of craftsmanship 80 The S&L crisis

81 New York' s 1939 World' s Fair 81 Fakes and mistakes

Art.view, our online column on art markets, appears on Wednesdays, For daily ana lysis and debate on books and arB, visit Economist.com/cuttu re

lebanon

Garden of thorns

Two w riters unpick Leban o n's complexities

A SMA LLcountry, so fractured and so dis./"\..puted, Lebanon is both alluring and frightening. The attraction is the landscape and free-spirited people; its compact richness such a contrast to the region's parched topography and monolithic politics. The danger is its propensity to explode, All this makes Lebanon a fascinating subject, but also a hazardous one for its chroniclers. The colourful pieces of its sectarian kaleidoscope, and the contributions of meddling neighbours, never cease shifting into new shapes. A writer may capture a moment and perspective, but all will surely have re-formed by the time his or her book hits the shelves. Just now, for instance, Lebanon is riding a boom in tourism and construction, a sudden balmy spell following years of turbulence. Those troubles began in 2005 with the car bomb that killed Rafik Hariri, a billionaire five -time prime minister, and sparked the uprising that ended a long, uncomfortable period of Syrian hegemony, They carried on into the 2006 war with Israel, and then flared up again in a nailbiting contest between delicately balanced factions, each pushed by foreign powers with regional ambitions, that only subsided following elections last year. It is hard to think of two writers better qualified to unpick Lebanon's complexities than David Hirst and Michael Young, Both their books exude the doom-laden mood that has now lifted fro m the

Beware of Small States: lebanon, BattLeground of the MiddLe East. By David Hirst. Nation; 480 pages; $29.95.

Faber; [20 The Ghosts of Martyrs Square: An Eyewitness Account of Lebanon's Life Struggle. By Michael Young . Simon & Schuster; 296 pages; $26 and £17.99 country, though it will very likely descend once more soon enough. Mr Hirst, the dean of foreign correspondents in Beirut after five decades in residence, begins his tale with Lebanon's creation in the wake of the first world war, as a French gift to the Maronite Christians of the coastal Levant who had long seen Paris and the Vatican as their saviours. Mr Young, a Lebanese scholar and commentator, starts with the rebirth that followed the tangled horror of the 1975-90 civil war, in which those Christians, having long since lost their bare majority in numbers, struggled and failed to maintain their dominance. Both have sharp ears for quotes and a fine way with words.Mr Hirst, for instance, recalls the comment of a PLO commander, explaining how the Pa lestinians, from 1969 until the crushing Israeli invasion of 1982, sustained an armed statelet whose existence helped provoke the civil war. Lebanon was simply, he said, "a garden without a fence". Mr Young paints incisive por-

traits, such as one describing the worldweary Druze chieftain Wali dJumblatt, "his eyelids for ever sagging under the weight of his impossible choices." His depiction of Michel Aoun, a renegade Christian civilwar general who returned,lS years later, to lead a breakaway faction allied to Hizbullah, the Shia Party of God, is aptly cutting: "There was a devouring dissatisfaction to the man, the spite of someone who felt the deck was stacked against him .. . alongside the peasant suspicion of someone avid to protect his measured gains." Mr Young's account is partisan, if tempered by a reluctant acceptance that Lebanon's curse, sectarianism, has also proved a shield for individual free dom in a region where this is in short supply. His main villain is Syria, along with its ally Iran and their joint factotum, Hizbullah, whose embattled mindset and glorification of armed struggle inevitably sabotage efforts to construct a more durable polity. "There is Lebanon, and there is Hizbullah's Lebanon," he concludes, "one or the other will prevail, but together they cannot co-exist in a stable way." Mr Hirst is less forthright about his prejudices, but has the advantage of a longer memory. Equally unromantic regarding Lebanon's own failings, he pins the larger part of the blame for its recent sufferings squarely on what he calls "a vastly more arbitrary example of late-imperial arrogance, geopolitical caprice and perniciously misguided philanthropy": Israel. Mr Young describes post-civil-war Lebanon as being "built on a foundation of officially sanc!ioned amnesia". But memory does provide a salutary window into other worlds. Mr Hirst reminds the reader that back in the 1930S, the Lebanese government printed tourist brochures in Hebrew, and sponsored lebanese pavilions at Tel Aviv trade fairs . •

The Economist July 3rd 2010 The politics of nudity

Flashing flesh A 8rief History of Nakedness. By Philip Carr-Gomm. Reaktion Books; 286 pages; $29.95 and £19.95 HEN. where and how much you take your clothes off matters a surprising W amount. A plunging cleavage is nothing remarkable in the right circumstances. Elsewhere it can get you fired-or stoned to death. Nipples are fine in parks in northern Europe (and many Mediterranean beaches) but not on American television, even when covered with a tassel. Male genitalia are OK in the greatest works of classical sculpture, but not, even when they measure just one millimetre, in children's books. The female pudendum is strictly for pornographers, gynaecologists and femi nists trying to make a point. Given that everyone ran around naked only a few thousand years ago, and that we all look more-or-less similar once unclothed, this is quite puzzling. One reason is that nakedness signals real or perceived sexual availability. The undressed form, especially for people who are unused to it, is distracting, or worse. Another is that it signals vulnerability: the annual World Naked Bike Ride gives cyclists a chance to highlight their fragility in the unequal tussle for road space with motorists. Nudity strips us of clothingbased social signals such as wealth or poverty. Leave itto Rudyard Kipling to explain: "The colonel's lady an' Judy O'Grady are sisters under their skins." Philip Carr-Gomm's lushly illustrated book takes a long and enthusiastic look at the politics and culture of nakedness. Nudism attracts eccentrics, and their stories, he feels, deserve to be told. But his po-faced treatment of their antics can be unintentionally comic. Mr Carr-Gomm is a selfprofessed Druid and a practitioner of Wicca (a modern form of paganism that can involve a lot of larking around naked) and enjoys stripping off his clothes during country walks. Halfway through the book many readers will feel they have read quite enough reverential descriptions of naturist and pagan cults in 19)OS Britain. He chronicles the breaching of taboos about public nakedness on stage and screen, and the increasing use of nudity in political protests. It is tempting to see a convergence. Once actors, ballet dancers, film stars and artists have performed naked, the human form is less shocking. But what is the point then of stripping off clothes to make a political point? Calendars showing tasteful tableaux of jam-making housewives, women footballers or soldiers' girl-

Books and arts 79 friends have been a fine way to raise funds for good causes in Britain. But when people yawn at nakedness rather than smile, we will know that the novelty has worn off. The book is thought-provoking, if somewhat frustrating. It is short of interviews with real people. The chapter on streaking retells the well-worn stories of long-ago escapades at sporting events, but the reader longs to hear from the participants_ Most of them will still be alive: why not track them down, then? Mr CarrGomm makes no mention of the steam baths of Russia, Thrkey and northern Europe-an integral part of life involving unremarkable and regular nudity. Shamefully, the American photographer, Robert Mapplethorpe, gets only a solitary mention. In the cultural history of nakedness, he matters rather more than the Druids __

(aravaggio

Dial M for murder (aravaggio: A Life Sacred and Profane. By Andrew Graham-Dixon. Allen Lane; 544 pages; £30

ICHELANGELO MERISl, called Caravaggio, died in Porto Ercole on the Tuscan coast on July 18th or 19th 1610. No one knows for sure because he died alone. Even so, we know more about him now than any of his contemporaries did. Persistent research has found much fresh evidence in Italian and Maltese archives. The most recent discovery, announced in Rome last month and based on a postmortem of bones that were probably Caravaggio's, suggests he died of sunstroke and syphilis, aggravated by lead poisoning from the paints he mixed. This news came

M

He painted as a man possessed

too late for Andrew Graham-Dixon's absorbing biography, which otherwise leaves no stone un turned. Caravaggio was a violent man living in violent times, but, says the author, he was not "the freak, the misfit, the absolute outsider that he has often been painted to be". Mr Graham-Dixon 's case is not proven. For instance, he recounts in detail one example of Caravaggio's wilful self-destructiveness. Having killed a man in a duel in Rome, he travelled to Malta, hoping to join the Order of the Kn ights of St John, with whom he might find freedom and forgiveness. The Order's Grand Master thought highly of Caravaggio's work, and commissioned him to paint a large altarpiece, "The Beheading of StJohn" (detail, below left), for a new oratory in Valetta, and he bent the rules to have Caravaggio admitted to the Order. However, Caravaggio was one of a gang that viciously attacked a fellow Knight. The day before the unveiling he was jailed. He escaped, and fled again, but was caught in Naples and badly wounded by men from Malta, bent on revenge. Nine months later he was dead, aged 38. That he was so mad, bad and danger~ ous to know makes his life a compelling story. But the reason why art historians are so fascinated is the conviction that Caravaggio was one of the most original and influential of all painters. He had a fine opinion of his work, placing himself in the same league as Michelangelo. Rubens and Vela.squez freely acknowledged his influence. Most of his work was sacred. His taste for the profane was exhibited in a few libidinous portraits of young boys, and it is generally assumed that he was a homo~ sexual. Mr Graham-Dixon suggests his sexuality was ambiguous, or "omnisexual". He might even have pimped for some prostitutes who were friends. Caravaggio's artistic style, self-taught and hugely inventive, is instantly recognisable- stark. vivid and naturalistic, with emphasis on light and shadow. or chiaroscuro. His religious paintings are like theat~ rical set pieces in confined spaces with subjects modelled on people he had picked up on the streets of Rome. The fact that the Virgin could be recognised as a whore of his acquaintance did not help his cause with the establishment, and he inspired dislike among academic painters who preferred to depict not the poor but the majesty of God in heaven. Neither was the papacy impressed. Caravaggio received only one commission to paint for St Peter's and the work was rejected. Mr Graham-Dixon concentrates on the drama of the paintings. He avoids jargon in his writing and is an entertaining art historian, as is shown by his popular television series on Spanish and Russian art, and by his weekly art criticism. He took ten years to come to terms with a very obdurate and highly original painter. Time well spent. _

The Economist July 3rd 2010

80 Books and arts

Joys of craftsmanship

Handy work Made By Hand: Searching For Meaning in a Throwaway World. By Mark Frauenfelder. Portfolio; 241 pages; $25.95 The Case for Working With Your Hand s: or Why Office Work is Bad for Us and Fixing Things Feels Good . By Matthew Crawford. Viking; 256 pages; £16.99

A NYONE who has taken an axe to a .l"\. laptop battery and thrown the bits in a pond (they explode: wear goggles) will like Mark Frauenfelder's book. Those who haven't will find a tantalising whiff of what they are missing. The author takes a hands·on approach to suburban life in Los Angeles. He rewires his espresso machine to produce what he calls proper coffee, keeps bees and chickens, whittles spoons from scrap wood, makes a ukulele and a cigar box from toothpicks, grows his own vegetables and tries to teach his children maths at home. The lawn is the archetypal enemy. Why do Americans spend such huge amounts of time, money, water, fertiliser and fuel on growing a useless smooth expanse of grass? Much better to cultivate something useful, like tomatoes. But how to do it? Mr Frauenfelder considers using herbicide to kill his unwanted lawn, but settles for covering it thickly with newspaper and weed· ing any grass that grows through: as with many of his projects, it is fun to start with, but becomes laborious. As the editor of Make, a magazine for American hobbyists, the author is wellplaced to tap the nation's vein of frustrated creativity and fiddling. Time was, he says

nostalgically, when household equipment came with the expectation that the owner could and would wield the tools required to fix it: a wrench, pliers, screwdriver and hammer were all that was needed to keep an early Ford automobile on the road. That changed, he says, thanks to Sigmund Freud's nephew, Edward Louis Bernays, the pioneer of emotional advertising. He sold dreams of perfection instead of a partnership between man and machine. Now domestic appliances come with forbidding labels, such as "no user-serviceable parts" and "disassembly voids warranty". For the mechanically curious, that is no obstacle. And in some ways technology has made it much easier to fiddle and fix. You can find unofficial instruction manuals on the internet,and watch YouTube to see someone doing it properly. You may make mistakes, but that is the way you learn how things work and how to mend them. Doing so makes you a better person, Mr Frauenfelder argues: master, not prisoner, of your environment. The book echoes Matthew Crawford's masterly and reflective, "The Case for Working with Your Hands", a bestseller in America which has just come out in Britain. Mr Crawford focuses on motorbikes, with doses of classical philosophy, rather than domestic gripes. Mr Frauenfelder rightly highlights the impotent fury aroused by tamper-proof tabs seals, and the joy of masteringrecalcitrant gadgets. But his own literary craftsmanship is irritating too. An ill-planned attempt to start a new life in the South Pacific is irrelevant and tiresome. His prose is tinny, and the mentions of his children dull and cutesy. The reader does feel sorry for his wife, though, when dead bees clog the light fittings and a coyote eats the favourite chickens. His motto is DIY . Hers is HA P (Hire a Pro). One can see why. _ The S&L crisis

Wisdom . of expenence SenseLess Panic: How Was hington Failed America. By William Isaac. Wiley; 190 pages; $24.95 and 16.99

EEKby week America's toll of failing banks continues to rise. The Federal W Deposit Insurance Corporation

(FDIC)

reckons this year's tally will exceed the 2009 total of 140 banks. But even this will fall well short of the record 5]4 failures in 1989 during the savings-and-Ioans crisis. Small banks were not the only ones that got into trouble back in the 1980s: the problems of Continental Illinois, then the country's seventh-largest bank, confront-

ed regulators with the same "too big to fail" issue that bedevils finance today. William Isaac, the chairman of the FDIC at the time of Continental's collapse in 1984, reckons that the lessons of this earlier wave of bank failures were not properly learned. Previously in his tenure, he had resisted heavy pressure to bail out a smaller bank called Penn Square: he judged the system could cope with its failure. Lettinga bank the size of Continental go under was an entirely different matter, because of its links with other banks and because of the panic that would ensue. Under Mr Isaac's watch, the FD IC bought a bundle of Continental's bad loans and also injected money into the bank; sharehol ders and managers suffered, but Continental's creditors did not. In a financial crisis, he says, diluting market discipline is a lesser evil than trying to maintain public confidence. Judged by this overriding priority, Mr Isaac finds plenty to criticise in the recent past. He slams not just the decision to let Lehman Brothers fail in Septem ber 2008 but others, as well-the imposition of losses on uninsured depositors at IndyMac, a big Californian thrift, in July of that year, and the hit to preferred shareholders in Freddie Mac and Fannie Mae when the government took over America's two housing-finance giants. Policymakers eventually got to the right destination- by offering greater security to depositors in banks and moneymarket funds, for instance, and guaranteeing banks' debt issuance- but the journey was horribly chaotic. Mr Isaac takes aim at other targets, too_ The secret of good bank regulation is to "lean against the prevailing wind"; force banks to build up capital and reserves in good times so they can get through bad times. But the lessons that policy makers drew from the crisis of the 1980s ended up having precisely the opposite effect. They felt that banks got into trouble because the penalties for bad lending decisions had not been severe enough. Mr Isaac reckons that many of the measures that were introduced to instil discipline-notably fair-value accounting, which forces banks to mark assets to the prevailing market price-actually exacerbated the latest crisis. Tn a similar vein he also attacks capital regimes and deposit-insurance schemes that require banks to raise equity and pay premiums when losses are high. Mr Isaac's account is selective. He says, for example, that the volume of subprime loans was too small to have caused Armage ddon, but he skates over the huge amount of leverage that built up. That makes his book unsatisfying as a guide to how the crisis unfolded. But as a warning that big banks are always likely to be too big to fail, whatever the claims made of America's new financial -reform bill, it has the wisdom of experience. _

The Economist July 3Td 2010

Books and arts 81

New York' s 1939 World' s Fair

All's fair in love and war Twilight at the World of Tomorrow: Genius, Madness, Murder, and the 1939 World' s Fair on the Brink of War. By James Mauro.

Ballantine Books; 432 pages; $28 and £18.99

HE New York world's Fair was "the T paradox of all paradoxes", magazine wrote in 1940. proved that

H arper's

"It

Man was noble, then it turned right around and proved that Man could also be a simpleton." The "World of Tomorrow", which lasted 1.8 months in 1939 and 1940, was indeed a wondrous and silly spectacle. Built on a huge rubbish dump in Queens, it sprang from a grand idea.Just when many were hobbled by the Great Depression, the fair envisioned a Utopian, machine-age future that would revive faith in corporations. The biggest exposition ever, it was expected to make a profit. In fact, the fair was perhaps "the most extravagant folly of its age", argues James Mauro. Organisers estimated it would cost around $4om to build and generate some $1 billion in revenue. Expenses reached $150m ($2.3 billion today) and the fair end· ed in bankruptcy. when ground was broken in 1936, planners hoped to create a world charming enough to persuade foreign dictators of the futility of war. But when it finally opened, several pavilions represented countries that no longer existed, such as Austria and Czechoslovakia. The Soviet Union opened one of the biggest and most extravagant pavilions, but backed out the second year. The "most exciting thing about the fair was its plans," lamented the fair's dapper president, Grover Whalen, in 1939. A spendthrift dandy in top hat and spats,

Whalen was an ambitious beneficiary of the machine politics of Tammany Hall and the fair's leading visionary. He paid himself a salary of $100,000 and demanded that all officers salute him. He also believed people would buy millions of tickets, despite statistics that found that 90%of American families lived on no more than around $800 per year. Other characters include Fiorello La Guardia, New York's popular, rough-andtumble mayor, who saw the fair as a good place to heckle Hitler; and Robert Moses, the city's "ruthless" parks commissioner (with the "impossibly large hands of a Michelangelo sculpture"), whose vision of a "Versailles of America"on the same site inspired him to clean up the former dumping ground. Mr Mauro also brings in Albert Einstein, the honorary chairman of the fair's science advisory committee. By 1939, aged 60, Einstein had lost nearly everything, including his home, savings, nationality and wife. Shaken from his pacifism by Hitler's rise, he struggled with his role as an intellectual icon in his adopted country, asking, "Why is it that nobody understands me, but everybody likes me?" Mr Mauro prefers scene-setting colour to deep analysis, yet this is an entertaining book about big ideas and bad timing. • Fakes and mistakes

Who didn't do it? The National GaUery explores the complexities of attribution LEUTHS are stalking the corridors of National Gallery. Identifying SandLondon's preserving paintings is one of the gallery's essential tasks. Is a painting a fake, created to deceive? Was it altered years after it was made in order to conform to later fashions and make it easier to sell? Is it a genuine work later mistaken for that of a more highly valued contemporary? If a picture is a copy, was it made at the same time as the original, perhaps by the same hand? Multiples were not an Andy Warhol invention, although earlier on they took longer to produce. The results of some of this sleuthing (clues uncovered and conclusions reached) have been brought together into a new exhibition at the National Gallery that is on until September JOth. The evidence is lucidly presented, in both words and images. Most of the works, whether by Sandro Botticelli, Dosso Dossi, Paolo Uccello, Rembrandt's studio or Giorgione, are from its own collection. The rooms concentrate, in turn, on Deception and Deceit, Transformations and

Modifications, Mistakes, Secrets and Conundrums, Being Botticelli and Redemption and Recovery. The result is a lively, educational and occasionally amusing show. A blown-up photograph of carefully painted crackle marks that cunningly mimic the look of centuries-old paint elicits a smile_ Fakers can seem such attractive rascals if you aren't their victim. For centuries art detectives had to rely mainly on connoisseurship. For that a good eye was essential. Knowledge of the wider world was useful, too. Now there is sophisticated technology. A painting thought to be by Francesco Francia, a Renaissance artist, when it entered the gallery's collection in 1924 was found to be a 19th-century fake after recent analysis by infra-red reflectography, which in effect sees through layers of paint. Not all technological revelations bring bad news: a 15th-century portrait of the then popular murdered Saint Peter Martyr (complete with c1eaverin his head) turned out, when it was x-rayed, to be an earlier image of a friar by Giovanni Bellini. When the alterations were made the market for images of this saint was stronger than for Bellinis_ Connoisseurship sometimes overrides scientific evidence. Analysis of the green paint in a small Roman landscape painted by Jean-Baptiste-Camille Corot and dated to 1826 showed it to be viridian. Artists were thought not to have had access tothat pigment until a decade later. Did that make the Corot a fake? Not at alL Further research showed that artists worked with viridian years earlier than had been thought. The Corot remains a Corot. Ashok Roy, the National Gallery's director of scientific research and co-curator of this exhibition, believes that while technology can determine who did not paint a picture, it cannot prove who did_ Connoisseurship remains a powerful tool. Nicholas Penny, now the National Gallery'S director, believed that two Italian paintings were by Paolo Veronese and Raphael. Research proved him right. Among the mistakes included in the show is a Durer portrait that later research determined was not by his hand; a Botticelli, too_ The gallery'S most famous reattribution is "The Madonna of the Pinks", now identified as being by Raphael. The museum bought the reattributed work for £22m in 2004. Amongthe lessons to be learned at this exhibition is that not all attributions are necessarily for ever. Technology, however sophisticated, may be supplanted by better methods with the passing of time. This is not detective fiction; Sherlock Holmes can get it wrong. Attributions can often be hypotheses rather than unshakable facts. It is to the National Gallery'S credit that it has included some of its expensive misjudgments. Learning about the process is one of the pleasures of this show. •

82

Robert Byrd Robert C. Byrd. doyen of the United States Senate. died onJune 28th, aged 92

W

HENEVER Robert Byrd walked the corridors and chambers of the Senate, he went in a crowd of people. Some were his constituents, in camouflage caps and T-shirts,gape-mouthed among the gilt and marble, come to talk to him about the problems of Marsh Fork Elementary School or their uncle's black lung. But he also saw Henry Foote of Mississippi wielding his pistol, Sam Houston of Texas whittling wooden hearts for the ladies, and littie John Randolph of Virginia strutting past with his hunting dogs; and Cicero in the shadows, and just behind him Cala the younger, whispering "I would not be heholden to a tyrant:' The Roman Senate fascinated Mr Byrd almost as much as the American. When it declined, the Republic fell. And why had it declined? Because it had become passive, failed to raise its voice; and especially because it had handed meekly to Caesar and Sulla the power of the pursestrings. Mr Byrd therefore spent his career-the longest Senate service in American history, incorporating six years as majority whip, 12 years as majority or minority leader and 20 years as chairman or ranking minority member of the Appropriations Committee- learning, describing and expertly applying the rules that kept the Senate a force in government. He was constantly alert

both to executive overreach and to weak· ness in his own beloved chamber, "the an' chor of the Republic, the morning and evening star in the American constitutional constellation". Dignity was his byword: three-piece suits, velvet waistcoats and the rolling oratory of a man who had been a fine lay preacher before he left West Virginia. His courtesy was instinctive, his thank-you notes reliably there the next day. The point of all this, though, was to uphold the worth of the Senate. At meetings with the president he insisted on taking a staff person, because the president had one, and the branches were equal. He kept laptops out of the chamber, but voted for televised proceedings, so that the Senate would be visible to the people to whom it belonged. The constitution, as he reminded listeners, pulling it from his left breast pocket where he kept it over his heart, had made the American people sovereign and m en' tioned their Congress first. Now, like him, they had to revere and defend it. He grappled masterfully with 11 presidents, and liked them less as he got ol der. George Bush junior he detested, a reckless and arrogant man who, on Iraq, overrode the war-declaring powers of Congress while the Senate stood pitifully by. "In this terrible show of weakness", Mr Byrd

wrote, "the Senate left an indelible stain upon its own escutcheon." Some Demo' crats pleased him little better. Though most of his 18,500 votes went with his party, he had an old southerner's conservative streak, besides a West Virginian's tenderness for coal-mining and steel-making; and party ran second to the Senate, in any case. Bill Clinton's bid to seize the pursestrings from Congress in the1990s with the line-item budget veto was opposed by Mr Byrd in 14 separate one-hour speeches, learne d by heart, to slow up debate. He had filibustered before, the old-fashioned way: in 1964 for a straight 14 hours 13 minutes, to try to kill the Civil Rights Act. This he later regretted. He was sorry, too, that he found himself slipping into talk of "white niggers" and "race mongrels", and that he was exposed as an active member of the Ku Klux Klan, charging 150 friends and colleagues $10 membership and $3 robe-and-hood hire to form a chapter in 1943 in Crab Orchard, West Vir' ginia. He had briefly joined the Klan for its anticommunism, he explained, and for the platform it gave him, a mere butcher and fiddle-player, to organise people locally. This, with his spirited playing of "Rye Whiskey" and "Turkey in the Straw", soon got him elected to the state House of Delegates in 1946, the us House of Representatives in 1952 and, by 1958, at 40, the Senate, which through almost nine terms henever left. Yet his heart was in West Virginia, a poor and backward state of mountains and coal mines, where foster-parents had brought him up without power or running water and he had finished college, in a decade of night classes, five years after he joined the Senate. Hi s years on Appropriations were spent not just juggling favours and nitpicking on procedure, but also proudly channelling money to the hills and hollows: making gravel tracks into Robert C. Byrd Freeways, turning fetid lock-ups into Robert C. Byrd Correctional Institutions, setting up the Robert C. Byrd Green Bank Telescope to look at the stars. This, too, was what the Senate was for.

On the mountain top In one of his weekly online columns he mused on the beauty of mountains, where God had revealed himself to Moses and Elijah had challenged the false prophets of Baal. A blogger or two pointed out that the lopped-off, naked mountains in the south of his state owed much to Mr Byrd's votes for uninhibited mining. He was unrepentant. Mining brought jobs, and burning coal kept America going. The people powered America; the Senate was the people's house; and the man who preserved the Senate, in all its glory and prodigality and arcane complexity, was Robert C. Byrd, King of Pork and senator senatorum. •

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[mlll-Ie'm

PROJECT M ANAG ER Bela rus Investment C lima te Project Minsk, Bela rus

experience and an understandi ng of environmental issues to hel p

industries to facili tate the development of innovative approaches to

~
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board level and (o-ord inating international projects. These initiatives

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develop, and lead, a growing number of initiatives with the private sector. The position will include liaisi ng with senior executives, presenting at

International Finance Corporation

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The Deputy Director, Regulation and Public Policy reportsditeetly tothe Executive Director, Quality and MemberRdationsand providessupporttothe IFACOffirers, thelF ACRegulatory Liaison Group and the IFAC Board. This position will be b~sed in the [FAC head office in New York. Responsibilities indude moniloring inlernational and national dewlopments and identifying strategic issues tlwt may impact IFAC and / or the account-IIICY prof~'SSion . Seek the views and input of various groups from IFAC's staff, boards and committees, and member bodies, as welJ as from outside the profession, to assist in determining the policy advice or position to be advocated_ De"dop [FAC's policy positions on strategi( issues. Provide high quality rcgulalOI)' and public policy advice to the IFAC Officers, Management Team and Board. Oversee technical and organizational support to the [FAC Regulatory Liaison Group. Research, prepkills. An appropriate knowledge of regulatory and public poUc)' issues. with a strong preference for experience in issues involving accounting and auditing . Excellent communication skills, both oral and wri tten_ Fluency in written and ~poken English i, oitical with knowk'
Please send resume, cover letter, and salary requireme nts to job [email protected] IFAC has additional career op portunities bJsed in its head office in New York City for Technical Manager, Small and Medium Practi ces and Techni cl i Manager, Member Development. The job des<:riptions can be viewed directly at I .i

2010

Appointments

Announcements

Heifer Internatiollul Executive Vice I),'esiticllt, Glohnl I' rogrllllls Little Rock, AR

HENRY DUNANT HOSPITAL Henry Dunant Foundation

lIeifer Intenl" tional, Iwadquatlered in Little Rock, AR i. a global nonpr<>6t organization working w:it h ~o mmu ni'u, ~ t o end world h llIlg"r a n d p ""'e rty a.nd care fo r the earth lIeife.' . work i. powerful and tran . formative . Heife. has ,,"er BOO a(],i,"

proj¢C1;~

Proclaims an International Tender for the Management of " Henry Ounant" General Hospital

in 53 countrie •. it. program. are di.tincti,-. in both

de. ign and deli"ery m<XleJ. T heir program . follow 12 Corner"tone principle. guided by the con: e<>mmitment to ·pas.mg on the gift" For more abou t H eifer . ,-i. it www .heifer.org. T he organi>:ation i. """king an F.I oo\ltive Vice I "'~oidcn t ( E VI') of Global Program. who will oversee their work in the de ve loping world and it o a d" <><:",,y and edu cation progTllmming , Reporting 1<> the ebict Oper ating Officer . the [V I' i. ch arged with taking Heife r to the n.xt ie,-el of progr ammatic exc"n.ne.., The EVP will manage a team of <w er 700 profe.sional. and IN: a part of t he Senior Leadership Team (SLT)

The ideal candidate i. a ~tl'Ollg, experienced and v;"wnary leader of global program_, with a llignificant track record of innovation and oucce ••. Compelling candidate. could come from a "ariety of nonprofit context_, and will bring ~igniflcant leade""hip and experience in international humanitarian work . A full Lcadc",hip Profile

i~

in t he Client . t a b at www.BoardWalkCon.Hlting .oom

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The Henry Dunant Foundation, by agreement of its founder, the Heffenic Red Cross, hereby formally proclaims an International Tender (phase A' and B') for the for the purpose of short-listing both foreign and domestic companies or consortia of companies that demonstrate the technical and financial capadty, as wel l as the requisite experience, to undertake the management of "Henry Dunanf General Hospital, and intends to guarantee by ils property any development programme, according to the foundation's statute. Bids shall be filled on Tuesday, Augu st 3rd , 2010. All prospective bidders may contact the Foundation for Tender Documents : t07 , Mesogeion Ave , GR 11 5 26, Athens , Greece Tel. : +302106972180 Fax: + 30 2106982424 Person in Charge: Miss Dagonaki Irene Question s and information regarding any aspect of the process should be directed to the Technical Consultant:

UNRWA. the largest United Nations programme In the Middle East, offers education, heal th care, relief and social services. Infrastructure and camp Improvement, and micro-credi t services to approximately t..5 million registered Palestine refugees In Jordan. Lebanon. Ihe Syrian Arab Republic, the West Bank. and the Gua strip. UNRWA IS currently seeking to employ seasoned arid InternClhonalLy expenented personnel for the follOWing posrtlons:

Plus Consulting Ltd Laimos InternatiOllal Centre 25 - 29, Karneadou Str., GR 106 75, Athens, Greece Tel. : + 30 210 7256062 Fax: + 30 210 7256061 Persons in Charge: Mr. Alevras Angelos, Mr. Michailakis Gabfiel during business days, 10:00 - 14:30. The Presloenl Andreas Martinis

• Project M anager- Compensation, Classificatio n and Performitnce M anagem ent. P-S, Amman • Field Programme Support Officer.

po'. Da mascu s

• Senior Urban Plannin g Officer, P-lO, Amm an • Emergency Officer, P-lO, Jeru sal e m • Chief, Inte rn at io nal Public Sec tor Accounting Standards and ERP System s Support, P- S, Amman

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• Head, H ousing, Infrast ructure an d PLanning U ni t, P-lO, North Lebanon

po',

• FieLd Finance Officer,

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• FieLd Fina nce Officer, p o', Ga za For fur ther dotails regarding th. above vaeal"lCll!S. as well as .nstructions on how to apply and application deao\ines. please VISit http://jobs.unrwa.org .

From the World 's No.1 P rov ider

UNRWA encourages applJcahons from qualified and e~periel'lced women. UNRWA welcomes appllca trons from qualified cClndidates With disabilities.

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Tenders

o

Republic of Kosovo Ministry 01 fconomy & financE"

Republika e Kosoves Republika Kosova-Republic of Kosovo Oeveria - Vlada - Government

Invitation for Exp tes !lons of Intere st I P$P in power distribution

REQUEST FOR EXPRESSIONS OF INTEREST (Eol) FOR QUALIFICATION Pursuant to the Law No.03IL-OgO"On Public-Private Partnerships and Concessions in Infrastructure and Procedures for their Award", on behalf 01 the Government of the AepubHc of Kosovo, the Inter-Ministerial Steering Committee (IMSC) hereby invites all interested private investors to express their interest 10 partidpate In an open Internationa l tendering procedure for the development 01 Hydro Power Plant Zhur (HPP Zhur - the ProjeCT) with Installed capacrty 01 around 305MW, induding related facilities lor coonection to the power

transmission networ\(.

ICJpa~1CJl4PSP) In til
1(£05 "Mll)o, t~ ooly ~~IlICI\)' dl,nrdlUl!OIHO'Tlp.!n'1ln tllrHOIKIlty <1nd :lPNlle a oelwok 0/ /IPIIroxrn.Jte4y 1 610 I<m for the IcrN YOItage ~~ and 1 Ol8 km fo< the mt(lIU-n voiIa-Ql' 0IlE'. The (\JS!QMef ~$l' encom:)a>Se!> about <100 t/"Ioo.Mnd ",stoners. anc! the annual - 9 ) ' consumplOon al dIs,,,b.llOl" ~ a_ages 4S70 G.....'h, ~pot.ed lncief a regulated 1r3fTl::wotk

The relectrlClly oRrtlutl()f1 re¥efIUeS of Kfl< for 2009 amooote>d III Euro 160 mIl"", It is 4nbC'P
The deveklpment of HPP Zhur will be conducted through a concession 01 up to 40 yeal"$, throlJgh private investment , in the form of Design - Finance - Build - Operate - Own - Transfer (DFBOOn.

The Pro;ect shall be developed in conformity with best international practices lor construction, operation, and management of social and enVironmental issues.

E~oncm'f

and flflilnce 01 t(()so-.o.NdIe-s 10 a.cCR'.Jte Plftlale seeler pa r.,.fiJ>/_. ip@(lll-:alyln It. ~ dl$lnOlAIOO seclOl, FOI II>f; pu<post'. 111\ol"51w1!d I:e, a member of the WoJ Id &.In!. G,OUII. 4S lIS le.!d ~'I5Of rOl Wuctur"'9 <1 PSP 1f8f"lSlKIICtI ,nd m:llemenllll9 a COt"lIpt'{rtNt tendtr for the pnvallLncn of tne tlm.nbl.t,on ana public supyIy busl'll!"SS 0/ :M KOIOYO Ele(tnClly Compan~ (t::£K) It .. ~Iso ,mpierrentlllQ tte fleCe5.IoI'" ,""foull'l u.d ~tCf)' mI!<1W'l!"S loewcbkl" II u~rnp.o~t en1!'19\' fIIIIrkel. IfI(fN5e efflClI!f\C)', and establISh an etrvuOtIment condvcvc to the ontrodu<.tron of t~e pI'lIIate SE(tOl As part 0/ lhese:~OIrm. ,hewtnbubOn...c pOlblK:><.pplyoKlr"'lJe Mil 1)0, ."u,rnbd and ~f<1l~ frt;m J;EJ;.lInd <1 new CompiIIIy' I<EC5, 15 ~f19 {J~ted The Mlnrstf\r of

DEVELOPMENT OF HYDRO POWER PLANT ZHUR Public Procurement Number 11313110/034/611

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.!>herl ~\("I!\1O"1 or lhe conp.o..,,~ <'<.tl\'lill".' (r""._ 3 ~), a sllort
1

All interested parties are invrted to subm it their expressfcn of interest (Eol) by 25 AlJgust 2010. Eol sholJld respood 10 the requirements set forth in the Prequalification MemorandlJm, which is availa~e in the following address:

~nd

MI. Selami Berisha, Procurement Office, Ministry of Energy and Mining Email: selami.belisha@ks·gov.net Tel:+38t382002t532 All entities that qualify according to the criteria stipulated in the Prequalification Memorandum will be ,nvited to submit thei' proposals on the Project.

MINISTERE DE L 'EQUIPEMENT ET DES TRANSPORTS

REPUBLIQUE DU MAU UN PEUPLE - UN BUT- UI\"E FOI

SECRETARIAT GENERAL /. NOTICE OF PRE-QUAI.IFICATION .-OR THE CONCESSIONING OF T HE INTERNATIONAL AIRPORT OJ.' BAl\.IAKO-StNOU The Go'-emlnent of ,\ \ali. represented by the ~\ini.try of Equipm"nt alld Transpon ( ~t;nistry in charge of civil aviatio n). invite. private i",·.stor< to panicipate in the tender process for the concessioning of the opc",tion oftk Bamako·St nou .irport ror a pcrioo of thirty (30) years. The project aim. at improving the operations of the airport infrastructure and at de"e\opi "g airs ide and landside i"r"'SlruClUres for tOial planned i""eSlmc "tS i" an amOOnt or 100 million Emus with mOre than 60% of the in" esl!nenlS to be. carried 001 during Ihe laS! len (10) years of the conce.«ion. The objedi"es of this

publk'I,,;~ate

partnership un.:

Achieving flexibility and efficiel>Cy in lhe operdlion of Ihe Bamako-Senou airpon "ith tl>e participation of pri"ate capital: !)e"eloping and maintaini"g airport facilities i" good "'orking cOlodition tl>ro,)g.h .ub'tantial inve.tment.: -

Raising lhe quality of se " 'ices pH",idcd security.

10

users. arod stre ngthe ning of safety ,,,,d

The tender process involves a pre-qualification phase in acmrdance with Decree No. 08-4R51P-R~t of Augusl 1 I. 1008. Interested Investor< may obtain further information and the pre-qualification documents alollS "ill> the i"ranna1ion nlelllOrdlldUIII by SC loding a wri((en reqllCSt to the Dire,·tion Admi niS!",!ive et Financiere du Mini,!ere de rEquipement et des Transports. UP: 78: Telephone: +123 20 23 14 41: fu: +223 10 23 90 60:. Email: lIlw:cabdoula)-cl @yahoo.lr;Dars.lamliBamako - IUpubliqueduMali ..... ith.copy to the Coordinateur du Projet d'Appui a la Croi"ance COllcdina'13,r @pacmaliJlq: and to Chef de Projet de rannulation ct de mise en place d'u" Partenariat Public-Privt des atropons du ~1ali bad )- DiaD~ml @)·ahoo .rr lx:fOKJuly 15th. 2010. This notice is trans/ale,/from f"rench. The f"rencll version will premil.

f

All

rECHNICAL: ADVISORTRA;\ISn IO\:AL JUS nCE

The Jus~ce law and Order (JlOSl i~ in the proce-ss of re·buddll1g the lustice Itwctures In the cooHict affeaed areas ,md 6elielop,ng an appropriate polICy and legal framework for accoontability, reconciliatioo and ttle tranSItion trom conflict to peace in Uganda

JL OS WIShes to recrUit an Internationa l Technical AtMSOf for TranSlllooal JIISllce who WID be responsibJe for prOYiding programme manilgeme/lt \Oppor~ polrey and planning and tedvuca l advKe to ensu re the IOCcesslul development ot an app roprtate tran~ttooal justtce system in Uganda with'n ttle framework of JlOS Tr.e Technica l Advtsor win be responSIble for polk)' formulation, planning and morutoring the ImpJementation of Iran~t"mal justICe programmes: plO'VlSK.lfI of te<:hrucal adYke to JlOS Stnxtures. caJkKlty bu~ding, tUndralSlng and preporing penodic r€ports to JLOS ilnd Government. Ttle detailed jOb descnption can be obtained 00 hnp:llwww.jlos.go.ug. The Techl1lcal Advisor \'1,; 11 report to the Senior Technical Advisor, Justice Law and Order Se<:tor.

Required Qual ifications: Post-graduate degree Oegal baCKground preferred): • 7· 10 ~ars' expenerlCe In post cooftlC1 and tran~ttooal envi ronments. ""';th local or internabonal orgaOlLlti{Vls; Pnor exper~n(e in other Afrrcan Countries Implement'ng t,allSltronal justice I11e<:Mfi isrns: In-depth ~nowledge of traOSltiooal justice and txpertise 00 the Rome Statute: Pllor expenence With 6elilSlng strategies in Ilnklr19 various tranSitional )lIStice mechanisms: Exper~n<e in work ing on human righl$ lSSUesor With VlClnm: MarlaQerial exper>erlCe: fun dra i~ ng expenerKe ; Good networ~ i ng abilities: ~{eU ent M lting skills. tnte.ested applicants may send a Jetler of applicattoo, Cop'es ot te5tLmorllais and Resume (indicatiOlj telephone numt:.er and email addre-ssl 10 be receIVed not later than 5.00p.m. {EASn 00 tile 23rd July.lOtO to The Soli
The Economist July 3rd 2010

•

6

Overview House prices in 20 large American cities rose by 3.8% in the year to the end of April, accordi ng to the s&pj Case-Shiller index. Some housing markets have recovered smartly from their lows. In San Francisco, prices were 18% higher i n April than a year earlier.

Output, prices and jobs % cha nge 00

In Germany, the number of people out of work fell in June by 21.000 to 3.23m on a seasonally adjusted basis, following May's decline of 41,000. The unemployment rate was unchanged, at 7.7%. Without seasonal adjustment, however, the jobless rate declined to 7.5%. IreLand's GOP grew by 2.7% during the three months to the end of March . The fi rst quarter of this year was the first for more tha n two years in which the Irish economy grew. Industrial growth in South Korea accelerated in May. Output rose by 21.5% i n the year to the end ofthe month, having risen by 20.1% in the 12 months to the end of April. Inftation in India rose to 13.9% in May from an already high 13.3%in April. Widespread politica l turmoi l caused year-onyear industrial growth in Thailand to slow to 17.2% in Mayfrom 21.8% the previous month. Turkey's GOP rose by 11.7% i n the year to the end ofthe first quarter. Indicators for more countries, as well as additionaL series, ca n befou nd at Economist.com/indicators

I

GLobaL mergers and acquisitions Dealogic, a research fi rm, reckons there were nearly 20,000 merger-andacquisition (M&A) deals worldwide in the six months tothe end of June. Thatwas nearly 10% more than the number during the corresponding period a year ea rlier. During that time, t he total value of M&A rose by 6.2% to $1.2 trillion, though it remains well below halfits pre-recession peak of a shade under $2.6 trillion . The size of the average deal has also shrunk to about half its 2007 peak. Over the past year growth has come disproportionately from outside the rich world. Deals that targeted emerging markets grew in value by a whopping 59%. They made up over 30% of the total in the first half of this year, from less than 10% a decade ago .

ye3r ago Gross domestic product latest qtr· 2010' 20111

Industrial production latest

Consumer prices Unemployment latest year ago 2010' ratet,%

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Consumer confidence in America declined sharply in June, according to the Conference Board, a research firm. Its index fell to 52.9 from 62.7 a month earlier.

8.

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The Economist commodity-price index Va lue and numher of deals

200D-I 00

Value. Jtm

Nllm~er,

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Emerging markets Rich countries

change on one one

%

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All items 153.5 153.7 Go. S ~er oz 1.232.15 1,23S.05 West Texas Intermediate 77.07 S ~er barrel 75.53 ·PI<m.ioo. 1 tMon·food 'gricultu,.l;.

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go Economic and financiaL indicators

The Economist July 3rd 2010

Trade, exchange rates, budget baLances and interest rates Trade bala n ce~ l
Current-account bala nce latest 12 % of GOP mon ths, Sbn 20101

Markets

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Budget balance Interest rates, % Currency uni ts, per S % of GOP l -month t o-year gov'! Jun 30th year ago 20101 latest bonds, latest

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Poland -5.0 ~pr -8:6 ~pr. -3.0 3.3~ ... 3:09 -3.0 ~ .87 5.83 ~.~.s~j~.. ........... :': ~.~.~: ~,~p.r....... ,.... :': ?}'.?.9.1........:!"?:~. . .. n:.? ........ )J.J ..... ...._:_ ?.?..... .....U5.............~:?9. .... . S"Xe~e.l) ........... :,:!'Q,Q.~'.'i .. .... :'}J:.~.9I, ...... :M ......... !.:?!}.......... ~: 5.l! ...... _ :~:! ......... q·Z~ ., .... ..?:M..... . ~"Xi~~~l~.~~ ....... :".?Q, .~ .~.'.'! ........... :':~.l!:.?9.~ ....... :!"I!,? ......... J.,q:!! ...........~,Ql!.........._:_ ~..}..... .....q,.!1..... ,...... .!.H .. . !Y!!.e.'t.. ___ ..:.5.Q,~~ ___-1.4:l.~r __ :,i.§... __ ...!:i8___!JL __-SL __ 7.Jl.. ___'\.:...84..: _ ~.~.~~r~\i.~ .......... :-.!-.?:~..~P!.............:~.?:.~ .~.1........._:_9 .,......... PI! ........ } :?4........ 3.:~ ..........4:.~? .. ........ 5.10 ~!l.~g.K9!!!I .. ..... :-}~,~..~.·!t .... ...•..• :':.l§.J.~.I........ :!"M ........... !.,?~ ......... ?,?? ......... 9.& .........q,.~?........... l·.~~..... .

.~!!~.i.~ .. ........... ::~.9.~:~.~.'.'I ............:~.!-:.~ 0' .._:_P....... 46.4 ~n.~.'?!:~.~!~......... :".?q,.t~P!... ....:':?:.l!.9.1.........;~,9........ .~,9.~.~

47.9

-5.5

5.67 .JQ,J 9.9. ...._:_?, t ........~,.R ~~.~p.!~. .......... :".nR.~p.' .. :':~.?.4 O1 ......:.tU ...... ... },?:4 ........ J~.2 -5.5 2.72 ~~~.~~!I. ...... .. ~}&~.'.'! ..... ,...... ~}.".?9.1... ......_:_.P ..?~.".~ ..... J!'!-,? ...._:_?,~.......!-.P9. ~i.~9~J:'!!r~ ........ :".?~:~ .~.'>: ... .. ..... :':~.~:.~.9.1....... :g~.......... J,45! ........ } :4.4 ....... 3 :? .........q:.~Q

8.14 .~, '!-.9.1.. .

1.591 . ~, ?tl.. .

......~:96 sn .. .

~.'?!-!~ .~.'?r.~~....... :"}M .~.'>: ........... :':n·t~.~~ .......;.~,~...........~,~?? ....... },~~~. ...... 3,'!-........ J.~~ . T,!j",!~.l) .............. :"J.~:~..~.'.I: ' ••...•....": ~.?.".'HA ........;M ......... .3.?:J ......... J?,~ ........:?:t ....... ..q}3.. , .........

.t·n .... .

__ ..!.1l,!11~ ___+.l5.:.! 2 r__~·L ___n,.4___3S L __-l.&.. __ ~L ___2&L _ ~[g.~!!!i'!iI.......... :':H:.6: .~.'.'! ............. :':~A.9.1.........;?,? .,........ }8} .......... ~,~Q .. ,..... ::U ....... '!-l} 1................~~... . ~~~~.L .............. :".?),7..~~ ............:~J·.4.~.~~..... 3 :~..... ,..... J,~Q...........!,~? ........_:_ ~.·. ?....... Jq,.!~ ............ ~,'!-.~.I... . ~~ jl~................. :".!.~, ? .~.'.'i ............. ~:.~ .9.1........._:_Q :~••.•••••••.•• ?41! ...........~3.~.........._:_H .........q:~~ .............l,n l... . ~,?~o.~.~i~........... ..:.U.~p.r....... ,...... ~J..!.~.~ ........_:_!:~.......... .~,n? . ......~ ,.!2.!.. ........_:_?:? .........UQ ............ 1,7):... . ~~lIj9L ............._:_P.~.'.'! ...... ' ...... ::~...Q.9.1........._:_.~}. .......... g.~ ...........~~, t .........: '!-.& .•.......4AQ ........... .~,n ..... ~!!.!!~e.!! __ ..!.3.Q,Q.!I:.... ___+l.9.:1 !!!. __':2.L __ .J,l,L __ ..!IL __-.1!... _ .lUi.. ___6d~ _ ~gyJ:'~. . ... :-.??,~ .q~........... ... ~}'.~ . ~.I.........;Q,~........... ~.,?Q . ?,~.~......... _:!P ....... '!-.Q,J!L ......... ~m.I... . 3.86 -4.2 3.62 ~~!.~~.L ...............:-.~:~..~!'>: ... .. .... ... :':?:.~ .9.1.........:? . ~...........},~8 ...............1.67 ............ ............... ~~~~.i. ~~~~.i .~ +104,1 .~~ .. .. ,... 39.".~.~~....'!".n9..... ... .... ~.,?~ .P.? .......... :'i.) ..Q.. 7.3.. ......... ... n~. 7 .74 SouthAfri c~ -1.1 ~pr -11.401 -5.0 7.67 -6.3 6.58 8.82 J!I~la.!!.L

Index

Jun 30th

Dec 31st 2009 in local in S week currency terms one

~.~!~.~~~~~J~~.~ L. .. .... .?}?4:0 ...._:_.5.,~ ......:F .... ::O' .~.~!~.~~~(~~.~.~.C!9>. .... 1...q~g:? ...._:_.5...~ ••••••• :.~:L .. ::?,~. ~.~!~.~~.~~~J~~~!!1p.} .... ?,.WU.....+~ :!.:O"' .. ::?:9. ~~p.~.~.t~i.~~.~n~}............ ~}~H..... _:_.5.,~ •..•• ::l.t~..... ::~,~. ,~J:'~.~.{T!!p!~L ..................~L4....._:_1·. L ....:!.:L ... ::?:~ I~j.~~..(~~.~L ................ ?.'n~:?.....:E .... ::?~:L._:_.~~:~. f.~i.r:.iI. .<~~.~~!.~ ~~~l .~9:!!J ....:U..... ::E& ..._:_.1.?:? ~,ri,t:a.~n. t~~ .~~L. .. 4,91.6.9 -5.1 " .. ,-~ :z...,-.1.~,~

.......

~l!!d!.l~USE ___ l!,~~_~1. _ ..:.3'& _~1

~:9. ~.r.~~. CF.l}U~!.~ .~P:QL. ....~9:!!:?" . " :~"'~"

... :: 1H ... 34:~

~~9}.r.~~. (Q-;I.Eq~JQ) ......?J?U ...:~:.~

-13.2.. 3~} .~.~~.t!!!:..l~}?!l.. ............ ,.... ?P.H ..._:_~·.L. ....:*,?.3.?,9. .~.~!gj!!~ .(~.~~.?9>. .............. ?,.~~.~:L ..:4:.~ ....•.. :,~:~•..._:_.1.~:~ Jr~.~~.~ .(~~.4.Ql. ............... ~/.¥.>.~,~. ..._:_.5...~ ••••• :: g,~... 3.~,}.

li!:f!I)~.~.l~m.: .............. ~/.~~.~:L ..:.t L .. , .ti!:L.._:_.I.~:~. ~.r.~ .(~.~J:l!!:~.~9.l!!pL ....... '/~~.~ ' ? ...._:_~ . Q...••.~ ;-4:7....-:-!>.~,?

.!~.lY.t~.EJ!'!~~) ............ ..!?.'.~~.!& ...._:_.5:.l ..... ::1~:?...._:_.~U. ~.~;.~!~.~~.~ .(~.~J... ..... ,......nH ...._:_.5.,~ ...•. ,.:.~:5...._:_.~v. ~~0~r!!!.S!)

____ i§1gI _ :§:!. _~2~ _-~ ·1

.~~ .~~p.~.~~!~ .( r~) ........... ~}9.U....._:_~:.Q .•.••..~.E ..._:_.I);}. P.e~.~~!.~ (9!:1.~m . ,...... JM,5....._:_ .5.:! ... -+;!6:1..... ~ ':R ~.~!!9.~!y. (~~.~J . . .~ !/.Q?Q:4.... 3:.Q... ....-1!:8•••._:_.I.?:? ~.
m:'.....

.. ..

l!!1!..eUIgL ____ ~,~~ _ .:11. _ ..!.3.& _ .:.!l ~.~~.I!.~\i.~ .(~.~.Qr.~,) .... ,.. ..... ~/g~& ...._:_~.:!. - 11.4.. -i},.1 ~.
~~.t.~ .l
_____ llU_ .:11.. _ ..!!I2. _+l!l

.~.r.9~m·j ~.~ .(~~.~L .......... ?,.~~.~:9....._:_~). ..... .:.~L ....~?:R .~.r.~p.!.(~.~n ..

......~9.'n~,? ....:~·.~..... ::1.F...._:_.1.4J.

f.~i.~ .n~.~~L. . .., ...!~/.~) ...._:_R·.4.... .:':tP. .....+'~}. ~\
n!CL ___ ~~~ _ .!9&. _ !l8.d __n1.

!]1!i~l!..

~!IYp'~ ,<~~.s.~}.Ql .......... ...... ~/Q~.U. ....:~.".~

I

The worLd's biggest banks

Despite their prominent role in the global financial crisis, American banks still dominate a n annual list of the world 's biggest, ranked by their tier-one capit al. According t o the Banker, Bank of America, which bought MerriU Lynch du ring the crisis , became t he largest bank in the world by this measure in 2009, displacing JPMorgan Chase. Three other American institutions make the t op ten . Being the biggest does not, however, mean being the most profitable: 1(8(, a Chinese bank, topped thatglobal league ta ble last year. America and China each have three banks a mong the world's ten most profitable. Citig roup, the third-largest bank in the world, also ra n up t he third-largest losses last year.

Tier·one capital. December 11st 2009, Sbn

~~~~a..m!.~L _ !E~U_~i._..:.5.l _.:H.

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

J!!\9P.t tF.m~!!-!~E~qP:Q)...... .~n~ :~.".~ :.~,Q... ._:_.1.~:? .!V9.~, .~~~ .(~~q) ..... . .... ~,.Q4.u....._:_.5:.Q ......~ ~R:~...._:_.I.q} I'"!1.~f9.i.~9.!!1~[~~\~.(!1~.q) ...... n~:9. ....:~.:4.. .....:Z,? .... ::?:?

o 40 80 120 160 Bank of America

~o.1d.!lll~C!l. ____

JPMorgan Chase

_ 11111_ .!91.. _ ..!.5.l _ !2.! .~.~~. fu~~~. (~D\~l! . , ....... '.'.!~.H ...._:_~·.~.......:H..... ::1,~.

QI,!!+ Qftt~~L _

Royal Bank of Swtland

y.o~~l~~, .~.~ .('@.l ..

HSB( ICB(

1.68.1 _ ~i. _ :.!0.i _-.!Q:i

!V9.~ .~9.~~t(~~~9.~' .......~?.! :~.....;.1.& ......:.!:Q......~1,R

Citigroup

Wells Fargo

..:U..... :.~:~.

.~~~.~U~~:JR9>" ....... ,......... .~~.Q}... ..:9.......:1.:9. .... ::~,? .~.~.~i. ~r~.~i~. cr~~~~~J) .. ..... ~.'.Qn~... ..:~.".~ .......:R:~..... ::~:~.

• •

BN? Paribas

[iiJ

Banco Santander

t;;]

Barday;

WI

Mitsubishi UFJ Finandal Group" lloyds Banking Group

W

~= ~li!J 'March 31st 2009

,........ J.~:5.....?~,~ ... ,?1}Jl.~e.I,sJ

~.~~.s!. ~.~~.(i~J.~ ...... ,...... .!?~).....;.3.,~ ..... :<:~,?. , ..;gl.

mt ....

.@~.~,. ~ .~!!1. (~P&j................ ~~."1 .... :':?~:? ...;.~~:l. (;albon trading lEUETS) € 15.3 -0.7 +20.5 +2.8 "Total r~"m irld ... bun 2'1th. lcrtOit-dofauIHw.?,pr ... d" .. ,;, ~ i nts. Sou",.. , ~tiwo l ,toti,tir;$ offio.. . con".1 blnh ond ,\od .."'. ng ..: Thomwo R<\lt. rI; WMjR<\lt 'rI; J PMorgon Cho",: B.nk loiJ mi 1.·1.... 01: (BOE: ( "m; Oon,ke s.n~: U X; HtfI.A: Ma rkit: St.lndord B .n~ GrOll?: UBS: \\'0<1]>0<

Indicat ors for more countries, as we lt as additionaL series, can be found at Economi 5t.comj i ndicator5

Who will you nominate for this? Nominations now open. Islamic finance. the fastest growing segment of international finance. is built on the intrinsic values ofimegrity, transparency and good governance.

Spearheaded by the Malaysia International Islamic Financial Centre initiative. Malaysia recognises one exceptional individual who has excelled with outstanding performance and contribution in Islamic finance globally.

Once every two years, an international jury panel, made up of respected industry experts, will evaluate and select one individual. His Majesty, the King of Malaysia will present this prestigious recognition in a special ceremony to be held in Kuala lumpur, October 2010. We now extend an open invitation to the global finance community for nominations of individuals who have contributed to the advancement of the Islamic finance industry.

Nominations dose on 15 July 2010.

MIFC Submit nominations ilt wwwrT1!fccom/award

Three exceptional journeys. One historic game . Cafe Ma ravillas, Mad rid Follow Pe le, Zida ne an d Ma radona on lo uisvuillonjourney's.com l ou i, Vu iHon i:; p roud to :;upport The C limate Pro ject,

lOUIS VUITTON