The economist by alberto canale

Mar 10th, 2012

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INDEX The world this week.......................................................................................................................................... 5 Politics this week....................................................................................................................... 5 Business this week................................................................................................................... 9 KAL's cartoon........................................................................................................................... 12 Leaders...................................................................................................................................................... 13 The dream that failed........................................................................................................... 13 Let Romney be Romney....................................................................................................... 16 Another oil shock?................................................................................................................. 18 From brawn to brain............................................................................................................. 20 Unity is strength..................................................................................................................... 23 Briefing............................................................................................................................................... 25 The death of trust.................................................................................................................. 25 United States................................................................................................................................... 33 No end in sight........................................................................................................................ 33 The gap widens, again......................................................................................................... 35 Snob nation.............................................................................................................................. 36 The rubber hits the road..................................................................................................... 38 Going nowhere fast............................................................................................................... 39 A snoop too far....................................................................................................................... 41 Answering the call.................................................................................................................. 43 The view from Tehran........................................................................................................... 44 The Americas................................................................................................................................... 48 Two ways to make a car...................................................................................................... 48 A Chinese beachhead?......................................................................................................... 51 A loonie idea............................................................................................................................ 53 Opposing worlds..................................................................................................................... 54 Calderón the campaigner.................................................................................................... 56 Asia...................................................................................................................................................... 58 A welcome slap in the face................................................................................................. 58 Small country, big year........................................................................................................ 61 Burmaÿs bimah..................................................................................................................... 63 Gored.......................................................................................................................................... 64 Satisfy the people.................................................................................................................. 67 The East is read...................................................................................................................... 70 1

Mar 10th, 2012

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The Buddha and the tigress............................................................................................... 72 Middle East and Africa.................................................................................................................. 75 Wanted: maybe a president?............................................................................................ 75 Wink or blink............................................................................................................................ 78 Picking up the pieces............................................................................................................ 80 A sour mood............................................................................................................................. 82 Just cap it.................................................................................................................................. 84 Europe................................................................................................................................................ 86 Moscow doesnÿt believe in tears.................................................................................... 86 Old school ties......................................................................................................................... 89 A very un-Dutch deficit........................................................................................................ 91 A two-finger salute to Brussels......................................................................................... 92 Bad blood.................................................................................................................................. 94 Thinking inside the box........................................................................................................ 96 Mario, put on your toga....................................................................................................... 97 Britain.............................................................................................................................................. 100 A radical departure............................................................................................................. 100 Hot and bothered................................................................................................................. 103 Pretty polys............................................................................................................................ 105 Room at the bottom........................................................................................................... 107 Smoke signals....................................................................................................................... 108 Monstrous success.............................................................................................................. 109 A wit may also be wise...................................................................................................... 111 International.................................................................................................................................. 114 Banking against Doomsday............................................................................................. 114 Doxed by Sabu..................................................................................................................... 117 Holy rollers............................................................................................................................. 119 Black ivory.............................................................................................................................. 119 Rocking the Holy See......................................................................................................... 121 Special report: Nuclear energy.............................................................................................. 123 The dream that failed........................................................................................................ 123 From squash court to submarine.................................................................................. 130 Blow-ups happen................................................................................................................. 135 Leave well alone................................................................................................................... 141 Bandwagons and busts...................................................................................................... 143 Over the rainbow................................................................................................................. 149 Business.......................................................................................................................................... 155 The end of cheap China.................................................................................................... 155 Waving a big stick............................................................................................................... 160 2

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Knickers in a twist............................................................................................................... 162 A pixelated portrait of labour.......................................................................................... 164 How to spend it.................................................................................................................... 165 Little monster mash............................................................................................................ 167 Slaves to the smartphone................................................................................................ 168 Finance and economics............................................................................................................. 171 The new grease?.................................................................................................................. 171 Man and machine................................................................................................................ 175 Pausing for breath............................................................................................................... 178 Fixing LIBOR.......................................................................................................................... 180 Year of the tortoise............................................................................................................. 182 Better Than Goldman?....................................................................................................... 183 Arise and fall.......................................................................................................................... 185 Natural stock selection...................................................................................................... 187 Bond shelter.......................................................................................................................... 188 Science and technology............................................................................................................ 191 The men’s room................................................................................................................... 191 The wow factor..................................................................................................................... 193 Violating the rules............................................................................................................... 195 Smarter than the average bear..................................................................................... 197 Books and arts.............................................................................................................................. 199 The big why........................................................................................................................... 199 Comfort, joy and disagreement..................................................................................... 202 Creation story....................................................................................................................... 204 My family and other animals........................................................................................... 206 Godzillaÿs grandchildren................................................................................................. 207 Obituary.......................................................................................................................................... 210 James Q. Wilson................................................................................................................... 210

Mar 10th, 2012

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Mar 10th, 2012

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The world this week Politics this week As expected, Vladimir Putin won Russia’s presidential election on March 4th. Officially Mr Putin got 64% of the vote, although there were widespread reports of foul play. Around 15,000 people took part in a heavily policed anti-Putin demonstration in Moscow a day after the election; some 260 were arrested, although most were released soon afterwards. At a summit of European Union heads of government notable for its lack of drama, the leaders of all EU countries except Britain and the Czech Republic signed a new fiscal compact that will place legal limits on their borrowing. Serbia finally became an official candidate for EU membership.

Hours after signing the fiscal agreement Mariano Rajoy, Spain’s prime minister, announced that his government would breach an EU-agreed budget-deficit target this year. Two of Spain’s regional governments promptly said they would ask the central government to reduce its own target for regional borrowing. Seeking to shore up his position ahead of a presidential election in April and May, Nicolas Sarkozy said that there were “too many foreigners” in France and vowed to cut immigration. Mr Sarkozy is trailing the Socialist front-runner, François Hollande, in opinion polls. Geir Haarde, a former prime minister of Iceland, went on trial facing charges of gross negligence during his time in office. Mr Haarde is accused of failing to take appropriate measures to avoid Iceland’s spectacular financial crash in 2008. He 5

Mar 10th, 2012

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denies the charges. Inch by inch The Republican primaries held in the ten states that voted on Super Tuesday produced a mixed set of results. Mitt Romney eked out a very narrow victory in Ohio over Rick Santorum, but won Massachusetts and Virginia (where Ron Paul was the only other candidate on the ballot) by huge margins. Mr Santorum was first in Tennessee, Oklahoma and North Dakota. Newt Gingrich romped home in Georgia, his native state, but won nowhere else. The race continues, but Mr Romney’s grasp of the nomination looks ever more assured. The FBI brought charges against five computer hackers in America, Ireland and Britain for a number of cyber-attacks aimed at company and government websites. A sixth hacker pleaded guilty. Most were active in LulzSec, a group which claims to have taken the CIA’s website offline.

Binyamin Netanyahu, Israel’s prime minister, went to Washington for talks with Barack Obama. Top of the agenda was Iran’s nuclear-weapons programme. Mr Obama urged Israel to wait for sanctions and international pressure to work before deciding on whether to launch a military strike against Iranian nuclear facilities. But Mr Netanyahu later told a meeting of America’s biggest Israeli lobby that “We waited for diplomacy to work; we’ve waited for sanctions to work; none of us can afford to wait much longer.” The murky reality The Palestinian extremist group Hamas, which governs the Gaza Strip, suggested that it would not support Iranin a conflict with Israel. Syria’s deputy oil minister resigned and joined the rebel opposition. Abdo Hussameldin is the most senior figure to leave Bashar Assad’s regime, which he 6

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said had turned to “barbarism to kill innocent people”. More than 7,500 people have died in the violence since the uprising began. Militants linked to al-Qaeda in Yemenkilled more than 100 people in clashes in southern Yemen. About 50 people were taken prisoner and at least 20 attackers died. Political leaders from eastern Libya, where most of the country’s oil is pumped and last year’s revolution started, demanded a high degree of autonomy. The interim government responded by saying it would defend national unity, with force if necessary. A fire that started at an arms depot in a densely populated neighbourhood in Brazzaville, the capital of the Republic of Congo, killed at least 200 people. Rescue efforts were hampered by rocket weapons exploding at the site. Many more bodies are thought to be buried in the rubble littering the surrounding area. The first long-haul international flight in two decades arrived in Mogadishu, the Somalicapital. Turkish Airlines expects to run two flights a week. Grim tallies Six British soldiers based in Kandahar were killed by a bomb while they were out on patrol in southern Afghanistan. It was the highest death toll from a single attack on British troops since the war began in 2001. Another bomb killed four civilians near the border with Pakistan. Meanwhile, an avalanche flattened a village in a remote corner of the north-east, close to the border with Tajikistan, killing a quarter of the villagers.

India’s ruling Congress party suffered setbacks in state elections that were widely seen as a judgment on the central government. Congress won just 28 seats of 403 in Uttar Pradesh, a gain of six from the previous election. The party also failed to 7

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excite voters in Goa and Punjab, but won in Uttarakhand and Manipur. Taiwan’s government tried to resolve a long-standing trade dispute with America by proposing rule changes that would allow imports of beef treated with a growth enhancer. In response the opposition threatened to bring down the government and protests erupted on the streets. The president’s prognosis Venezuela’s president, Hugo Chávez, disclosed that the tumour removed from his pelvic region during an operation in Cuba was malignant and that he would undergo radiotherapy; however, he added that there was no sign the cancer had spread. On a trip to Mexico and Honduras, Joe Biden, the vice-president of the United States, said that the American government opposed Latin American calls for drug legalisation, and offered continuing aid to fight drug-trafficking. Brazil’s economy grew by 2.7% last year, a sharp drop from the expansion of 7.5% chalked up in 2010 and well below the average for other Latin American countries. With industrial output falling sharply again, the Central Bank slashed its benchmark interest rate to 9.75% from 10.5%, a bigger cut than had been expected. Brazil’s economy is forecast to grow by around 3% this year.

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Business this week China-watchers pored over the government’s pronouncement that it will aim for an economic growth rate of 7.5% this year, the first time in eight years that the official target has been under 8%. Some wonder if Beijing’s resignation to slower growth will hurt the region and commodity-rich countries, such as Australia, that feed China’s mighty appetite for raw materials. But the government’s new focus on domestic demand as a driver of the economy was welcomed by those who think it should do more to reduce global trade imbalances. Still too high

Spain’s long-term borrowing costs rose above those of Italy for the first time in eight months, after Mariano Rajoy, the Spanish prime minister, admitted that Spain’s deficit this year would be above that agreed with the EU. Meanwhile, Greece hastened efforts to convince more private creditors to sign up to a restructuring of the Greek sovereign debt they hold, which is a condition of Greece’s recent bail-out package. Oil prices remained high, despite news of a push by the West to open fresh talks with Iran over its nuclear programme. Brent crude fetched more than $125 a barrel; the price has risen by around 15% since the start of the year. BP reached a deal with some of the parties bringing a civil suit against it over the oil spill caused by an explosion at a rig in the Gulf of Mexico in 2010. The energy giant is to pay out around $7.8 billion to fishermen and other businesses from a fund earmarked for those affected by the disaster. A trial that was set to start on February 27th, but was delayed when negotiators said they were close to a settlement, will now be put off indefinitely. BP still has to settle with the federal 9

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government, and unless it does so the trial will go ahead. Either way it faces a big payout. Not cricket India imposed an immediate ban on cotton exports for the second time in two years. Although it is the world’s second-biggest producer of the fibre (after America), the Indian government wants to increase its domestic supply of the stuff to help textile companies battling high cotton prices. But its decision to halt exports did little for its reputation in international markets. A jury in Texas found Allen Stanford guilty of operating a $7 billion Ponzi scheme, one of the biggest frauds in history. Mr Stanford, a former banker who based part of his business in Antigua and used his riches to sponsor his own cricket tournament in the West Indies, was arrested in 2009. He will be sentenced later this year and faces decades in prison. Lehman Brothers officially emerged from its court-protected bankruptcy after three-and-a-half years. Lehman exists as a holding company now, with the sole task of distributing to creditors the $65 billion in assets they are expecting to get. The first payments are expected in April. Meanwhile American International Group, another famous casualty of the crisis but one partly owned by the Treasury, raised $5.6 billion by selling half of its remaining stake in AIA, an Asian insurance business which it listed in Hong Kong in 2010. AIG will use the money from the sale to repay some of the cash it owes. The Treasury announced that it would sell up to $6.9 billion of AIG stock it holds. The European Commission began a consultation period with companies about appointing more women to the boardroom. Last year the commission encouraged companies to pledge to raise the number of women on their boards to 40% by 2020; 24 firms have made that commitment. Businesses are insisting that any change should be voluntary and not, as has been mooted, imposed through legislation. Peugeot-Citroën launched its €1 billion ($1.3 billion) share issue, through which General Motors is taking a 7% stake in the company as part of their recently announced alliance. The price of the shares in the offer were discounted by a hefty 42%. The debt-laden French carmaker said it might like to buy a reciprocal stake in GM in the future, but not now. 10

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General Motors suspended production of its Chevrolet Volt hybrid electric car for five weeks because sales of the vehicle are below target. The Volt has won some big awards, including “European Car of the Year” recently and “Green Car of the Year” in 2011. But only around 7,700 were sold in America last year and stock has been building up. GM has set itself an ambitious goal to sell 45,000 Volts in 2012. The third coming Apple unveiled its latest iPad tablet computer (which is simply called “iPad”, rather than iPad 3). It has a zippier processor and a “resolutionary” new screen. Tim Cook, Apple’s boss, said the device would become the “poster child of the post-PC world”.

Mar 10th, 2012

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Mar 10th, 2012

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Leaders Nuclear power

The dream that failed A year after Fukushima, the future for nuclear power is not bright ü for reasons of cost as much as safety

THE enormous power tucked away in the atomic nucleus, the chemist Frederick Soddy rhapsodised in 1908, could “transform a desert continent, thaw the frozen poles, and make the whole world one smiling Garden of Eden.” Militarily, that power has threatened the opposite, with its ability to make deserts out of gardens on an unparalleled scale. Idealists hoped that, in civil garb, it might redress the balance, providing a cheap, plentiful, reliable and safe source of electricity for centuries to come. But it has not. Nor does it soon seem likely to. Looking at nuclear power 26 years ago, this newspaper observed that the way forward for a somewhat moribund nuclear industry was “to get plenty of nuclear plants built, and then to accumulate, year after year, a record of no deaths, no serious accidents—and no dispute that the result is cheaper energy.” It was a fair assessment; but our conclusion that the industry was “safe as a chocolate factory” proved something of a hostage to fortune. Less than a month later one of the reactors at the Chernobyl plant in Ukraine ran out of control and exploded, killing the workers there at the time and some of those sent in to clean up afterwards, spreading contamination far and wide, leaving a swathe of countryside uninhabitable and tens of thousands banished from their homes. The harm done by 13

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radiation remains unknown to this day; the stress and anguish of the displaced has been plain to see. Et tu, Japan Then, 25 years later, when enough time had passed for some to be talking of a “nuclear renaissance”, it happened again. The bureaucrats, politicians and industrialists of what has been called Japan’s “nuclear village” were not unaccountable apparatchiks in a decaying authoritarian state like those that bore the guilt of Chernobyl; they had responsibilities to voters, to shareholders, to society. And still they allowed their enthusiasm for nuclear power to shelter weak regulation, safety systems that failed to work and a culpable ignorance of the tectonic risks the reactors faced, all the while blithely promulgating a myth of nuclear safety. Not all democracies do things so poorly. But nuclear power is about to become less and less a creature of democracies. The biggest investment in it on the horizon is in China—not because China is taking a great bet on nuclear, but because even a modest level of interest in such a huge economy is big by the standards of almost everyone else. China’s regulatory system is likely to be overhauled in response to Fukushima. Some of its new plants are of the most modern, and purportedly safest, design. But safety requires more than good engineering. It takes independent regulation, and a meticulous, self-critical safety culture that endlessly searches for risks it might have missed. These are not things that China (or Russia, which also plans to build a fair few plants) has yet shown it can provide. In any country independent regulation is harder when the industry being regulated exists largely by government fiat. Yet, as our special report this week explains, without governments private companies would simply not choose to build nuclear-power plants. This is in part because of the risks they face from local opposition and changes in government policy (seeing Germany’s nuclear-power stations, which the government had until then seen as safe, shut down after Fukushima sent a chilling message to the industry). But it is mostly because reactors are very expensive indeed. Lower capital costs once claimed for modern post-Chernobyl designs have not materialised. The few new reactors being built in Europe are far over their already big budgets. And in America, home to the world’s largest nuclear fleet, shale gas has slashed the costs of one of the alternatives; new nuclear plants are likely only in still-regulated electricity markets such as those of the south-east. 14

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A technology for a more expensive world For nuclear to play a greater role, either it must get cheaper or other ways of generating electricity must get more expensive. In theory, the second option looks promising: the damage done to the environment by fossil fuels is currently not paid for. Putting a price on carbon emissions that recognises the risk to the climate would drive up fossil-fuel costs. We have long argued for introducing a carbon tax (and getting rid of energy subsidies). But in practice carbon prices are unlikely to justify nuclear. Britain’s proposed carbon floor price—the equivalent in 2020 of €30 ($42) a tonne in 2009 prices, roughly four times the current price in Europe’s carbon market—is designed to make nuclear investment enticing enough for a couple of new plants to be built. Even so, it appears that other inducements will be needed. There is little sign, as yet, that a price high enough to matter can be set and sustained anywhere.

Whether it comes to benefit from carbon pricing or not, nuclear power would be more competitive if it were cheaper. Yet despite generous government research-and-development programmes stretching back decades, this does not look likely. Innovation tends to thrive where many designs can compete against each other, where newcomers can get into the game easily, where regulation is light. Some renewable-energy technologies meet these criteria, and are getting cheaper as a result. But there is no obvious way for nuclear power to do so. Proponents say small, mass-produced reactors would avoid some of the problems of today’s behemoths. But for true innovation such reactors would need a large market in which to compete against each other. Such a market does not exist. Nuclear innovation is still possible, but it will not happen apace: whales evolve slower than fruit flies. This does not mean nuclear power will suddenly go away. Reactors bought today may end up operating into the 22nd century, and decommissioning well-regulated reactors that have been paid for when they have years to run—as Germany did—makes little sense. Some countries with worries about the security of other energy supplies will keep building them, as may 15

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countries with an eye on either building, or having the wherewithal to build, nuclear weapons. And if the prices of fossil fuels rise and stay high, through scarcity or tax, nuclear may charm again. But the promise of a global transformation is gone. The Republicans

Let Romney be Romney The Republican front-runner should be talking about jobs above all

IT WAS not, to be honest, all that super. Only ten states voted on March 6th, compared with the 21 that voted on the last Super Tuesday in 2008; and they delivered a mixed message. Mitt Romney, the front-runner, won six of them. His nearest rival, Rick Santorum, won three, and came within a percentage point of wresting the main catch of the day, Ohio, away from him. The remaining state, Georgia, went to its native son, Newt Gingrich: maybe just enough to prevent his campaign from dissolving in its own bombast. Ron Paul, a strident libertarian, won nothing, but his campaign will soldier on to the end. Nothing, in short, was settled on a night that was more about losing than winning. But Mr Santorum lost more than Mr Romney did. As in Michigan a week earlier, the conservative former senator missed a chance to upend the contest by scoring, despite his vastly inferior funding and organisation, a victory in a big swing state. Had Mr Santorum won Michigan or Ohio, he might have fatally wounded Mr Romney. Instead, the former governor of Massachusetts plods on, remorselessly amassing delegates. He has some 400 of them, significantly more than the combined tally of his three rivals. 16

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Mr Romney, however, was a loser as well. He faces a long slog to reach his target of 1,144 delegates. Unless Mr Santorum gives up—which he has no obvious reason to do—the contest will not be settled for many weeks yet. More seriously, Mr Romney once again managed to remind America how weak his support is in the Midwestern states in which elections are won and lost. With the sole, admittedly large, exception of Florida, he has won solid victories only in states that are either small or very unlikely (such as Massachusetts) to vote Republican in the general election in November. As he contests the primaries, the Republican front-runner is the victim of a double squeeze. To his right are legions of social conservatives, evangelical Christians for the most part, who harbour deep suspicions about Mr Romney because of his Mormonism and his past flexibility over gay marriage and abortion. On his left flank stand America’s white working-class voters, who face stagnant wages at best and protracted unemployment at worst. With a personal fortune of some $250m and a record of closing businesses as well as starting them, Mr Romney was always a tough sell; but his attempts to suck up to these voters have been comically hamfisted (he even reassured carworkers that his wife owned a couple of Cadillacs). Mr Santorum’s achievement has been to forge the two groups into a powerful conservative-populist coalition. How to seal the deal There is nothing Mr Romney can do about the evangelicals: they will never love him. By pandering to them he will only scare away independents. And conservative hatred of the “secular socialist” Barack Obama will drive them to the polls in November as if they heard Satan’s hooves at their heels. America’s stressed median-income voters matter far more. Some may be so angry with the richest 1% that they will never vote for Mr Romney. But the Harvard-educated, arugula-munching Mr Obama is hardly a man of the people either. What these voters want above all is jobs, something the current president has not provided. Rather than making unconvincing attempts to be one of them or taking populist swings at China, Mr Romney would do much better to explain why his entrepreneurial, pragmatic skills are exactly what is needed to put them back to productive work. That would be good for America, which needs a reminder that capitalism usually delivers; it would also provide this awkward but efficient former chief executive with a chance to be himself.

Mar 10th, 2012

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The world economy

Another oil shock? The right and wrong ways to deal with dearer oil TWICE in the past four years surges in the price of oil have walloped the world economy. In 2008 the cost of a barrel of Brent crude soared to $147, enfeebling global growth even before the financial crisis killed it. A year ago supply disruptions from Libya sent the price to $127, enough to stall America’s nascent recovery. With oil now back above $120 a barrel, and tensions with Iran running high, the worries are back. Will an oil shock, once again, upend the global economy? For now, the answer is no. The cost of crude is back where it caused trouble in the past. But global growth is affected less by the level of the oil price than the rate of its rise. And so far that rise has been more modest. A barrel of crude costs some 15% more than it did at the beginning of the year. In the first three months of 2011, the oil price surged by almost 35%.

Nor is this increase entirely a result of actual or feared problems with supply. Output disruptions have indeed pushed up prices. Rich-country oil stocks are at a five-year low and Saudi Arabia, the only OPEC producer with significant spare capacity, is already pumping at a near-record rate . But part of the recent rise is demand-related. The world economy looks less fragile than it did at the beginning of the year, as the odds of an imminent euro catastrophe have diminished and America’s recovery looks to be on stronger ground. The optimism about global growth that has boosted share prices has also buoyed the oil price. Still, this is no cause for complacency. One obvious risk is that worries about supply increase, especially if relations with Iran deteriorate to the point of an Iranian attempt to close the Strait of Hormuz. Even if America’s navy ensured that such a closure did not last long, the potential disruption would be great: the price of oil rose by 80% in the initial stages of the first Gulf war. An oil price of $200 is yet 18

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another reason for America to steer Israel away from an attack (see Lexington). A second risk is that economic policymakers overreact even to the relatively modest price rises so far. The European Central Bank (ECB) tends to worry more about the inflationary impact of dearer oil than other rich-world central banks do, not least because more wages in Europe are automatically indexed to inflation. Last year it (misguidedly) raised interest rates in response to costlier oil, hardly helping its weak economies. With output in the euro zone shrinking, the ECB is unlikely to repeat that error. The danger this time is that the rise in oil prices will deter it from easing monetary policy further. That would be a mistake. Inflation is far less of a threat than a deepening recession, not least because the weakest euro-zone economies are also the ones most dependent on imported energy. The right European response to dearer oil is not just cheaper money, but also less draconian fiscal austerity. In emerging markets rising oil prices pose less of an inflationary threat than in recent years, both because their economies have cooled and because food prices, which make up a bigger part of inflation indices in the emerging world, have been stable. But dearer oil poses a risk to those energy importers which still fix the price of fuel products. India is a prime example. It has large current-account and budget deficits, and subsidises the prices of kerosene and diesel. It should resist the temptation to increase those subsidies in response to costlier oil (and the ruling party’s drubbing in elections this week). Rather, to reduce its fiscal deficit, it should summon the courage to cut fuel subsidies in its budget on March 16th. Politician + pump prices + poll = panic Although America’s strengthening economy is better able to weather higher fuel costs, election-year politics is bound to bring pressure to “act” against high petrol prices. One misguided response would be a temporary cut in the petrol tax in an economy that already taxes fuel too lightly. (Far better to use the next price fall as an opportunity to raise the tax.) A more dangerous idea would be prematurely to release supplies from the country’s strategic oil reserves to dampen prices. Barack Obama did that last summer; the president will doubtless be tempted to do so again if petrol prices rise much further. At a time when there is a risk of a genuinely big supply disruption, from Iran, that would be reckless. The odds of averting a 2012 oil shock depend disproportionately on America keeping its cool, both at home and abroad.

Mar 10th, 2012

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Innovation in China

From brawn to brain If China is to excel at innovation, the state must give entrepreneurs more freedom

THE end of cheap China is at hand. Blue-collar labour costs in Guangdong and other coastal hubs have been rising at double-digit rates for a decade. Workers in the hinterland, too, are demanding—and receiving—huge pay increases. China is no longer a place where manufacturers can go to find ultra-cheap hands . Other countries, such as Vietnam, are much cheaper. What will this mean for China and the world? Contrary to conventional wisdom, it will not mean that companies close their Chinese factories and stampede to somewhere poorer. China is still a terrific place to make things. Labour may be cheaper elsewhere, but it is only one cost among several. Unlike its lower-paying rivals, China has reasonable infrastructure, sophisticated supply chains and the advantage of scale. When demand surges for a particular product, the biggest firms in China can add thousands of extra workers to a production line in a matter of hours. So China is not about to hollow out. But if it is to keep growing fast, it must become more innovative. At present Chinese innovation is a mixed bag. There are some outstanding private firms. Frugal engineers at private companies such as Mindray, which makes medical devices, and Huawei, a telecoms giant, are devising technologies that are cheaper and sometimes better than their rich-world 20

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equivalents. Manufacturers operating near China’s coast, whether home-grown or foreign, are adept at “process innovation”—incrementally improving the way they make things. And China’s internet start-ups, such as Tencent (a social-networking service) and Alibaba (an e-commerce company), have had a genius for copying Western business models and adapting them to the Chinese market. But innovation is about more than this. One way of defining it would be as fresh thinking that creates value people will pay for. By that measure, China is no world-beater. Though its sweat produces many of the world’s goods, it is designers in Scandinavia and marketers in California who create and capture most of the value from those products. China’s leaders know this, and are pouring billions of dollars into research and development. The current five-year plan calls for “indigenous innovation”, which the government thinks it can foster by subsidising “strategic” industries and strong-arming foreign firms to transfer intellectual property to budding national champions. That system of state capitalism worked when the aim was to copy and adapt other people’s ideas in the cheapest way possible. But can new ideas truly be created by fiat? Elsewhere governments have tended to run into two problems: the state is not a good innovator, and it gets in the way of others who are. Is China really so different? Although the Chinese government invests a fortune in research and development, too much of this cash is wasted, according to the OECD. Most of it goes into development; not enough into research. It is far too difficult for new Chinese ideas to move from the laboratory to the marketplace. And the pockets of research excellence that exist—for example, in genomics—tend to be disconnected and politicised fiefs. Meanwhile, the state’s efforts to pick technology winners have been patchy. Telecoms has been a success, but electric cars have not, and subsidising clean-energy manufacturers has had mixed results. As for trying to set up regional internet clusters, China seems committed, but so far Silicon Valley has proved far too complex and delicate a system for a bureaucrat to copy. Let me in to the dragon’s den If the argument that the Chinese state is uniquely innovative is at best unproven, the obstacles in front of a small private-sector innovator are clear. The most obvious is piracy. China’s intellectual-property laws are not bad on paper, but are enforced patchily and partially. Another problem is the way so many industries 21

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have been consolidated in the hands of favoured firms. Antitrust and competition laws are not applied vigorously to well-connected champions. State-directed banks take the Chinese people’s savings and lend them at microscopic interest rates to national champions. This starves clever but unconnected firms of capital, and cheats savers, too. Nobody expects the Chinese government to let the reins go completely, but it needs a less top-down approach that gives its citizens more space to experiment. It must let private investors risk money on ideas they think might work, and bear the rivat va quence uenc consequences of failure. An obvious place to start would be to let firms build on what they already do well, such as process innovation. But the next Chinese y alre h may actually come in an unexpected field. China was once a dazzling breakthrough k of pr innovator: think printing, paper, gunpowder and the compass. If its rulers loosen their grip a little, itt coul could be so again.

Mar 10th, 2012

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Trade in Latin America

Unity is strength Regional integration, not protectionism, is the right response to fears of deindustrialisation IN RECENT years there has been a swagger about South America’s biggest economies. Brazil was not only the B in BRIC, but it also had a thing or two to teach the world about how to run a modernising economy. Argentina has nearly matched China for growth in the past two years. Now, suddenly, the confidence is giving way to fear. The worry is that competitors from Asia are eating the region’s lunch. South American currencies have been strong and the region’s costs have been rising. Although China is no longer as cheap as it was , it remains a formidable competitor. It has been taking bites out of local manufacturing, especially in Brazil and Argentina. And Brazilian industrialists are starting to lose ground throughout the Americas, their main export market.

The governments of Brazil and Argentina, petrified of deindustrialisation, are resorting to protection. Argentine officials now require some importers to match their orders with exports, an absurdity that has led to car firms selling wine. The Argentine government no longer grants automatic import licences to Brazilian firms, making a mockery of the rules of Mercosur, to which both countries belong and which once aspired to be a proper customs union. In a more limited way, Brazil has also caught the protectionist bug. It is threatening to tear up an agreement with Mexico that allows free trade in cars between the two countries. South Americans are right to worry about deindustrialisation. It has been almost impossible for large countries to become developed economies without strong industry. But attacking the symptoms, not the deeper causes, may make the 23

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problem worse. The main losers from higher trade barriers will be consumers who have to pay higher prices for cars and other products, while industrialists pocket undeserved profits. The underlying problem in Brazil is that high interest rates and taxes, plus deficient infrastructure, make doing business in the country expensive. That problem—the “Brazil cost”—has been aggravated by the strength of the real. Part of the currency’s appreciation comes from the inflow of short-term capital seeking to profit from fro those high interest rates (9.75% even after this week’s cut). Brazil is ed d in ttrying tr justified to deter such flows through taxes and controls, though it should also eliminate nate ate tthe fiscal deficit which helps to drive up those rates. But in part the gth th is a reflection of the greater wealth in Brazil, which has just real’s strength in to become b overtaken Britain the world’s sixth-biggest economy. Industry will have to get used to it. Time to resurrect the FTAA To her credit Dilma Rousseff, Brazil’s razil’ president, is trying to cut the Brazil cost, albeit razil’s ionism on timidly. But a recourse to protectionism sends the wrong message. Instead, Brazil should be leading a new push to tear down barriers within Latin America as a whole. Consider its agreement with Mexico. The car industry in both countries has rket ket a benefited because, by offering a larger market and more economies of scale, it has encouraged specialisation. That, in a nutshell, ell, l, is the case for regional economic c and a mountain of presidential integration. Yet, despite a torrent of rhetoric hed. Latin American countries summits in recent years, integration has languished. export much less to their neighbours than do their counterparts in other continents. nterpa checke hecke by higher tariffs, Huge distances are partly to blame. But trade is also checked hold-ups at customs, a tangled skein of separate trade agreements and poor ree ee transport links. acturin cturi Brazil and Argentina should look to Mexico. After seeing manufacturing jobs beca migrate to China, Mexico’s industry is now growing again. That is partly because of its wide network of trade agreements, including the North American Free-Trade Agreement with the United States. It is also because higher wages and transport costs are making Chinese goods more expensive. A decade ago Brazil walked out of talks to turn NAFTA into a 34-country Free-Trade Area of the Americas. Many industrialists in São Paulo now regret that. After all, their chief market is in the Americas. It could and should get bigger. But it won’t happen if governments put up more trade barriers. 24

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Briefing Japan after the 3/11 disaster

The death of trust Last yearÿs triple disasterüearthquake, tsunami and nuclear meltdown ühas shattered Japanese faith in many of the countryÿs institutions

ON MARCH 11th, the first anniversary of the day that turned her world upside down, 13-year-old Wakana Yokoyama will be performing a rice-planting dance for her fellow villagers. It will be a happy occasion, because she will be with old school friends she rarely sees any more. But it will be tinged with sadness, too; because although there are still villagers, there is no longer a village. On that bitterly cold day a year ago Ukedo (pictured above) took the full force of the tsunami. It killed about 180 of the village’s 1,800 residents, including two of Wakana’s grandparents. Some might have been saved, but when the first of three reactor buildings at the nearby Fukushima Dai-ichi nuclear power plant blew up, the authorities’ focus shifted to evacuating the living rather than searching for survivors. Wakana, her family and thousands of others were ordered to drive to evacuation shelters which, although farther away, were directly in the path of the plant’s plume of radioactivity. Wakana now lives in Koriyama, a city 60km west of Fukushima Dai-ichi. She attends a new school without any of her old classmates, and may go outside for 25

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only three hours a day because of lingering radiation. As time slips by, it is harder to stay in touch with others from Ukedo, where she grew up breathing the salt smell of the Pacific coast. But her eyes light up as she talks about the folk dances she performs, which are hundreds of years old. Keeping alive the traditions of a village she may never live in again is a strange responsibility for a child, but it is one she understands. The more edifying part of the story of Japan’s response to the disasters of 3/11, as it is known, know now is one of individual burdens borne, of traditions reinvigorated and of unal nal self-reliance. s communal It is not the whole story. A whopping ¥14.3 trillion ($175 billion) has been approved in four extra central-government budgets for recovery as s bee ster ter tthat th from a disaster killed more than 19,000 people and made about 325,000 gover homeless. The government’s Reconstruction Agency, which co-ordinates the way ministries spend money oney for rebuilding towns and villages, did not open its doors 1 mo until February 10th, 11 months after the disaster. So those dislodged from their homes have been thrown back on their own resources. Their response is part art of o what Hakuhodo, one of Japan’s two foremost ration at advertising agencies, dubs “Operation Me”: a growing embrace of autonomy in a ted ed th country that has traditionally operated through a subtle form of groupthink, with challenges to authority well hidden. Thanks in large part to the spirit of self-help, a lot o of the more obvious damage was th the tsunami-hit coastline looked cleared up quickly. Immediately after March 11th uildin uilding like a Dali painting, strewn with the skeletons of buildings, crumpled vehicles and overturned ships; now there are neat roads and traffic lights. lights But the sunken roads shops hops The sheer expanse are still liable to flood, and there are almost no houses or shops. of the emptiness is shocking. Operation Us ness and the The public cannot fail to notice the contrast between official sluggishness eva emboldened efforts of people doing things for each other. For nuclear evacuees, government health checks have been sporadic—Wakana has undergone only one full-body scan, almost a year afterwards—but citizens’ groups have increased their monitoring of nuclear evacuees for thyroid cancer and other problems. Charities have led the way in decontaminating radiation hotspots. An anti-nuclear network called the Citizens’ Nuclear Information Centre has streamed Fukushima-related news conferences live on the internet since March 11th, bypassing the self-censoring filter of the mainstream media. 26

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In the tsunami-ravaged regions, volunteers have crowded back to the furusato, or home towns, their parents abandoned years ago. This has been vital in places like Rikuzentakata, a fishing port three hours’ drive north of Fukushima, which was almost obliterated. It lost 2,200 people to the wave, about 10% of its population, including 100 municipal workers, about a third of the total payroll. It needs all the manpower it can get. Yet for all the solidarity, many of the volunteers, like the communities themselves, are disappointed with the results. One official at an aid organisation in the Rikuzentakata area says that the recovery has been plagued by tatewari, the “stove-pipe” thinking of the individual bureaucracies. For instance, in rescuing the fishing industry, the first dose of aid went via the fisheries ministry to the trawlermen; ice-makers, without whom the catch rots, fell under a different ministry and got nothing. “Even after the disaster, the ministries put their own interests ahead of the victims,” says the official. Without non-profit organisations, many victims of the disaster would have fallen through the gaps. “The local NGOs are getting more and more power,” says the official. “This is self-sufficiency, since the government and ministries do not do much of the work.”

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And there is much work to do. The tsunami left an estimated 22.5m tonnes of debris scattered across Japan’s north-east coast—the equivalent of possibly 20 years of municipal waste. Only 6% of it has been permanently disposed of (see map). Massive mountains of carefully sorted tyres, planks and other detritus rise like burial mounds along the coastline, lapped by a now gentle sea. Much of the farmland is contaminated with sea water; it will take several years for the salt to be washed out. In Rikuzentakata, as in many places, very little rebuilding has begun, other than rows of temporary houses that have commandeered school playing fields. The faint traces of concrete foundations in the earth are a poignant reminder of the town that has been lost. Disillusion with government is not just felt in the north-east. It spreads throughout Japan, and has origins that go much further back than last year. Something similar was at play when, in 2009, voters ended almost 55 years of uninterrupted rule by the Liberal Democratic Party (LDP) and subsequently fell out of love with the Democratic Party of Japan (DPJ) that replaced it. But since March 11th the disillusion has grown a lot stronger. In an annual study released in January, Edelman, a public-relations firm, found that the Japanese people’s trust in their national institutions, which had long been flat, had plummeted: it now hovers just above that seen in Vladimir Putin’s Russia. The nuclear accident clobbered faith in government officials and power companies. Trust in the media also dived. Even municipal authorities are now openly distrustful of the central government. Three mayors of towns near the Fukushima plant boycotted a meeting with government ministers in February about burying radioactive soil. “The government lies all the time,” said one. Ask Yoshihiko Noda, the prime minister, about the breakdown of trust and he admits there is a perception that the government’s response has been slow. He points to the temporary housing and numerous reconstruction budgets as evidence that the government has in fact “rolled up its sleeves”. The ruling and opposition parties, he says, have worked “shoulder-to-shoulder” to help victims. Visit the stricken north-east, however, and a different story emerges. Political bickering in Tokyo delayed reconstruction efforts for at least three months, say local officials. For a while the LDP refused even to meet the prime minister in person, in effect obstructing relief efforts in the hope of forcing a snap election. The DPJ was rife with internal tensions that forced out the prime minister of the time, Naoto Kan. Mr Noda says, appealingly, that it is up to the local communities to decide how the reconstruction money is spent. But projects must fall into one of 40 predetermined 28

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categories; the funds are doled out in tranches over time; and the reconstruction agency’s policy and guidance manuals run to more than 130 pages. Outdated rules persist. For instance, Rikuzentakata was unable to build a supermarket because of zoning laws aimed at protecting small shopkeepers. As many small shops were engulfed by the sea, coddling them is hardly a pressing matter. What counts is having somewhere to shop. Many rules thwart the recovery, says Futoshi Toba, the beleaguered mayor. Although people feel anger and frustration towards Tokyo, they know they still depend on it. They doubt their overstretched local authorities are up to the task, and want wise policymaking support from the central government of the sort that, for good or ill, used to be a hallmark of the Japanese state. There is a feeling that they are getting little attention, and that what they do get is from second-rate civil servants—the top brass being too self-important to leave Tokyo. As for the mainstream political parties, almost everyone in the affected areas sees them as part of the problem. Even now, Mr Noda’s political priority has little to do with the tsunami: it is the consumption tax, which he wants to raise to prevent a financial meltdown. Once again, the spectre of parliamentary upheaval looms. If Mr Noda’s government is forced to call a general election on the issue, as the opposition is demanding, progress in the north-east may once again grind to a halt. The fire last time As acute as these criticisms are, they pale beside the damage that the nuclear crisis has done to people’s faith in authority. Mr Noda says, rather blithely, that “everyone has to share the pain of responsibility” for what happened at Fukushima. Indeed, much of society, excluding an anti-nuclear fringe, happily accepted the “safety myth” that enabled Japan to cram 54 nuclear reactors on one of the world’s most earthquake-prone archipelagos. But if people bought the myth, it was because successive LDP governments, ministries, big-business lobbies, media barons and university professors sold it to them. Accidents such as Three Mile Island in Pennsylvania in 1979 and Chernobyl in 1986 caused barely a flicker of hesitation over the building of more nuclear plants in Japan. For years, safety breaches were covered up and regulators looked the other way. They gave a virtual free hand to powerful regional monopolies like Tepco, the firm that operated Fukushima Dai-ichi.

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Within hours of the blackout that left that plant without the power to cool its reactors, it became clear that there was no comprehensive disaster-management plan. Mr Kan, the prime minister at the time, had to improvise, which often involved yelling at regulators and Tepco executives. Mistrust between the DPJ and Tepco, which had long supported the rival LDP, made matters worse. So did Mr Kan’s despair at the civil servants around him, many of whom came from the elite University of Tokyo. Mr Kan, who attended the more practical Tokyo Institute of Technology, appears to have found them so unbearable that he appointed his own kitchen cabinet of crisis advisers, some of them friends from university days. One of those advisers, Hiroshi Tasaka, a former nuclear scientist who served Mr Kan from a few weeks after the disaster, says it was a matter of “luck” that things did not get far worse. A worst-case scenario suggested that parts of Tokyo itself might have had to be evacuated. At the darkest moment, after a third meltdown and a third hydrogen explosion, Tepco prepared to pull out its employees. Only a life-risking effort by 70 brave workers brought things back from the brink. Mr Tasaka fears lessons have not been learned. If there were another disaster tomorrow, the prime minister still could not call on specially trained experts or employ the full legal powers to cope with it, for example by ordering evacuations. A full review of how to reform regulatory structures is awaiting the conclusion of a string of investigative committees. Given the uncertainties, it is little wonder that 52 of the country’s 54 nuclear reactors are now off-line—their power replaced by old thermal plants working at full capacity. Sounds of silence Possibly the most sensitive source of popular disquiet relates to information on radiation. This was partly held back to avoid causing panic. In some instances that may have been justified—though experts like Tatsuhiko Kodama, head of the Radioisotope Centre at the University of Tokyo, say there was no excuse for the bogus assurances that there was no risk to public health. “What makes me most angry is the censorship,” he says. The information that ministries had on the spread of radioactive fallout in the early days of the crisis was not shared with Mr Kan, nor, just as important, with the families of children like Wakana Yokoyama, who were evacuated to areas of even greater danger. Greenpeace, an environmental group, accuses the government of changing its standards on acceptable levels of radiation with no thought for the 30

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snap election over the consumption tax, voters may well start to cast around for alternatives to the DPJ and LDP. In the past year the outspoken pro-business mayor of Osaka, Toru Hashimoto, has caught national attention, and has launched a political party that might field candidates in an election. Mr Hashimoto’s rise is not a direct reaction to the tsunami; his support is mostly in the west of the country. But if his party enters national politics, it is likely to cause upheaval. Some worry that his slick style could veer towards shallow populism. Voters may not much mind; he represents change.

varying degrees of risk they pose to children and pregnant women. Hospitals were also evacuated, causing many doctors and nurses to leave the area—and therefore making it more difficult to conduct regular radiation checks on children.

The culture of suspicion could have dire consequences. Japan’s enormous debts are propped up by its citizens’ willingness to buy government bonds. If they stop doing so, who else will? And if a lack of trust keeps the nuclear power plants shut down for lack of convincing regulatory reforms, industrial firms, already squeezed by a strong yen, may accelerate their move out of Japan. Elections or no, the political class needs to be much more serious about restoring the trust it has lost. One year old, too

In this it might learn from Japan’s businesses, which—as the public has noted— have weathered the crisis much better. Large manufacturers agreed to change their operating hours to balance their energy use, and sent teams of engineers to restore supply

Disenchanted as they may be with all this, the Japanese have mostly avoided noisy expressions of protest, other than a spate of anti-nuclear demonstrations. But if Mr Noda calls a 31

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chains quickly. A government survey showed that there was almost no long-term loss of business from firms switching suppliers after the disruption. Toyota, the biggest car company, has tapped into the self-help mood by announcing plans to construct its own power plants at a newly built factory in the north-eastern region of Tohoku, which it will feed into the grid to help the local community in the event of power cuts. It is deeply worried about a stable supply of energy because of the closure of nuclear power plants. “We call it self-defence,” says Shinichi Sasaki, its executive vice-president. Aeon, Japan’s largest supermarket chain, has set itself much tougher safety standards than the government’s to ensure that food is radiation-free. It is conducting its own checks. With greater self-reliance may come a new vitality. One of the most pressing needs of the country is a revival of the entrepreneurial spirit that emerged after the second world war. If Japan is to phase out nuclear energy, it will need to pour copious human, intellectual and financial capital into new sources of power, while also breaking up the monopolies that dominate the industry today. A willingness to consider politicians from outside the mainstream may bring fresh air into Japan’s stuffy politics. And any hints that people are prepared to challenge authority, however quietly, may press more of the elderly men who run Japanese companies to let a younger generation take charge. One sign of change is that a few prominent businessmen have bankrolled their own inquiry into the Fukushima disaster. Under their auspices a new think-tank, the Rebuild Japan Initiative Foundation, has gathered leading figures from media, business and technology and produced evidence of what went wrong. In a land where seniority reigns, Koichi Kitazawa, the panel’s chairman, notes that the younger experts were able to solicit much better information than their elders. Change in Japan is usually visible only with hindsight. The mood, as one disenchanted civil servant puts it, recalls the moment before the end of the second world war when many Japanese soldiers and civilians realised the generals were leading their country to disaster, but dared not speak out. The earthquake, tsunami and nuclear accident have been the biggest shock to Japan since those dreadful days. But if the people find a voice, there may yet be hope of revival.

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United States The Republican nomination

No end in sight There was something for all the contestants to hang on to on Super Tuesday. But Mitt Romney still looks like the eventual winner

“WE’RE counting up the delegates for the convention, and it looks good,” declared Mitt Romney on March 6th—“Super Tuesday”—the biggest single day in the race for the Republican presidential nomination. And so, up to a point, it did: Mr Romney, the front-runner, won six of the ten states holding primaries or caucuses, including a narrow victory in Ohio, the most fiercely contested. He performed just as well in terms of delegates to the Republican convention in August, where the nominee is formally selected, securing over half of those on offer. He now has well over twice as many delegates as his closest rival, Rick Santorum, and is over a third of the way towards the 1,144 needed to prevail. And yet it was still a lacklustre night, in many ways, for the presumed but unloved nominee. Rick Santorum, a former senator from Pennsylvania and Mr Romneyÿs main rival, won three states ü North Dakota, Oklahoma and Tennessee ü and came within a percentage point, less than 11,000 votes out of 1.2m cast, of Mr Romney in Ohio. Newt Gingrich, a former speaker of the House of Representatives who was once seen as the gravest threat to Mr Romney, won his home state of Georgia, the largest single prize of the night. And in Virginia, where bureaucratic obstacles kept all Mr Romneyÿs rivals off the ballot save Ron Paul, the laggard in the field, Mr Paul managed to win 40% of the vote. 33

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Mr Romney prevailed in a creditable array of states, from Idaho, which is fiercely conservative, to Massachusetts, a liberal bastion where he served as governor for four years. According to exit polls, he won a clear majority of voters who were looking for the candidate best placed to win the general election and of those whose chief concern was the economy. His victory in Ohio is especially significant, both because Mr Santorum would have been massively bolstered by a win there and because it is a big swing state, with 18 electoral-college votes, that will be pivotal in November. No Republican has ever won the presidency without winning Ohio, and no Democrat has done it since Kennedy in 1960. But the exit polls suggest that Mr Romney continues to struggle with supporters of the tea-party movement, with evangelical Christians and with those who describe themselves as . He has not yet won any Southern states, bar Florida and his notional ascendancy in Virginia. He seems to have done well in conservative spots in the West more out of religious than ideological affinity: a big share of Republican primary voters in that part of the country are Mormons, like Mr Romney. In short, Mr Romney has not yet won over the heart of his party. Mr Romney

s limp performance was all the more striking because he and his

backers outspent his rivals by a huge margin across the board. Mr Santorum claimed to have spent only one dollar for every 12 of Mr Romney s in Ohio. That sounds like an exaggeration: most observers put the ratio at something more like four to one. Either way, though, Mr Santorum was fighting an uphill battle yet still nearly triumphed. Perhaps more embarrassing, Mr Romney s camp spent far more than Mr Santorum in Tennessee, but still went down to defeat. He even outspent Mr Gingrich in Georgia, yet he lost there by over 20 points. The gulf in spending, chiefly on negative advertisements, has allowed Mr Romney s critics to argue that he is winning not by selling himself to voters but by using vast amounts of cash to smear his rivals over the airwaves. If he wins the nomination, they point out, he will not be able to repeat this trick since he is unlikely to enjoy such an overwhelming financial advantage. The other candidates, rehearsing such arguments, all say that the race is far from over. They all gave defiant speeches on the night, trumpeting their achievements and vowing to fight on. Mr Santorum immediately began campaigning in Kansas, which is the next state to vote, on March 10th. Mr Gingrich has set his sights on Alabama and Mississippi, which vote three days later. None of these states looks 34

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like fertile territory for Mr Romney. Mr Paul, for his part, not only says he is staying in the race until the convention, but has never categorically ruled out running as an independent. Inequality

The gap widens, again No more than a temporary blip from the Great Recession OCCUPY WALL STREET may be long gone from lower Manhattan, but worries persist about the gap between Americaÿs richest 1% and the rest. Talk of inequality pervades the presidential race. In his January state-of-the-union message, Barack Obama called the struggle for a level economic playing field Āthe defining issue of our timeā. Republicans bristle at the notion. In February Rick Santorum, the second-placed Republican candidate, declared: ĀThere is income inequality in America. There always has been and, hopefully, and I do say that, there always will be.ā New income data from Emmanuel Saez, an economist at the University of California at Berkeley, may fan the flames. Mr Saez is well known for his work on tracking the share of national income that goes to the highest earners. From Internal Revenue Service tax numbers he has constructed a series of data going back to 1913 that has helped frame the debate over rising inequality in America. On the eve of the Great Recession, his numbers show, income gaps reached extremes last experienced in the late 1920s. The top 10% of American earners brought in 46% of the nationÿs salary income in 2007. The top 0.1% alone earned over 12% of all salary income. These striking totals capped years of rising inequality. Between 1993 and 2010, over half of all real income gains in America flowed to the top 1%.

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The recession then took a heavy toll on the rich. Between 2007 and 2009 the inflation-adjusted income of the bottom 99% dropped by 11.6%, the largest decline seen since the Depression. The top 1% suffered a much larger drop of 36.3%, substantial enough to suggest the possibility of a break in the previous trend. The distribution of incomes in America levelled off sharply in the 1930s and remained flat until the late 1980s (see chart). A repeat performance seemed possible. That now looks less likely. On March 2nd Mr Saez updated his figures to the end of 2010. The new data reveal a rebound in the fortunes of the rich. From 2009 to 2010, the top 1% of earners enjoyed an 11.6% rise in income while the rest of the workforce saw a gain of just 0.2%. Renewed gains at the top are not surprising. Declines in high incomes during the recession were driven by a collapse in stock prices, which have since roared back to their levels of before the crisis. By contrast, salary income has scarcely budged. Excluding capital gains, the top 10% of earners captured a near-record share of income in 2010. More increases may follow. Mr Saez argues that there was little reason to expect enduring change from the Great Recession. The Depression hurt the rich, but it was the regulatory and tax changes that followed which made a lasting impact on income distribution. Regulatory reform in the wake of the latest crash has been far more restrained. Despite some Democrats Obama proposes to cut the deficit by returning the top marginal income-tax rate to the 39.6% level of the late 1990s. Between 1932 and 1944, by contrast, the tax rate on top incomes rose from 25% to 94%. Such confiscatory rates are hard to imagine now. But the resumption of the pre-recession trend may change the political debate. College enrolment

Snob nation Surging enrolment may help explain a labour-market puzzle ON FEBRUARY 25th Rick Santorum, the second-ranking Republican presidential hopeful, called President Barack Obama a snob for advising everyone to get 36

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themselves a college education. America, apparently, is a nation of snobs. In a recent poll 94% of parents said they expected their children to go to college. And in January almost 60% of Americans aged 16 to 24 were enrolled in school, an all-time high for that month . Enrolment has been rising for decades, egged on by parents, presidents of both political stripes (not to mention Mr Santorum, when a senator) and the rising wage premium that college graduates command. The recession added an extra kick. Enrolment rose from 57% in the 2007-08 academic year to 59% in 2010-11.

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With fewer people entering the labour force, there are fewer job hunters to be counted as unemployed.

Unemployment always hits the young particularly hard, reducing the opportunity cost of going back to full-time education. An expansion of both federal Pell grants, from 5.5m in 2007-08 to 9.6m in 2011-12, and of college tax credits has helped defray costs, which may help explain why the share of students holding down jobs also dropped sharply after 2008.

Not Mr Santorum’s favourite person

The drop has been by far the largest among 16-to-24-year-olds; their participation rate has dropped almost five percentage points since 2007. Alan Krueger, the chairman of Mr Obamaÿs

This trend sheds light on one of the central mysteries of the recovery: why so many people have left the labour force. The proportion of the working-age population that is working or looking for work (the participation rate) has fallen from 66% in 2007 to below 64% in January. This has been an important part of the reduction in the headline unemployment figure.

Council of Economic Advisers, reckons this can explain almost a third of the drop in the overall participation rate. That puts a different spin on a trend most economists have seen in a drearier light. They thought a lacklustre economy was suppressing 37

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participation by driving discouraged workers out of the labour market altogether, and that participation would rebound along with the economy. Mr Krueger agrees that part of the drop is due to lack of demand for labour because of the recession, but thinks something else is at work: the underlying trend in participation in the past decade has already been falling because of an ageing work force and a downdrift in participation by women. It may tick up in coming years as the young people now in college graduate. When they do, Mr Krueger notes, they will have more human capital, which will, with luck, earn them higher wages and boost the economy omy s overall potential. Which would be all to the good, since they will have hefty student loans to repay. Correction: This article originally suggested that 60% of Americans aged 16 to 24 are enrolled in college. In fact, that proportion are enrolled in school of some sort, be it college, high school, etc. This was changed on March 12th 2012.

Contraception

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The rubber ber hits the road The next chapter of the endless contraception controversy ĀDEAN HELLER just took the war against women to the next level,ā declared Shelley Berkley on March 1st. Ms Berkley is a Democrat vying to oust Mr Heller, Nevadaÿs junior senator. Mr Heller had just voted to let employers refuse to pay for contraceptives and other services. Democrats defeated the bill, but the vote had its desired effect. Ms Berkley and other Democrats have a new weapon to fight Republicans. Conservatives can use the vote to bash Democrats with equal gusto. Barack Obamaÿs requirement that insurers must cover contraception, with no cash payment from patients, has occupied the headlines for more than two months. At first, the fight involved only the White House and horrified Catholic bishops. Now others are leaping into the ring. Senate and congressional candidates have seized the issue as their own. State legislatures are considering bills to counter Mr Obamaÿs rule. Voters may be sick of the debate, but political strategists are not. The fight appeals for two main reasons. First, it ignites the passions of each partyÿ s base. Second, its arguments are simple. Conservatives say the requirement undermines religious freedom, forcing employers who do not believe in contraception to pay for it. Democrats say Republicans are playing politics with womenÿs health. 38

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Though the arguments are uniform, the brawl takes a different form in different places. Seven states, led by Nebraska, filed a lawsuit on February 23rd to challenge Mr Obamaÿs requirement. Nebraskaÿs Republican attorney-general happens to be running for the Senate. Other Republicans are simply using the rule to rekindle fury over health reform. Claire McCaskill, a Democratic senator from Missouri, already faced a tough re-election. The contraception kerfuffle has not helped. ĀThey put government in charge of our health care,ā purred a recent Republican advertisement. ĀNow what are Barack Obama and Claire McCaskill focused on? Regulating the Catholic church.ā Democrats in Montana and North Dakota are similarly vulnerable. Democrats such as Ms Berkley, meanwhile, are casting the fight as an assault on women. Republicans are helping to make the case. Rush Limbaugh, a radio host, recently called a law student who supported Mr Obamaÿs rule a Āslutā and a Āprostituteā. Ms McCaskill is one of many trying to bathe in the vitriol. On March 3rd her campaign reminded supporters that Mr Limbaugh had not just sexually insulted the student, but had called Ms McCaskill a Ācommie babe liberalā. The letter then asked for a donation. This jousting will continue, predicts Jennifer Duffy of the Cook Political Report. It is unclear how the tenor may change as November approaches. If Republicans continue their recent streak, they risk alienating independents. In the meantime, state legislatures are taking matters into their own hands. On March 1st, the same day that the Senate defeated the Republicansÿ contraception bill, Arizonaÿs House passed a similar measure. New Hampshireÿs House passed its own bill on March 7th. Another proposal is brewing in Missouri. If the bills become law, they will conflict directly with Mr Obamaÿs rule. And so the brawl drags on. High-speed trains

Going nowhere fast Even California, Americaÿs last big hope for high-speed trains, is reconsidering NOT long ago, Barack Obama was hoping that high-speed trains would provide America with the desired Ā twofer ā . First, building the special tracks and locomotives would put a division or two of Americaÿs army of unemployed back to work. Then, once built, the trains would get people out of cars and planes and to 39

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their destinations in a way that would be cleaner and use less foreign oil. But those dreams have mostly died. Republicans have decided that government spending, not outdated infrastructure, is the real bogeyman, and Republican governors in Florida, Wisconsin and Ohio have rejected federal money to begin building.

ᰤ Must the e drea dream die? Only in California does the dream live on. As Governor Jerry Brown, aged 73 and a Democrat, likes to remember, another big railway project in the 19th century connected the young state to the rest of America. In the 1960s his father, Pat, served as governor and built ambitious aqueducts and highways. In the 1970s Mr Brown himself became governor for the first time, and had visions of his own grand projects. These, as much as his theological bent and his liking for meditation, earned him the nickname ĀGovernor Moonbeamā. Today Mr Brown still sparkles as he mocks the Ā dystopian journalists ā and Ādeclinistsā who obstinately fail to see that Californiaÿs population will grow from just under 38m now to about 50m in 2030; and that, unless the state has something like Japanÿs bullet trains, Californians will choke in traffic jams or go mad waiting for delayed flights in inadequate airports. Of late, he has compared his stateÿs planned high-speed train to the Panama and Suez canals. And he has added that if China, Germany, Spain and Japan can build one, there is no earthly reason why California shouldnÿt do so too. California ÿ s voters used to agree. In a 2008 ballot measure (before Mr Brown 40

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became governor for the second time), they approved $9 billion in bonds to fund just such a train. As advertised, it was to connect the two big population centres, Los Angeles and the San Francisco Bay area. Speeds were to reach 220mph, giving a travel time of less than three hours; the project was to cost $33 billion and be completed as early as 2020. Then the iron law of infrastructure projects asserted itself. According to current estimates, the train would in fact cost three times as much or more, and take 13 years longer to build. Mr Obama still wants to help; he has asked Congress for $35 billion in railway funding over five years, of which $3.5 billion may go to California. But even with the bond funds, those dollops would cover less than 13% of the estimated cost. Republicans are in no mood to allocate more. It gets worse. After the ballot measure, it was decided that construction should begin not in the two population centres but in the vast and flat farmlands of the Central Valley, where building is much easier. This means that funds could run dry before the big cities are even connected to the network. A high-speed train would then run through sparsely populated countryside, with hardly anybody riding it. Some call this a Ātrain to nowhereā, others a white elephant. Using a rather more original metaphor Richard White, a professor of history at Stanford, calls it Ā a Vietnam of transportation: easy to begin and difficult and expensive to stop.ā Counter-terrorism

A snoop too far Has New Yorkÿs police department crossed a line? BECAUSE of the September 2001 attacks, the New York Police Department has become a sophisticated counter-terrorism agency. In the decade since then the NYPD has increased the number of detectives on a joint task-force it has long operated with the FBI from 17 to more than 100. It hired a former senior CIA spook to head its intelligence division. Detectives have been posted all over the world, in Abu Dhabi, Amman, Israel, London and Madrid, among other places. Scores of native speakers of around 50 languages, including Arabic, Dari, Persian, Urdu, Pushtu and Bengali, have been hiredüsome say the NYPD has more Arabic speakers than the FBI. It has, at times, irritated both the CIA and the FBI, who are jealous guardians of their turf. But the results have spoken for themselves. Several plots to devastate New York have been foiled, including plans to blow up the 41

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Brooklyn Bridge, the stock exchange and Times Square. The NYPD has been duly applauded for all this. Last year Barack Obamaÿs head of counter-terrorism called its efforts Āheroicā. But now it may have overstepped the mark. According to an exposé by the Associated Press, the NYPD has been monitoring Muslims not just in New York, but also across the Hudson river (and the state line) in Newark, New Jersey. It appears to have done so for no better reason than that its targets practise Islam. A 60-page Ādemographicsā report about Newarkÿs Muslims, compiled by NYPDÿ s Intelligence Division, includes photographs of shops, restaurants and a school that are owned or frequented by Muslims. It also catalogues information about Muslims on Long Island. And the NYPD has kept a close eye on students on several campuses in the north-east, including Rutgers, Columbia and Yale. An undercover w cop apparently even went with students on a white-water rafting trip. oups are a angry and anxious about all this. Parents are Muslims and civil-rights groups advising their children not to join Muslim student groups. Azka Mohyuddin, one such student, worries that her name will end up on a Ādo-not-flyālist. Cory Booker, stie, ie, New N Newark ÿ s mayor, and Chris Christie, Jersey ÿ s governor, who were not informed about the NYPD ÿ s activities, are not happy either. New Jersey ÿ s attorney-general is looking into the matter, and the federal Justice Department is wondering whether to investigate the complaints. This being America, a class-action lawsuit is looking likely. But Ray Kelly, the police commissioner, defended his force in a speech on March 3rd, saying it would be folly to ignore what takes place outside the city. Ā If terrorists are not limited by borders and ot lim boundariesā, he said, Āwe canÿt be either.ā At the federal level, mechanisms are in place to keep agents in check. In New York the NYPD has to abide by the so-called Handschu guidelines, which are designed to keep the police from investigating a person or group solely because of politics or religion; they need something concrete to go on. But the guidelines were relaxed after the 2001 attacks, and are anyway open to broad interpretation. Faiza Patel of the Brennan Centre for Justice feels that an independent oversight authority, like the inspector-general in Los Angeles, may be needed. The irony about this surveillance, says Eugene OÿDonnell of John Jay College of Criminal Justice ü a former policeman himself ü is that it is alienating the very groups the NYPD need to keep sweet in order to induce them to give information about extremists. ĀThis dragnet approach was a recipe for trouble,ā he says. 42

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Building mosques

Answering the call Despite opposition, the number of mosques in America is increasing IN EARLY 2010 opponents of a proposed mosque in Murfreesboro, Tennessee, spray-painted Ā NOT WELCOME ā on a sign announcing the new building. Simple-minded vandalism, perhaps; but their scrawl captured the feelings of an increasingly noisy segment of Americaÿs population. In the months that followed, nasty disputes erupted over planned mosques in Wisconsin, California and New York. Some suggested that Islam did not deserve protection under the first amendment, which guarantees freedom of religion as well as speech. Yet these mosque projects and others continue. Since the terrorist attacks of September 2001 Islam in America has flourished. The number of mosques has nearly doubled over the past decade, rising from 1,209 in 2000 to 2,106 in 2011, according to a new report from a multi-faith coalition.

Several factors explain the building boom, says Ihsan Bagby of the University of Kentucky and the reportÿs main author. The growing size of Americaÿs Muslim population has created a need for more mosques, partly as a reflection of the religionÿs growing diversity. Muslims are also increasingly moving away from the cities, where most mosques are sited. The proportion of mosques in the suburbs has grown from 16% of the total in 2000 to 28% in 2011. These findings will probably further rouse those who are worried that radical Islam will take root in America. But the report suggests such worries are misplaced. 43

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United States

Nearly 90% of mosque leaders say they have seen no increase in radicalism among young Muslims. And most also say that they take a flexible approach to Islam rather than strictly interpreting its texts. Other findings back up an earlier report from the Pew Research Centre, which showed that most Muslim Americans have assimilated. Nearly all mosque leaders agree that Muslims should be involved in American institutions and should take part in American politics. They even seem unfazed by the scrutiny of a suspicious government (see article). Only a quarter say they believe American society is rnme nm hostile to Islam, well down from 54% in 2000. As with other religions in America, the main challenge facing Islam is not radicalism, but secularisation. The good news for mosque leaders is that there is a growing pool of prospective worshippers. The numbers in the report, if accurate, cast doubt on previous estimates, which have put Americaÿs Muslim population at between 1m and 3m. Mr Bagby thinks the number is closer to 7m. Enthusiasts for plea America ÿ s diversity will be pleased to hear that. Others, unfortunately, will be alarmed. Lexington

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The view from mT Tehran What might Ayatollah Ali Khamenei be making of Americaÿs noisy Iran talk this week?

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HERE in Iran I have been finding it hard to make sense of all the strident utterances about the Islamic Republic emanating from America ÿ s capital this week. Being Supreme Leader, I need to understand what my enemy is thinking. Being an ayatollah, I can modestly say that I am something of an expert in textual exegesis. Nonetheless, I confess that Iÿm puzzled. The first thing we need to know is whether America or Israel intends to attack our nuclear facilities, and if so when. So I decided to read first what Barack Obama told Israelÿs visiting prime minister, Binyamin Netanyahu, and the 13,000 delegates to the annual policy conference of the mighty American Israel Public Affairs Committee (AIPAC), as the Zionist lobby is known. From the beginning of his presidency, Mr Obama has pronounced himself determined to prevent our revolution from acquiring nuclear weapons. This week he seemed to sharpen things up. He told AIPAC that prevention meant prevention. Contrary to some reports, he did not intend merely to Ācontainā a nuclear-armed Iran but to make sure that we never got a bomb in the first place. Moreover, stopping it was in Americaÿs national interest, not just in Israelÿs, and to this end all options, including military ones, were on the table. So far, so clear: Mr Obama may attack if we proceed towards nuclear weapons. He seems utterly unimpressed by my assurances that we do not want one. On the other hand, he is not thirsting for a fight. His main point this week seemed to be that the sanctions he imagines to be Ācripplingā should be given time to work and that this was therefore not the moment for Āblusterā. Too much Āloose talkā of war had already helped Iran, by driving up the price of oil. He said it would be better right now to heed Teddy Rooseveltÿs advice to speak softly and carry a big stick. From here in Tehran it looked as if the intended recipient of Mr Obamaÿs strictures was the leader of the Zionist entity, which the American hegemon does so much to prop up. It was therefore a little startling to see Mr Netanyahu, speaking to AIPAC a day later and only hours after visiting the White House, pay almost no heed to what his American patron said. Far from speaking softly, this Zionist upstart presumed to mimic the roar of Winston Churchill, the unlamented British imperialist. Israel, he said, could not give diplomacy and sanctions much longer to work. As prime minister, he would never let the Jewish people live Ā in the shadow of annihilation ā . Those who argued against stopping Iran from getting a bomb were like those who in 1944 refused the Jewish plea to bomb the alleged death factory in Auschwitz. ĀWe deeply appreciate 45

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the great alliance between our two countries,ā he said, Ābut when it comes to Israelÿs survival, we must always remain the masters of our fate.ā Though ayatollahs are well versed in subtle distinctions, I am not quite sure how to interpret this apparent rift between the Greater and Lesser Satans. Mr Netanyahu sounds seriously reckless. It is even possibleüand this is a worryüthat he is not altogether rational. Will little Israel, with its 8m people, really dare to go to war alone against our 80m? Perhaps this is just a bluff, to goad Mr Obama into further sanctions, ions ons or make him take the military action he plainly wants to avoid. On the other hand, what if Israel does launch an impetuous attack, in defiance of Mr Obamaÿs plea for time? Would the American president still feel obliged to defend Israel from the consequences of its own folly? Maybe not. I am looking now at a transcript of a press conference in the White House on March 6th, the day after Mr Netanyahuÿs speech to AIPAC. Mr Obama says here that Israel is a sovereign nation that has to make its own decisions about its national security. But then he adds this: One of the functions of friends is to make sure that we provide honest and unvarnished advice in terms of what is the best approach to achieve a common goal ü particularly one in which we have a stake. This is not just an issue of Israeli interest; this is an issue of US interests. It s also not just an issue of consequences for Israel if action is taken prematurely. There are consequences to the United States as well. a will be incandescent if Israel That can surely mean only one thing. Mr Obama provokes a war which he has said is not yet necessary, and on the eve of an election. And now that I have agreed to let my nuclear experts start talks again with the Europeans, Americans, Russians and Chinese, the Zionists will find an attack even harder to justify. True, the sanctions are hurting, but while these talks continue (we know how to spin them out), and for as long as Mr Obama continues to call the war talk Āblusterā, it is tempting to conclude that our programme is safe from bombing. The Republican angle That said, I did not become Supreme Leader by being naive about America. It is a flighty country, whose policies chop and change as presidents come and go. As Supreme Leader, Iÿve already seen out two Bushes and one Clinton. Next year a Republican may be president, and they too have been rude about Iran this week. One, Newt Gingrich, thinks that he can magically cut the price of gasoline to $2.50 a gallon. The man is an eejit, as we say in Farsi. 46

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Mitt Romney seems a bit more serious. My aides have translated his article this week in the Washington Post and the message he sent to AIPAC. On the face of it, he sounds like a warmonger. He says that Mr Obama has Ādawdledā on sanctions, and that if he were president he would send more warships and carriers to our coast. But Iÿm not convinced. Our intelligence people point out that this Romney is just a businessman from an unloved minority sect. Our own bazaaris tend not to like war. He is probably just pandering to the Zionists, as they all do. Still, it is hard to be sure. I would feel a lot safer if we already had that bomb.

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The Americas

The Americas Brazil, Mexico and trade

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Two ways to make a car ㏨

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A dispute over trade tr in cars exposes contrasting attitudes to globalisation in Latin Americaÿs ÿs biggest economies

⾪ OFFICIALS from Brazil and Mexico are arguing over the future re of o a 2002 agreement that allows free trade in cars between them. For a decade it worked as it was meant to, and to Brazilÿs advantage, by encouraging carmakers in Mexico to specialise in larger models and those in Brazil to make smaller ones. But last year Mexican exports under the accord grew by 40% to $2 billion, while Brazil exported cars worth just $372m. Brazil has cried foul. This apparently petty dispute says much about how Latin Americaÿs two biggest economies think about trade and industry. By throwing open its market under the North American Free-Trade Agreement (NAFTA) with the United States and Canada and a host of other bilateral trade accords, Mexico has become a base from which carmakers export to both halves of the Americas, and worldwide. Volkswagen, for example, makes all its Beetles and Jettas there. Although Nissan produces some vehicles at a Renault plant in Brazil, 48

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most of those it sells in Latin America come from two plants in Mexico. In all, 2.1m of the 2.6m vehicles produced in Mexico last year were exported. By contrast, in Brazil the main aim of public policy has been to push carmakers to build local factories from which to supply the countryÿs huge domestic market. Only 540,000 of the 3.4m vehicles manufactured in the country last year were exported. Around three-quarters of Brazilÿs car exports go to Argentina. Mercosur, to which both countries belong, has long aspired roughly to balance trade in cars and car parts between the two. The Brazilians have become worried about a surge of imports that has come about partly because of the strength of the real (which has risen by 32% against the dollar since the start of 2009). Car imports grew by 30% in 2011 (and those from China by ten times as much). In December the government slapped a punitive tax increase of 30 percentage points on imports of cars whose makers lack a factory in Mercosur or Mexico. Officials then cast a tremulous eye at the accord with Mexico, which they think has become a conduit for the import to Brazil of cars largely made at the East Asian plants of global carmakers, such as VW and General Motors. Brazil now wants to change the agreement in three ways. First, it wants cars benefiting from it to have at least 40% local content. It complains that Mexico fails to enforce the current requirement for 30% local content. That is something strongly denied by Bruno Ferrari, Mexicoÿs aptly named economy minister. In any event, Mexico sees its car industry as part of a global supply chain. It is hard for it to raise local-content requirements quickly, since that would change the basis on which companies invested. In Brazil, by contrast, carmaking has long been an integrated industry, with high local content. Second, Brazil wants to extend the agreement to trucks and buses, in which it reckons it is competitive. Mexico is Ānot afraid of doing thatā, says Mr Ferrari, but only Āwith reciprocityā. At the moment, Brazil builds engines to European Union emissions standards, whereas Mexico uses both the EU standards and the United Statesÿ different (though no less strict) ones. But whereas Mexico accepts imports of both types of engines, Brazil accepts only the EU type. Mexico wants that to change. Third, Brazil wants to limit tariff-free imports by a quota similar to the one imposed on car trade in Mercosur in response to surges in imports. ĀI would rather discuss how to increase our trade than how to decrease it, ā says Mr Ferrari. Brazilian officials are making no public comment. 49

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Mexicoÿs stance reflects the openness of its economy, at least to trade in goods (many service businesses in the country are in the hands of cosseted cartels). Its average tariff, weighted by the composition of imports, is 5.56%, compared with Brazil ÿ s 10.47%, according to the World Trade Organisation. In 2010 almost two-thirds of its imports entered free of duty, compared with just over a quarter in Brazil. Mexico a big shake-out of its industry when NAFTA came into effect in co suffered su 1994. A decade ago it saw several hundred thousand jobs in assembly plants go to China. But openness to global competition has made Mexicoÿs surviving industries highly efficient. production has grown again in the past two years. ent. Industrial In Manufacturingÿ s share of GDP has remained steady at between 17% and 18% since 2003. In contrast, Brazilÿs government sees the countryÿs domestic market as an asset vernm to be protected. And it sees imports from China, made even cheaper by the strength of the real, as a threat to its industry. ĀThe regional economy has been threatened by predatory competition that has taken hold around the globe,ā said Fernando Pimentel, the industry minister, last year. ĀDeveloped countries are those that have industry and we re going to protect our own.ā Yet Brazilÿs growing protectionism risks locking in high costs. The country has Āa competitiveness problem, not a trade problem, ā says Ricardo Mendes of Prospectiva, a consultancy in São Paulo. Manufacturingÿs share of GDP has fallen from 17.2% in 2000 to 14.6% in 2011. Falling industrial production was one reason Brazilÿs economy grew by just 2.7% last year. The blame lies mainly with high interest rates and other domestic burdens. Mercosur was supposed to provide a bigger market for Brazilian industry. But Brazil is now locked in a series of trade spats with Argentina, which is even more protectionist. Débora Giorgi, Argentinaÿs industry minister, and Guido Mantega, Brazil ÿ s finance minister, recently suggested that Mercosur should raise its common external tariff. That will not go down well with Uruguay and Paraguay, the groupÿs smaller members. But even if it did, it looks like a recipe for industrial decline.

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The Caribbean

A Chinese beachhead? New investors on Americaÿs doorstep A CROWD of 17,000, almost 5% of the population of the Bahamas, turned up to watch the firework display when a new national stadium opened in Nassau, the capital, on February 25th. A celebration of Āour Bahamian identity and nationhoodā, said the prime minister, Hubert Ingraham. In fact the stadium was designed and paid for by China, and built mainly by migrant Chinese labourers. China ÿ s investment and aid looms increasingly large in the English-speaking Caribbean. Not far from the stadium, China State Construction is deploying hundreds of Chinese workers at Baha Mar, a $2.6 billion resort financed by the Export-Import Bank of China. On Grand Bahama, 80 miles off Florida, Hong Kongÿ s Hutchison Port Holdings runs a giant container port; a sister company owns a clutch of hotels and casinos. Norwegian Cruise Line, whose ships tower over Nassau, is half-owned by Genting Hong Kong.

Jamaica is benefiting from $400m in Chinese aid. In Guyana Chinese companies mine bauxite and want to build a hydroelectric plant and a hotel and to modernise the main airport. Chinese firms are helping to lay fibre-optic cables linking Cuba, Jamaica and Venezuela, as well as Guyana and Brazil. Work is due to start next month on a $150m Chinese-funded childrenÿs hospital in Trinidad. 51

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Most of these investments are business ventures on commercial terms. They are welcomed by local politicians, as is the aid. Many English-speaking Caribbean countries are heavily indebted, and their economies are stagnant. But local businesses fret over competition from state-funded Chinese rivals. Ā Chinese construction has been a disaster for national development, for the local construction sector and for local labour, and no money has been saved,āsays Emile Elias, a Trinidadian contractor. Many projects, he claims, have been awarded with no public tender and end up over-budget, late or poorly built. Some see a political agenda in Chinaÿs involvement in the Caribbean. A decade ago this involved wooing islands which recognised Taiwan. Dominica switched to Beijing in 2004 in return for grants of $122m (a third of its GDP at the time). Grenada has done the same. But most of the recent investment has been in countries that already recognised China. ady re Some locals wonder why Complant, a Chinese company, has bought into Jamaica ÿ s high-cost, struggling sugar industry. American diplomatic cables released by WikiLeaks speculate that China may be investing in the Bahamas as a n for tthe demise of the Castros in Cuba. Chinaÿs Āstrategic moveā in preparation interest in the region has good Ābusiness logicā but also reflects a recognition of the Āstrategic valueā of the Caribbean, says Evan Ellis, a China-watcher at the Centre for Hemispheric Defence Studies in Washington. That motive may lie behind Chinaÿs aid programme in the area, which includes small amounts of money for the police and armed forces. Jamaicaÿs police chief has studied in Beijing as well as the United States. Yet it is hard to see the Caribbean becoming a Chinese beachhead on Americaÿ s doorstepüa mirror image of Taiwan. Despite the presence of small ethnic Chinese communities in many islands, the Caribbean continues to look north. China keeps promising a stream of tourists, but few come. Baha Mar will be managed by Hyatt and other American companies.

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Canada and Iceland

A loonie idea A rival to the euro NATURALLY enough, Canadians are thrilled whenever foreigners single out their country for positive attention ü especially when the praise raises it above the behemoth to the south. The idea that Iceland might want to ditch its battered krona in favour of the Canadian dollar, not the American version, scores high in this regard. It strokes the Canadian ego and bolsters the Conservative governmentÿs line that the economy is one of the worldÿs strongest. But is it a serious proposition? The Canadian media treated it thus when Canadaÿ s ambassador to Iceland, Alan Bones, told Icelandÿs national broadcaster on March 2nd that his government would be open to discussing the idea. Otherwise serious commentators pointed out that Iceland and Canada were both resource economies and shared an interest in Arctic matters. Economists said there were few technical problems in Iceland abandoning the krona and adopting the loonie, as the Canadian currency is known.

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Then cracks began to appearünot uncommon in Iceland, a volcanic country that sits astride the mid-Atlantic Ridge. A speech by Mr Bones, in which he was expected to expand on the idea of allowing Iceland to adopt the loonie, was suddenly cancelled on Ottawa ÿ s orders. More important, Sigmundur Gunnlaugsson, the leader of the opposition Progressive Party, which seemed to be pushing the idea, suggested that it was just a ploy to force Icelandÿs government, which is seeking to join the European Union and possibly adopt the euro, to have a serious debate about alternatives. ĀItÿs not like we are fighting for the adoption of the Canadian dollar,ā r,ā ā he said. Polls show w that seven out of ten Icelanders are happy to ditch the krona in favour of a more stable currency, but those pulling for the loonie and the euro are evenly matched. So the Icelandic government is in a bind. Perhaps the half of the country that sits on the North American tectonic plate pulling westward should get the loonie, while the other half on the Eurasian plate pulling east makes do with the euro. Argentina and the Falklands ds

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Opposing ng w worlds A climate of nationalist agitation AS THE 30th anniversary of Argentinaÿs short-lived invasion of the Falkland Islands approaches, President Cristina Fernández continues to ratchet up the pressure in pursuit of her demand for talks with Britain about what her country calls the Malvinas. The industry minister, Débora Georgi, has called on Argentine companies to stop sourcing imports from Britain. Authorities in Ushuaia turned away two cruise ships, with several thousand tourists on board, because they had called at lights from the Falklands. And under the guise of an offer to launch scheduled flights Buenos Aires, Ms Fernández threatened to withdraw permission for a weekly commercial flight by LAN Chile from Punta Arenas which crosses Argentine airspace. The government defends all this as a response to what it says is Britain ÿ s Āmilitarisationāof the south Atlantic, with the dispatch of the Royal Navyÿs newest destroyer and of Prince William, as a helicopter pilot. Britain says these are routine missions, and refuses to comment on an Argentine claim that a nuclear submarine is in the vicinity. 54

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Even if some Argentines believe that Ms Fernández is using the issue to distract attention from approaching economic problems, most back the demand for sovereignty over the islands, which have been a British territory since 1833. The only sign of dissent came in a thoughtful open letter published last month by 17 writers and academics, who criticised Āa climate of nationalist agitationā, pointed out that the issue bears little relation to the countryÿs main problems, and called on Argentina to accept the rights of the islanders to self-determination. They were greeted by a barrage of insults and death threats. The islanders, who want to stay British, are stoical about the Argentine measures. A shortage of eggs did not last long. Most islanders keep chickens and grow their own vegetables in their gardens and greenhouses. Staples that they cannot produce, such as milk and rice, arrive by ship from Chile. The economy is more buoyant than it was in 1982, thanks to the sale of fishing licences and tourism. Ms Fernández has forsworn the use of force to retake the islands. Even if she had not, Argentinaÿs depleted armed forces would struggle to overcome the British garrison of 1,300 troops backed by four Typhoon jets. (But Britain would now find it hard to oust a better-equipped invader.) If the deepwater drilling now proceeding around the islands reveals significant quantities of oil, that might prompt Ms Fernández to attempt a full-scale economic 55

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blockade. And in a continent that is imbued with resource nationalism, and which backs Argentina ÿ s claim, this might be rather more effective than Britain is prepared to admit. Mexicoÿs election

Calderón the campaigner ⁒ The president siden iden bends the rules THE candidates in Mexicoÿs presidential election are legally forbidden to campaign until March 30th. But President Felipe Calderón, who is barred from running, is hard at it. Opponents accused him of breaking the electoral rules when, at a bankersÿ conference last month, h, he brandished a poll showing the candidate of his conservative National Action Party (PAN) just four points behind Enrique Peña Nieto, the front-runner from the centrist Institutional Revolutionary Party (PRI). (Other polls say the gap is much wider.)) Leaks say that federal prosecutors are investigating three former governors of re inv Tamaulipas, a northern border state where criminals and politicians rub shoulders. All three, who deny any wrongdoing, belong to the PRI. Last year the finance ministry exposed an accounting scandal in Coahuila, PRI-run border state. huila, another a e PRIÿ PRI s president, who had been That led to the resignation of Humberto Moreira, the Coahuilaÿs governor at the time of the alleged book-cooking. -cooki Few commentators have rushed to defend the integrity off the Tamaulipas three. One of them, Tomás Yarrington, is also accused by the United States Drug Enforcement Agency of receiving drug money (though the DEA has sometimes been hasty with such accusations). But the timing of the investigation, some of which relates to matters more than a decade ago, and the illegal leaking suggest that the aim is Āto provoke a parallel trial by the media, to fuel the perception that the PRI and the narcos are inseparable,ā says Saúl López, a law professor at ITAM, a university. Mr Calderón ÿ s government is already seen as uneven-handed in its pursuit of corruption. In May 2009 federal prosecutors ordered the arrest of ten mayors (eight belonging to the opposition) and 18 other officials in Michoacán over their alleged drug links a few weeks before mid-term elections. All were later freed. The collapse last year of cases against former opposition mayors in Cancún and Tijuana 56

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was similarly embarrassing for the government. The opposition is now worried about the impartiality of election watchdogs. Last month the attorney-general ÿ s office replaced José Luis Vargas, the head of its electoral-crimes unit. Mr Vargas recently declined to annul an election for governor of Michoacán, which Mr Calderónÿs sister had narrowly lost to the PRI. Not only did the PAN protest about these kind of shenanigans when the PRI was in power until 2000, they also risk giving the opposition grounds to impugn the result if it loses on July 1st.

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Asia

Asia Indiaÿs state elections

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A welcome slap in the face 䃒

After India a ÿ s equivalent of mid-term elections, prospects dim for Congress and economic econ reform. But Indian democracy is in rude health

䉘 IF HE had any other surname, Rahul Gandhi, commonly mentioned as a prime minister-in-waiting, would surely be pondering a new career. His ill-starred record as a political campaigner reached a new low on March 6th, when he accepted the blame for his partyÿs dreadful showing in assembly elections in Uttar Pradesh (UP). Congress won only 28 of the 403 seats in Indiaÿs largest state (population 200m), up just six from the 2007 poll. Mr Gandhi must regret his personal effort, which he grandly dubbed Ā Mission 2012ā (he campaigned full-time, with lavish funds, for over a year). He spurned an offer to join Manmohan Singh ÿ s government in Delhi. Instead he picked 58

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gargantuan UP, the old family fief, hoping that success there would compensate for Congress ÿ s fading fortunes in another big state, Andhra Pradesh. His sister, Priyanka Gandhi, joined him in the campaign, urging voters to stay loyal to the Nehru-Gandhi dynasty. They ignored her. There were similar drubbings in two other assembly elections in the five states that voted. A rally by Sonia Gandhi, Congressÿs boss, swayed nobody in Goa, where the predominantly Hindu Bharatiya Janata Party (BJP) snatched victory with Catholic support. And Mr Gandhiÿs efforts to rejuvenate the party also failed in Punjab: a local BJP ally, Akali Dal, romped back to office, the first time since the 1980s that a Punjabi incumbent has held on. Indiaÿs ruling party should be deeply worried. A general election looms in 2014 and the near-feudal power of the Nehru-Gandhi dynasty is waning. Congress cheered a narrow electoral win in Uttarakhand in the north and a more emphatic one in Manipur, a poor and troubled north-eastern state. But regional power-brokers, such as Mulayam Singh Yadav, whose Samajwadi Party (SP) won by a landslide in UP, hold increasing sway. Indian politics has long been fragmenting. The SPÿs mighty victory with 224 seats, for example, merely displaces another dominant local figure, Mayawati. Voters were offended by her governmentÿs flagrant corruption and fondness for erecting grandiose public statues of herself and other dalit (low caste) symbols. She quit as chief minister after her Bahujan Samaj Party (BSP) came second, with 80 seats and 26% support. Still, that was only just below the 30% that brought her a landslide in 2007. She will doubtless be back. Mr Singh ÿ s government, which is entangled in corruption scandals, will remain hamstrung. If the SP had done a bit worse and ended up needing Congress ÿ s support in UP, it might have helped to push reforms nationally. Instead Mr Singh is stuck with an uppity regional ally, Mamata Banerjee, who runs West Bengal, and tends to block any reforms. (Expect no invitation to foreigners to invest in Indian supermarkets.) After her Trinamool Congress party won seven seats out of state for the first time, in Manipur, she must fancy her chances in a general poll. Congress has but one consolation: fragmenting politics could be an even bigger threat to its only national rival. The BJP also did badly this week. Its tally of seats fell not only in UP, but in Punjab and in Uttarakhand. It once again got none in Manipur. Tiny Goa aside, it has done nothing to persuade regional allies it has momentum or ideas for a strong challenge in 2014. 59

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All this, however, may be rather cheering for democracy. Yogendra Yadav, an election analyst, argues that local strongholds are Āthe foundation of Indian unityā. He reckons the robustness of Indiaÿs state, in a region of otherwise fragile ones, relies on a Āthickā idea of nationhood made up of Āregional parties and centres with their own culturesā rubbing along together. Far better that, he suggests, than trying to impose everything from the centre.

Voters, too, seem to like it. Turnout out ut soa soared everywhere. In UP it rose from 46% in 2007 to around 60%. Elsewhere it reached eached 80%. An extra 24m people voted in the five states. That undercuts populist supporters of Anna Hazare, an anti-graft campaigner, who last year suggested that elected politicians are discredited in India. It is encouraging, too, that women are ever keener to take part: in all five states, female voters substantially outnumbered males. d male result show signs of a shift Perhaps most hopeful of all, the first studies of the results away from identity politics, in which voters lump together by caste or religion to back one of their own. Mayawatiÿs loss in UP was one example of the trend. The landslide re-election of Nitish Kumar as chief minister of Bihar in 2010 was another. He has sought to stand above caste politics and focus on wider development goals. Better educated or more demanding voters holding politicians to account would be hugely beneficial. Various winners this week appealed beyond their core supporters. The Hindu BJP lured Catholic Goans. The SP usually gets backing from Muslims and yadavs (lowish caste) but this time educated, urban dalits swung behind it too. Similarly the Akali Dal, in Punjab, which long relied on prosperous and landowning jats, reached out to dalits. The most successful politicians are regional figures who persuade different sorts of voter that they can bring better rule. The hapless Mr Gandhi, a national figure and scion of a ruling party in paralysis, never had a chance. 60

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Timor-Leste

Small country, big year Elections will test the stability of a state celebrating ten years of independence THE Timor Plaza in the centre of Dili could probably fit into the basement of many of Asia ÿ s megamalls, but that has not stopped it from becoming an instant landmark. Timor-Lesteÿs first shopping centre, opened last year by a Timorese who had made good abroad, has become a symbol of the tiny half-island stateÿs slow recovery from the devastation visited upon it by departing Indonesian troops and their vicious proxy militias after the Timorese voted in 1999 to end Indonesian rule. This year the country will pass more important milestones. Bracketing celebrations in May to mark the tenth anniversary of its founding, Timor-Leste will hold elections. On March 17th comes the first round of a presidential vote. In late June there will be a parliamentary poll. The hope is that a UN peacekeeping force of about 1,300 policeman will leave at the end of the year, as will a separate international force composed mainly of Australian troops. If everything goes well, internal security would be turned over to the Timorese for the first time in 13 years.

That is a big if. When Timor-Leste gained independence, there were doubts that it was even a viable state. It suffered an army mutiny and a coup in 2006, followed by the attempted assassinations two years later of the president and prime minister. Consequently, the way this yearÿs elections are conducted probably matters more than the results. If they are seen as fair and peaceful, that will trigger the UN withdrawal and reassure foreign investors that the country has put the years of violence behind it. If things go wrong, lofty development plans, as well as Timor-Lesteÿs ambition to join the Association of South-East Asian Nations 61

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(ASEAN), could be scuppered. So far, however, so good. Sensitive to what is at stake, party leaders have agreed not to incite violence and generally to keep the political thermostat turned down. There have been few signs of trouble from much-feared martial-arts groups of unemployed youths, and campaigning has been largely peaceful. This calmer, optimistic mood is enhanced by the fact that the government of Xanana Gusmão, a former liberation leader and now prime minister, has been on a spending spree since it was elected in 2007, courtesy of revenues from the countryÿs offshore oil and gas. This yearÿs state budget, at about $1.67 billion, is 28% higher than last yearÿs. That has allowed the government to start a cash-transfer programme, giving money to favoured constituencies such as the rogram elderly and Āveteransā of the liberation struggle. It has also given many people a stake in the cash economy for the first time. And it has made the amiable Mr Gusmão even more popular. What a happy coincidence. The cash payments alone should ensure that his party, the Congresso Nacional da NRT), w Reconstrução de Timor-Leste (CNRT), wins the most seats in the parliamentary o win an outright majority. election, even if it once again fails to Mr Gusmãoÿs tactics will probably trump concerns that Timor-Leste is falling prey to a resource curse. Pumping so much money into a fragile, underdeveloped economy has already produced an inflation rate of about 17%. The main opposition party, Fretilin, argues that it is also increasing corruption uption and inequality. More important, argues Charles Scheiner of the local Institute for Development Monitoring and Analysis, over-reliance on oil Ācrowds out the policy spaceā for other ways to increase national income. Oil still accounts forr 95% 5% of government revenuesüand production has peaked. One person who has been complaining increasingly loudly is another liberation leader, President José Ramos-Horta. He is running again, yet despite his background he might lose this time. His former comrade-in-arms, Mr Gusmão, no longer backs him and the CNRT supports another candidate, a former chief of the armed forces. If Mr Ramos-Horta loses the presidency, Timor-Leste will be deprived of both an important interlocutor with the outside world and a constructive internal critic. Myanmarÿs last Jews

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Burmaÿs bimah A tale of conservation, faith and a surprising survival

AMID the bustle and crumbling masonry of downtown Yangon, there is one building that likes to keep up appearances: Myanmarÿs only synagogue. On a narrow street, tucked behind a lot of paint shops, stands the splendid Musmeah Yeshua. Dating from the 1890s, it is a reminder of a lost world and an almost vanished community. It also provides a test of how far Myanmar can change. Many of Myanmarÿs Jews came from Iraq in the 19th century to trade and set up businesses. What was then Rangoon was a flourishing port of the British empire, and the Jewish community became influential. At its peak, it numbered around 3,000. The city even had a Jewish mayor. Some of the prosperity and worldliness of those days lingers in the streets around the synagogue. Musmeah Yeshua is virtually next door to a Sunni madrassa, dating from 1914. A bit farther down the same street is a large mosque. Both of these are legacies of a Muslim influx from Gujarat, in India. Across the way is a large, gaudy Hindu temple. A few streets down is a large Hokkien temple. Methodist, Catholic and Anglican churches are all nearby. Immigrants came to Rangoon from around the world to make their fortunes.

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A virtue, perhaps, of having been isolated from the world is that several decades of religious bigotry seem not to have touched this corner of Yangon. Living and working together, Jews, Muslims and others seem to get along cheerfully enough ü in contrast to the violence between the majority Burmans and many other indigenous groups, such as the majority-Christian Kachin in the north and the Muslim Rohingyas in the west. When the devastating cyclone Nargis hit Yangon in 2008, interfaith prayers were held in the synagogue. It was to describe just such a multicultural and commercial conglomeration that J.S. Furnivall, a British colonial servant in Burma, coined the term Āplural societyā 60 years ago. After the generals took over in 1962, Myanmar turned its back on pluralism, and much else. Following waves of forced nationalisations, thousands of Indians and ws fled. fled The freshly painted interior and beautifully restored rattan hundreds of Jews benches around the central bimah (platform) are the work of only about 20 resident Jews. But the few who remain hope their numbers could swell again. That, and the encouragement of broader religious toleration, will be a test of Myanmarÿ s reforms. ars rs Taiwan, America and meat wars

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Gored red

Taiwanÿs attempt to defuse a trade row with America backfires THOUSANDS of pig farmers throwing dung in the streets of Taipei. Demonstrators marching on Americaÿs informal embassy wearing Uncle Sam hats and leering cow masks. Opposition lawmakers chanting slogans and occupying the speaker ÿ s podium in parliament, disrupting the opening session and delaying the prime ministerÿs inaugural speech. These are all episodes in a growing row over meat imports into Taiwan that is pitting America, the island ÿ s most important ally, against the vast mass of public opinionüand forcing the government of the recently re-elected president, Ma Ying-jeou, to manoeuvre frantically between the two. At issue are American exports to Taiwan of meat that contains ractopamine, a controversial growth compound fed to cattle and pigs and which is banned by Taiwan, the European Union and China. The Americans want Taiwan to lift its ban. They point out that 27 countries have found meat from animals fed with ractopamine to be safe for humans, and are asking Taiwan to set maximum residual levels for allowable amounts instead. America has made clear that unless this is 64

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done it will not agree to any new economic initiatives with the diplomatically isolated island, including bilateral tax and investment agreements. And it will not champion Taiwan ÿ s membership of the American-led Trans-Pacific Partnership (TPP), a nascent free-trade group. Yet public opinion and Taiwanese meat producers vociferously support the ban. They claim that over 100 countries ban the drug (a claim the Americans contest). Toxicologists also argue that residual concentrations of the drug are five to ten times higher in offal, which is eaten by Asians but not often by Americans. President Ma is caught in the middle. He cannot afford to offend the majority of the islandÿs citizens. A poll in mid-February found that 71% support the ban even if it harms relations with America. But he also says that getting Taiwan into a position to join the TPP is one of his main goals. His officials want to start trade-liberalisation talks with other countries because they worry that dependence on China will give the mainland too great an influence on the islandÿs economy. Restarting trade talks with America, suspended almost five years ago in a previous round of arguments over beef (this time over mad-cow disease), is high on Mr Maÿ s to-do list. So, seizing the opportune moment immediately after his re-election as president in January, Mr Ma set out to defuse the row. He told a visiting American official in February that his cabinet would take a Āfresh approachā, proposing a panel to solicit technical advice on the health risks and the feasibility of lifting the ban. This caused uproar, which quietened down only when the prime minister promised not to lift the ban before June. Squabbles broke out in parliament, with opposition members accusing the president of doing a secret deal with America (which he denies). America then called off what would have been the highest-ranking official visit in a decade, that of a senior trade diplomat. On March 6th the government put forward a new compromise: it said it supports a Āconditionalā easing of the rules, under which the ractopamine ban on meat from cattle would be replaced by maximum residue levels, but blanket restrictions would remain on imported offal from cows and on all pork. The cabinet gave no timetable for the plan, and said it would continue to discuss it. The opposition vowed to bring the government down over the proposal, which has to be approved in parliament. That approval cannot be taken for granted. Mr Ma suffered a setback over the same issue in 2010, when he agreed to relax restrictions to allow offal and beef mince from America into Taiwan, hoping to restart bilateral trade talks suspended in 2007. The resulting backlash, with the 65

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opposition playing up health and safety worries, caused his own party to turn on him in parliament and reverse the deal. His attempt to defuse the current row is a first test of the reforms he promised for his second term. It may also prove the hardest.

China 66

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The National Peopleÿs Congress

Satisfy the people As he prepares to leave the ruling Politburo, Chinaÿs prime minister warns parliament of troubles ahead

CHINAÿS prime minister, Wen Jiabao, may be glad he is entering his final year in office. In a two-hour speech on March 5th at the opening of the annual session of Chinaÿs parliament, the National Peopleÿs Congress (NPC), Mr Wen spoke of Ānew problemsā besetting Chinaÿs economy, from high prices to slowing growth. But his problem might lie in convincing citizens that his promised efforts to build a Āharmoniousā China have made progress. Mr Wenÿs state-of-the-nation address was his penultimate as prime minister, but his last as a member of the ruling Politburo. He and President Hu Jintao will step down after a five-yearly Communist Party congress in the autumn. At next yearÿ s NPC (a rubber-stamp affair that usually lasts about ten days), Mr Wen is expected to hand over to his deputy, Li Keqiang. The presidency will almost certainly be passed to the current vice-president, Xi Jinping. In his speech, Mr Wen reminded almost 3,000 hand-picked delegates that this was his last year, and called for diligent work to Āsatisfy the peopleā. This will be a lot tougher than meeting the lower-than-usual target of 7.5% growth this year that Mr Wen proposed (see article). More than any other prime minister 67

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since Zhou Enlai (who held the job for 26 years until his death in 1976), Mr Wen has tried hard to cultivate a man-of-the-people image. At a press conference after his appointment in 2003, Mr Wen boasted that he had visited 1,800 of China’s 2,000-plus counties, and that this had helped him understand people’s lives. “I know what they expect…I will live up to their trust,” he said. Their expectations, however, may have exceeded his capacity. The rest of the world has marvelled at China’s double-digit growth rates for most of the past decade, and millions of people have become richer. But many grumble that Mr Hu and Mr Wen have made less progress with their pledges to build a “harmonious society” in a way that pays more attention to people’s welfare and the natural environment. The gap between rich and poor has continued to widen. Outbreaks of unrest, many of them the result of land grabs by local-government officials, are increasingly frequent. Migrant workers from the countryside, who fill most blue-collar jobs in urban areas, are usually denied welfare benefits enjoyed by other city-dwellers.

Polls suggest that many ordinary Chinese are feeling uneasy. In I January a report by the Capital University of Economics and Business in Beijing found that the city’s “happiness index” had been declining for four years. Worries about income were cited as the main reason for the drop. A survey published in the same month by the Chinese Academy of Social Sciences showed that urban residents felt less confident that they would get richer than they felt about prospects for the economy generally (see chart). Mr Wen highlighted some achievements. Spending on health care has received a boost since efforts to provide insurance for all were stepped up in 2009. But the World Bank and the Development Research Centre (DRC), a Chinese government think-tank, in a report in February, said that government spending on health, at around 2.5% of GDP, is still lower than average among the upper-middle-income countries with which China is now categorised. In his speech Mr Wen pledged that 68

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government spending on education would reach 4% of GDP for the first time (up from around 2.5% in 2003). A budget report submitted to the NPC said that such spending by the central government had risen by 27.5% last year. Mr Wen did not remind his audience, however, that China promised in 1993 it would spend 4% of GDP on education by 2000. By the end of this year, Mr Wen said, all of rural China would be covered by a government-funded pension scheme that officials began rolling out in 2009. Rural pensioners receive a minimum of 55 yuan ($8.70) a month, which for the poorest families is a welcome boost. Mr Wen said rural incomes last year rose faster than those of urban residents for a second year in a row. They grew by 11.4% in real terms, the fastest rate since 1985. A considerable proportion of rural income comes from migrant labour in the cities. An official plan issued last month calls for increases in the minimum wage of at least 13% a year to 2015. Such measures could help to narrow wage differences between urban and rural areas (as will a diminishing supply of surplus rural labour). Mr Wen deviated slightly from the wording of last year’s five-year plan, which had called for a “gradual” narrowing of the income gap. He said the government would “quickly” reverse the widening trend and ensure that income distribution is governed by “proper standards”. He did not say how, although growing upward pressure on blue-collar wages will certainly help. The rich-poor gap is clearly an embarrassment to Mr Wen’s government (as it was to the preceding one). Caixin, a magazine, reported in January that this year the government would again publish no estimate of the Gini coefficient, a measurement of inequality commonly used around the world. The last time such a figure was officially released, it said, was in 2000. The coefficient then was 0.412 (on a scale of 0, where everyone has the same income, to 1, where one person receives all of it). America’s coefficient at that time was very similar at 0.408, but India’s was much lower at 0.32. Some Chinese scholars believe China’s is now higher than 0.5. The World Bank-DRC report says China is among the most unequal countries in Asia. During the NPC Bo Xilai, the party chief of Chongqing, a region in the south-west, used the issue in an apparent attempt to revive his tarnished image (a political ally of his had fled to the American consulate in Chengdu last month, emerging a day later to be led away by Chinese security officials). Mr Bo pointedly told a group of delegates that it was possible to have fair wealth distribution and fast growth at the same time. Alone among Chinese provincial-level governments, Chongqing has set 69

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a target for reducing its Gini coefficient. Few Chinese pay attention to the NPC’s discussions, despite efforts by official media to enliven coverage with alluring pictures (see top photo). Internet users have been more interested in examining photographs of the wealthiest delegates, some of whom have flaunted their riches by wearing expensive clothing to the meetings. Hurun Report, a company which tracks China’s wealthy, said the net worth of the 70 richest NPC delegates—many of whom are also prominent businesspeople—rose by $11.5 billion in 2011. Who’s reading what?

The East is read T ㏿

❸ The internet is changing Chinese literature

DIGITAL books are changing traditional publishing models everywhere. In America and Britain, the rise of electronic books is the cause. Chinaÿs revolution is different. ĀI canÿt identify any popular literary trend that didnÿt originate online,ā says Jo Lusby of Penguin China. Although e-readers are still scarce, the internet has greatly affected reading habits. Chinese people increasingly read books on phones, tablets and laptops. People under 30, who are most likely to own such devices, are the most avid readers, says Eric Abrahamsen, a Beijing-based publishing consultant. 70

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The result has been an outpouring of mass-market fiction, written (and read) on websites, not in print. Five years ago internet publishers were typically informal, back-room outfits, but Shanda, an online gaming company, seized the commercial opportunity and now owns most of the literary sites. It sells subscriptions by the chapter or book, by the week or month. Online novels start at around five yuan ($0.80) compared with 30 yuan for an average printed volume. Some of the newly popular online genres, such as romance, exist everywhere. Others could be termed fiction with Chinese characteristics: grave-robbing stories, for example; official corruption fables involving scheming cadres; and time-travel books where 2,000-year-old warriors pop into a contemporary Beijing disco. Some of this online material makes it into book form. Print sales, dominated by the country’s 580 state-owned publishing houses, are now worth 44 billion yuan ($7 billion). But growth has slowed from 10% a year in 2007 to around 5%, according to Yang Wei of OpenBook, a market-research firm. Like many online start-ups, Shanda is not yet making money out of web books, although revenues are growing. The internet has also changed the way that books are promoted. China has relatively few bookshops so cultural networking sites such as Douban.com have proved good at targeting new readers. Few writers make much money, online or in print. The handful of stylish novelists who do have become celebrities. Guo Jingming, a 28-year-old with six novels in 2011’s top 20 list, manages a group of young writers whose magazine Top Novel sells 400,000 copies a month. Han Han, a 29-year-old novelist turned racing-car driver, has a popular blog. Mr Han rose to fame cleverly tweaking the authorities without running foul of the censors. Today’s edgy writers, such as Murong Xuecun, can steer around the censors with their online writing, then make necessary cuts in their print editions. Most authors give the censors no trouble. They know where the line is drawn. The proliferation of television channels has created a new stable of authors, and books by television hosts populate bestseller lists. Many are self-help titles. Bai Yansong, a state television presenter, shot up the charts with “Are You Happy?”; and the popularity of “Why is our Life so Hard?”, a book by a talk-show host, Lang Xianping, says much about people’s concerns that they are not better off, despite a booming economy. Some foreign titles win commercial success. Stieg Larsson’s “Girl with the Dragon Tattoo” trilogy has sold more than 100,000 copies in Chinese. Yet publishing is a local affair, and even translated titles may be trumped by more popular Chinese 71

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imitations. Dan Brown’s “The Da Vinci Code”, for example, has been outstripped locally by his Chinese counterpart, He Ma, whose ten-part “Tibet Code” unearths ancient Tibetan Buddhist secrets. Banyan

The Buddha and the tigress ⁒ In Tibet, t, self-destruction selfhas become the latest form of defiance

A FAMOUS story tells how, in a previous ous life life, the Buddha took pity on a starving tigress, who might otherwise have had to eat her newborn cubs. He sacrificed himself instead. The tale is often recalled by Tibetans in exile in Dharamsala in northern India as they lament a seemingly endless ess cycle cyc of self-immolations in their homeland. In the past year at least 26 Tibetans, mostly young Buddhist monks, have set fire to themselves. As they burned, usually to death, they shouted slogans against Chinese rule and for the return of the Dalai Lama, their spiritual leader, who has been based in Dharamsala since 1959. The moral of the tiger parable is that, though Buddhism abhors even self-inflicted violence, it can be justified if the sacrifice is for the greater good. The agonising question, however, is whether these brave acts do anybody any good at all. The first of the recent wave of suicides, Lobsang Phuntsog, a 20-year-old monk, set fire to himself on March 16th 2011 to mark the anniversary of an uprising against Chinese rule that had flared across the Tibetan plateau three years previously. The timing of that unrest had in turn commemorated the abortive rebellion in March 1959 that led to the flight of the Dalai Lama and some 80,000 of his followers to India. Each year now loads the anniversary with some new grief to be nurtured. Already this month a widowed mother of four and a teenage student have become the first Tibetan lay women to immolate themselves. More such acts are likely throughout the month. 72

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If the purpose of the protests is to change Chinese policy, they seem woefully counter-productive. Nor have they succeeded in enlisting more than hand-wringing from foreign governments, none of which recognises the Tibetan exile government in Dharamsala. The Dalai Lama, who formally dropped his political role last year, enjoys enormous respect. But respect has no army. In China, protest has provoked not liberalisation but renewed repression, and not only in Tibetan areas of Sichuan province, where the self-immolations began. New arrivals in Dharamsala describe a pervasive Chinese security presence, severe restrictions on movement, night raids to round up activists and only sporadic access to telephone and internet links. The region has been so cut off from the outside world that Reporters Without Borders, an advocacy group, says the foreign press has a bigger presence in North Korea than in Tibet. The smart new reception centre for recent arrivals in Dharamsala tells a similar story. Built to house as many as 500 people, only one-tenth of its beds are in use. In the crackdown that started in 2008, the number escaping to India through Nepal has shrunk from about 3,000 a year to under 1,000. Those who get through tell of families making huge financial sacrifices to raise the money for bribes. Many come to India for a Tibetan education. In the past they planned to return. Now most believe they will be in India a long time. In January 7,000-8,000 Tibetans from China are estimated to have been among the vast crowds attending teachings by the Dalai Lama at Bodh Gaya in India, where the Buddha attained enlightenment. They travelled on Chinese papers. On their return, several hundred were detained. Life for the 20,000 or so Tibetan exiles in Nepal has also become tougher, as the Nepali government cosies up to China and suppresses protests. As China has prepared for this month’s anniversary, as well as for the annual session of the National People’s Congress that opened in Beijing this week, officials have been falling over each other to preach a hard line on Tibet and blame the immolations on the Dalai Lama, who has discouraged but not explicitly prohibited them. Zhu Weiqun, from the Communist Party’s United Front department, who has led China’s team in negotiations with the Dalai Lama’s representatives, has argued for another approach. In an article in a party newspaper he suggests that “some of our current educational and administrative policies have unintentionally weakened [national minorities’] sense of nationhood and Chinese nationalism.” The solution, he thinks, is to do away with the ethnic-minority status marked on identity cards 73

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and with privileges such as separate education for minorities. Yet Tibetan identity cannot be abolished by bureaucratic fiat. Tibetans say that it is wrong to see the self-immolations as futile acts of desperation. Rather they portray them as gestures of defiance, of national unity and hence even of hope. Tenzin Atisha, an official in the exiled government, who has sat opposite Mr Zhu in occasional fruitless talks (the most recent of them two years ago), remains optimistic. He notes that the Dalai Lama, who will turn 77 this year, has promised to live to the age of 113. Mr Atisha believes the Communist Party may not last that long and that the Dalai Lama will return to spend his final days in Lhasa. The only hope guine, fearing that Han Chinese immigration into Tibet will Others are less sanguine, swamp their culture, that the party will outlive the present Dalai Lama and that it may make hay out of a contested reincarnation. Already, they concede that some Tibetans have given up and decided to make the best of the subsidies and economic growth Chinese rule provides. What is remarkable, however, is that a third post-1959 generation is growing up in Tibe Tibetan areas that is largely hostile to China and loyal to the Dalai Lama. Were China only to see it that way, this could an opportunity. The Dalai Lama, d be a unlike many of his followers, has accepted Chinese sovereignty so long as Tibet has genuine autonomy, and he also opposes violence. Three recent arrivals in Dharamsala are still waiting for the audience their leader traditionally grants y can die without regrets. newcomers. They say that when they have seen him, they And they mean it. Through repression, China can doubtless continue to control ans ac Tibet. But only the Dalai Lama has any chance of making Tibetans accept Chinese rule. Correction:An earlier version of this article referred to an uprising across the Tibetan plateau as having ving happened h five years ago. In fact the uprising in question happened March 2008, only three years ago. This article was corrected on March 10th 2012.

Middle East and Africa Egyptÿs presidential race 74

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Wanted: maybe a president? Egypt wobbles to the finish line of its transition to democracy

A YEAR ago Egyptians voted in record numbers to amend their constitution and set a course for democracy. Most were still ecstatic about the fall of Hosni Mubarak, who had ruled the country since 1981. A large majority trusted the army to shepherd the country back to civilian rule. Yet when elections were held last month for the Shura Council, a feeble upper house of parliament that many Egyptians would prefer to abolish, turnout shrank to a dismal 6.5%. Much of the post-revolutionary optimism of 2011 has been shamefully squandered. Transitional cabinets have proved too timid or unimaginative to try real reform. The Supreme Council of the Armed Forces (SCAF), a body of top generals that functions as Egyptÿs interim executive, has followed hesitant, seemingly contradictory and often violent policies, leaving an impression of ambiguity about the revolution that it professes to support. The generals recently set a schedule for the end of the transition period. Nationwide polls in May should lead on June 21st to Egyptÿs first popularly elected president. The trouble is that he (the sole credible female candidate stands little chance) will take over a country that is deeply divided and mistrustful, with an anaemic economy and a woefully creaky bureaucracy. Confusingly, too, Egyptÿs next ruler will take on a post without a job description. His permanent powers will not be defined until a new constitution is approved. 75

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Parliament has only just begun to debate the composition of the body that is supposed to draft the constitution. Auguring future tussles over the constitution itself, the debate over who is to draft it is already fierce. Islamists from the Muslim Brotherhood and the ultra-conservative Salafist movement, who account for over 70% of seats in parliament, say elected legislators should dominate the constituent assembly. They would prefer either a parliamentary system or a mixed system like that in France, where e the th legislative majority, not the president, appoints the government. Liberals favour a more strongly presidential system in the hope that a non-Islamist figure will prevail. They would like greater influence on the writing of the constitution from civil society, including professional associations, unions and academics. The new president may thus assume office with nearly all Mr Mubarakÿs dictatorial powers, only to be demoted soon after to a more honorific role. He will officially oted s command the army, but it is unclear whether the generals will actually submit to civilian control. This is why many see the looming presidential election as a test of wills between the Islamists who dominate parliament and SCAF, which sees a strong presidency as its last chance of protecting the armyÿs privileges. Some Egyptians suspect that, in order to avoid confrontation, the Muslim Brothers and SCAF could join forces to back a consensus candidate. One such potential figure is Muhammad Selim al-Awa, a conservative intellectual with ties to the Brothers who nonetheless defends the armyÿs privileges. But Mr al-Awa alarms liberals and also Egyptÿs Christians, whom he has accused in the past of colluding with Israel. The lack of a clear consensus candidate has raised the hopes of numerous challengers. A smattering of former top officials from the army, the secret service and the government have sought the generalsÿ backing for their presidential bids, including Mr Mubarakÿs last prime minister, Ahmed Shafiq, a former air force chief. Other retired officials are said to be contemplating a run. Amr Moussa, the former foreign minister and secretary-general of the Arab League, is at present the front-runner. Critical of the army, he has anointed himself as the leader of a catch-all Ānationalistā trend. But despite his fame and his influential friends, most Islamists reject Mr Moussa as too secular. The Islamistsÿ own offerings range from the dour Mr al-Awa to Hazem Abu Ismail, 76

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a fiery preacher who cheers revolutionaries by denouncing the army but frightens many with pledges to make prayer and the veil compulsory. A rising moderate is Abdel Moneim Abolfotoh, a former senior Muslim Brother who was expelled for questioning the groupÿs rigid hierarchy. A doctor who spent years in prison under Mr Mubarak, he attracts mild Islamists who chafe at the grip of the Brotherhoodÿ s number two and strongman, Khairat al-Shater, a probable future prime minister in a coalition government. The rivalry between Mr Abolfotoh and Mr Shater is likely to stop the Brothers from endorsing his candidacy, but will not stop some Islamists from voting for him. Mr Abolfotohÿs campaign has inspired unlikely followers. His economic adviser, a Marxist professor, was drawn by its commitment to progressive tax rates and to free health care and education. Mr Abolfotoh is also the only candidate to demand not just civilian oversight of the army, but mandatory retirement for ageing generals. This has increased his appeal to reformist youths without estranging him from the wider, stability-seeking public. Mr Abolfotoh has also profited from the decision in January by Mohamed ElBaradei, the former director of the International Atomic Energy Agency and an important figurehead for Egyptian liberals, to drop out of the race in protest at the armyÿs handling of the transition. A former supporter of Mr ElBaradei says that he seemed too aloof. ĀAbolfotoh is different,ā he says. ĀHe listens to what you have to say. He is a conservative personally but does not want to impose his views on others.ā Besides, other liberal candidates are thin on the ground. None of the assorted rights activists, artists and intellectuals who have put themselves forward so far enjoys national stature or a well-funded campaign. Few seem likely even to meet the threshold to register for the election, which requires the backing either of 30 MPs or of 30,000 voters spread across the country. And although official campaign rules aim to level the field by limiting spending to a mere 10m Egyptian pounds (about $1.6m), this is expected to be vastly exceeded by in-kind donations from businessmen who are likely to back more prominent candidates. The presidential race has revived some post-revolutionary enthusiasm, but also introduced new risks. Mr Abolfotoh was recently hospitalised with a concussion after a late-night carjacking that his aides say was politically motivated, and Mr Moussa has also been attacked on the campaign trail. Fingers point to dirty tricks by the security establishment, an ominous sign of the battles that Egypt ÿ s foundering revolution still faces.

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Iranian nukes and polls

Wink or blink Iran may be declaring victory while seeking a way out

䓾 ᰤ Iranians are a subtle people. They are used to things not being what they seem, and to words not meaning what they appear to say. Still, it must seem odd that just when some Western leaders have been rattling sabres louder than ever (see Lexington), Western diplomats suddenly proposed, on March 6th, to resume suspended talks with the Islamic Republic over its vexed nuclear programme. It must seem equally strange that Iranÿs leaders, who in February bluntly barred the UNÿs nuclear inspectors from visiting a particularly suspect site, now suddenly say they are welcome to a tour. The obvious conclusion is that tough talk on both sides has masked quieter efforts to reach a compromise. A year ago Iran broke off negotiations with a contact group that includes the five permanent UN Security Council members plus Germany, angered by what it called their narrow focus on nuclear proliferation. In the interim Iran has spewed bellicose rhetoric while accelerating uranium enrichment. Its biggest snub was the denial of access to a military base at Parchin, south-east of the capital, Tehran, where the UNÿs nuclear watchdog, the International Atomic Energy Agency, says it may have tested detonators suitable for nuclear bombs. Recent satellite images shown to the agency by Western intelligence services are said to reveal signs of a belated clean-up at the site, raising further concerns. 78

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Yet in other respects Iran has continued, grudgingly, to co-operate with the inspection regime. In February Ayatollah Khamenei, the Supreme Leader, reiterated that the Islamic Republic Āhas never and will neverā pursue nuclear weapons because it considers them sinful. Iranÿs nuclear negotiator, Saeed Jalili, also suddenly deigned to answer a letter, sent to him in October by Catherine Ashton, the EUÿs foreign-policy chief, requesting renewed talks with the six-nation contact group. Less publicly, Iran has shown that it is beginning to be rattled by increasingly punitive international sanctions. It has, for instance, sharply increased imports of grain, in what looks like an effort to pre-empt future food shortages. Its officials have also dropped their tone of bluster about the economic impact of sanctions, with even President Mahmoud Ahmadinejad quietly admitting that they hurt. He is right. Controls on international financial transactions, which already badly squeeze Iranian traders and have fuelled galloping inflation, have tightened again in recent weeks. Electronic transfers to or from Iran using the ubiquitous global SWIFT interbank network will soon be suspended, in effect blocking the movement of any money except cash. Iran says it will accept payment for goods in gold, non-Western currencies or via barter, but these are not long-term options. Big Asian customers for Iranian oil, including Japan, Singapore, India and South Korea have begun trimming imports from Iran, and the EU is set to cut off Iranian imports entirely by July. Insurers also now balk at covering shipments of Iranian oil, adding yet more cost and complexity to a trade that Iran relies on for the bulk of its revenue. Perhaps what Iran needs is a face-saving way to climb down. This may explain a recent efflorescence of bravado in official statements. The foreign ministry, for instance, advised Iranÿs enemies to Ābow before the grandeur and dignity of the Iranian peopleā. Mostafa Mohammad Najjar, the interior minister, declared that Iran had recently dealt those enemies a Āslap in the faceā and a Āpunch in the mouthā. These statements referred not to some martial triumph, but to the supposedly impressive turnout of Iranians for parliamentary elections on March 2nd. The polls, to elect 290 members of the majlis, or parliament, to a new four-year term, were the first nationwide vote since the disputed presidential elections of June 2009 which led to a vicious political clampdown. This is why Iranÿs leaders were so keen to paint the holding of new elections as a 79

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national victory. Given that candidates are sifted in advance for loyalty to the regime by a council of senior clerics, and that most of the opposition had declared a boycott, the outcome was essentially foreordained. Conservatives of varied factions won a big majority of seats. To Iranÿs real decision-makers, which is to say to the court surrounding the Supreme Leader and to his security chiefs, the only number that mattered was the turnout, which they declared to be 64% . Few but the regimeÿs blindest supporters believe such figures: a text-message joke in Tehran quipped that 80% of Iranians th had satt on their couches, amazed to see 70% of Iranians voting. isis sis Syriaÿs crisis

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Picking P icki up the pieces The opposition struggles to respond to the regimeÿs offensive REFUGEES crossing the Lebanese border came bearing tales of slaughter. After rebel fighters withdrew from the Baba Amr district of Homs, Syriaÿs third-largest d city, on March 1st, President Bashar Assad ÿ s militiamen moved in. Those who escaped, mainly women and children, say security ecurity agents rounded up the menfolk at checkpoints. At least two families had their throats slashed by loyalists with knives. Yet the full extent of civilian casualties may never be known, since Mr Assadÿs men blocked Red Cross convoys from reaching Baba Amr. Syriaÿs suffering is not limited to Homs. Even as mopping up operations continued o there, government forces shelled the nearby city of Rastan and half a dozen other towns. Activists who smuggle medicine into the country and the injured out are finding their networks disrupted. Avaaz, an international online campaigning group that sponsors some 200 Ācitizen journalistsā inside Syria, says some areas have become information black holes.

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Yet the pattern during the year-long revolt has been for areas crushed by government forces to rebound as soon as they leave. Less robust in the face of regime offensives has been the political opposition. The Free Syrian Army, the rebelsÿ loosely banded fighting force, says it retreated from Baba Amr to spare civilian lives after almost a month of artillery fire. Yet it admits that its lightly armed men had run out of ammunition. Some among Mr Assadÿs diverse opponents advocate building a well-equipped and organised rebel army to confront the regime. Burhan Ghalioun, the professorial leader of the Syrian National Council, the main opposition group in exile, has pledged to oversee and organise the rebels, but not to equip them. Other members have accused the council of half-hearted support and set up a splinter group to lobby for supplies of powerful weapons. ĀWe wonÿt secure enough to outgun the regimeÿs forces, but we can increase the cost for them,ā says Fawaz Tello, one of the groupÿs founding members. Others are wary of the bloodshed likely to follow from an uneven fight. They want instead to convince Russia, whose vetoing of UN Security Council resolutions has emboldened the regime to carry on killing, to turn against Mr Assad. They hope that after Kofi Annan, the newly appointed UN and Arab League envoy to Syria, goes to Damascus on March 10th he will formulate a transition plan that can win Russia over. But they have done little to pave the way for wider talks, for instance by reassuring ethnic and religious minorities that back the regime because they fear the mainly Sunni resistance. The dissidents like to boast of their acumen, but would-be helpful foreign governments as well as protesters inside Syria are tiring of a council that has proved opaque, indecisive and politically naive. In a sign of growing tension between the political and military men, the Free Syrian Army ÿ s self-appointed leader, Riyad al-Asaad (whose own authority is questioned), ruled out working with 81

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the councilÿs new military committee. And as the Free Syrian Army is revealed as a ragtag bunch of local groups rather than a nationwide organisation, even vocal supporters of arming them, such as Qatar and Saudi Arabia, appear loth to send weapons in. Mr Assadÿs exiled opponents may be scrappy, but those on the ground are making progress. Large swathes of Syria, including parts of Homs and suburbs of the capital, Damascus, have in effect seceded from the central state. Numerous neighbourhood committees have united into town councils. Local leaders with more clout than bickering dissidents are helping to keep control and contain the level of internecine violence. They cannot prevent Mr Assad from having the upper hand militarily, but they are further eroding his shrinking political authority. One sign of this was the defection, on March 7th, of Syria ÿ s deputy oil minister, Abdo Hussameldin. He is highest-ranking official yet to abandon the regime. s the h Burundiÿs troubles

A ssour ou mood Civil strife beckons again NOT long ago Burundi was considered a modest success in one of Africaÿs most violent regions. Under foreign prodding, a civil war that had lasted nearly a decade was brought to a close in 2000. By 2003 all the main protagonists seemed ready to accommodate each other. Former rebels joined the national army, and their leaders took off their uniforms in favour of civilian garb. UN peacekeepers, at one time nearly 6,000-strong, kept things steady enough to allow most of them to leave by the end of 2006; just over 100 are still there. Squashed against the chronically lawless vastness of eastern Congo, little Burundi seemed a miracle of calm. No more. The mood has again turned sour. Opposition forces that renounced violence are regrouping menacingly on the country ÿ s border. In the past eight months unknown assailants have attacked Burundian towns and villages, killing scores of civilians. In September 39 people were slaughtered in one attack on Gatumba, an hour ÿ s drive from the capital, Bujumbura. The government of President Pierre Nkurunziza has blamed people with ties to the former rebels. Those it has arrested say that the stateÿs own agents perpetrated the killings to create a pretext for hammering the opposition. 82

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That is certainly what has happened. Human-rights groups say that some 300 opposition members have been killed since July, and dozens arrested. The government has lashed out at independent media and charged civil-society activists and lawyers with inciting terror. Yet Burundiÿs leaders also refuse to admit there may be a rebellion afoot. Foreign donors and diplomats know not to utter the ĀR-wordāürebelsüwhen they meet government officials. The trouble really began in 2010, when the opposition boycotted elections which it said were flawed but which international observers judged to be passably fair. Without any challengers, the ruling National Council for the Defence of Democracy and the Forces for the Defence of Democracy, known by its mouthful of French initials as CNDD-FDD, won the presidency with 91% of votes cast. It now has almost equally crushing majorities in both houses of parliament. Much of the opposition has retreated to exile or into the bush. A particular worry is the National Liberation Front, whose leader, Agathon Rwasa, is believed to be based in eastern Congo. Troops loyal to him have begun to team up with other militias and rebel groups there. In recent months two other new armed movements in exile have proclaimed their intention to overthrow the government. So far these fledgling groups lack organisation, manpower and vision. But in the lawless forests of Congo even ragtag rebels can do a lot of harm. ĀIt doesnÿt take much to mount a credible activity in the DRC,ā says Filip Reyntjens, an expert on the Great Lakes Region at the University of Antwerp. ĀIf you have 200 guys and a Kalashnikov, you have a rebellion.ā Fearing another civil war, an array of peace-minded figures, including Catholic clergy, members of the non-violent opposition and a former head of state, 83

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Middle East and Africa

Sylvestre Ntibantunganya, have called for dialogue. The government says it would talk if the opposition returned from exile. But many doubt the governmentÿs sincerity. Burundi ranks among the poorest of countries, but officials enjoy rich pickings. Transparency International, a Berlin-based lobby, says it is the most corrupt country in the region. And the rebels happily earn money from Congolese gold-trafficking and protection rackets. ĀThe rebels have another life in Congo,ā says a Western diplomat wary, in the current jumpy climate, of talking to a foreign journalist. ĀItÿs an open question whether ant o on they want one here, back in Burundi.ā HIV/AIDS in South Africa

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Just cap it

Rising condom use brings a dramatic fall in infection rates

AT LAST some good news out of South Africa, home to 0.7% of the world ÿ s population, but 17% of all HIV/AIDS sufferers. Although the number of South Africans living with the disease continues to rise, and now totals nearly 6m (out of a population of 50m), the tally of new cases each year has tumbled by half since 1999üthanks largely to a dramatic increase in the use of condoms, according to new research. Africaÿs biggest economy has suffered hugely from the HIV/AIDS pandemic, which has so far led to an estimated 2.8m premature deaths. At the peak of the scourge in 2005 it was killing over 700 South Africans a dayümost of them in their prime ürobbing the country of vitally needed skilled workers and depriving families of 84

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their sole breadwinner. Over 1m children under the age of 18 have lost their mothers to AIDS. Among South African adults aged 15-49, 17% are HIV-positive, more than triple the rate for the whole of sub-Saharan Africa. This compares with a global adult prevalence rate of just 0.8% (0.6% in America and 0.2% in Britain). Black South Africans, who make up four-fifths of the country ÿ s population, have been the hardest hit: 13% of their total of all ages are HIV-positive, compared with 3% of coloureds and Indians and just 1% of whites. Research suggests that this has little to do with poverty. Instead blame is put on cultural differences. According to various studies, black South African men tend to be more promiscuous, have more concurrent sexual partners and have sex more often than other South African males. Prostitution and sexual violence appear to be more common in black communities; a survey conducted in Soweto, a Johannesburg suburb, found that a quarter of schoolboys described gang rape as fun. Some still believe that sex with a virgin is a cure for AIDS. Black South Africans have also tended to be particularly hostile to condom use, believing that Āflesh-on-fleshā intercourse is good for their health. But, according to a study published in the British Royal Societyÿs Interface journal last month, this seems to be changing. National surveys show the proportion of young South African men aged 16-24 who reported using a condom at their last sexual encounter leaping from 20% in 1999 to 75% in 2009. This, more than an equally dramatic rise in anti-retroviral treatment, is the Āmost significant factorā in the fall of new infections, say the British and South African authors of the study. Former president Thabo Mbekiÿs refusal to accept any causal link between HIV and AIDS got South Africa off to a late start with the treatment of the disease. Retrovirals were not introduced in public health until 2004. Under President Jacob Zuma, the government has made huge efforts to catch up. Over 1.5m South Africans now receive anti-retrovirals ü more than in any other country. Sufferers can now live longer, so slashing the death rate and pushing up life expectancy from 54 in 2005 (down from 63 in 1990) to 58 in 2010. The battle has not yet been won. Some 900 South Africans continue to contract the virus every day; more than 500 a day are still dying from AIDS-related diseases. But the enemy is at last on the retreat.

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Europe Russiaÿs presidential election

Moscow doesnÿt believe in tears Vladimir Putin returns to preside over a country whose people have grown increasingly mistrustful of him

WITH hundreds of military lorries, menacing police vans, hovering helicopters and thousands of soldiers and riot police around, for much of the past week Moscow felt like an occupied city. The purpose of this mobilisation was to defend the official result of the presidential election on March 4th that gave Vladimir Putin, outgoing prime minister, 64% of the vote. On election night, the army and police guarded some 100,000 grim-looking people who had been brought to Manezh Square, beneath the Kremlin walls, to celebrate Mr Putinÿs victory. Many of them were paid or coerced into joining the patriotic celebration. This was a very different lot from the middle-class Muscovites who had mostly voted against Mr Putin. Yet it was the Manezh Square crowd that Mr Putin chose to address. ĀWe won in an open and honest battle! Thank you friends, thank you!ā Mr Putin 86

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said. A tear rolled down his face. It was the speech of a conqueror in a hostile capital. There were no kind words for his opponents, no promises to be a president for all Russians, no offers of compromise. Instead he spoke of a fight against Āpolitical provocations which have only one aim: to destroy Russian statehood and usurp power.ā The problem for Mr Putin, wrote Alexander Baunov, a columnist, is that he is not recognised as a legitimate president by a large minority of Russians and by a majority in Moscow. Mr Putin has little reason for jubilation. The election was neither open nor honest. As Russian observers noted, all plausible opposition candidates were barred in advance, creating the impression that there was no alternative to Mr Putin. The Kremlin monopolises television, which remains the main source of news for much of the country. And by some estimates vote-rigging added at least ten percentage points to Mr Putinÿs tally. The main victim was Mikhail Prokhorov, a business tycoon and the only fresh face in the election. Officially he got 8%. His real vote was probably nearly twice that, says the League of Voters, a group set up by civil activists after a rigged parliamentary election in December. Back then the electoral commission simply kicked out observers and blatantly falsified the count, especially in Moscow, leading tens of thousands of Muscovites to take to the streets. This time the Kremlin was cleverer. The counting was more transparent, but the numbers voting for Mr Putin were artificially increased. Voters were transported to multiple polling stations in special buses. Electoral registers were inflated with people from state organisations both fake and genuine. Bumping up Mr Putinÿs numbers was not just a way of ensuring that he won over 50% of the vote and thus did not have to endure a run-off, but a demonstration to his bureaucracy and security services that he is still in charge and able to mobilise whatever resources he needs to stay in power. Yet the fact that the Kremlin was forced to use more elaborate means to rig the election was also testimony to the growing pressure from civil society. Four times as many Russians volunteered to act as election observers as in December. In Moscow, where Mr Putin got less than 50% of the vote and Mr Prokhorov more than 20%, the official result was notably closer to the figures provided by independent observers than in other parts of the country. This was one explanation for the relative lack of vigour in the protests in the capital. As Alexei Navalny, a popular blogger and protest leader, put it: ĀPeople did not feel they were as screwed.ā

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Even so, 15,000 Muscovites gathered in Pushkin Square a day after the election. But the euphoria of earlier protests had given way to gloom and desperation. The demonstrators were split between those uncomfortable with the protestÿs growing radicalisation and those for whom it was not radical enough. Many middle-class Muscovites who had attended earlier rallies voted for Mr Prokhorov, who turned up at the protest. ĀI greet you, the free citizens of Russia,ā he said. ĀI thank those who gave me their votes, despite the fact that the election was dishonest.ā His speech was well received. Yet the biggest cheers went to Mr Navalny. ĀWe are the real masters here!ā he shouted. ĀWe will occupy the streets and squares and we will not leave.ā nction When the sanctioned part of the protest was over Mr Navalny and other opposition politicians, including Sergei Udaltsov, a young radical communist, stayed. An hour later the riot police moved in, arresting Mr Navalny and some 260 others. Most of them, including Mr Navalny, were released unharmed (the police were more brutal in St Petersburg). Mr Putin has so far preferred combative rhetoric and threats to real violence. He may hope that the rallies run out of steam. Mr Navalnyÿs calculated attempt to escalate the protests could not disguise their fading intensity. The next demonstration, on March 10th, say organisers, should concentrate on electoral fraud rather than general slogans such as ĀRussia without Putinā. But with an election cycle over, it runs the risk of attracting even fewer people. Indeed, this may explain why the Moscow authorities are allowing it to take place. The ideologists of the protest movement know that its current phase, which began in early December under the banner of Āhonest elections , is reaching its limits. They say the movement needs not just a new format but a new focus. The next few months may see a shift to the regional and municipal level in Moscow and other big cities. ĀWe must start the movement for bringing back the city in which we live,ā says a new protest manifesto. This could mobilise the large number of Muscovites who are unhappy with the running of their city and want the freedom to choose their own mayor, as they cannot do now. Mikhail Dmitriev, head of the Centre for Strategic Research, a think-tank, says that Moscowÿs protesters are happier to take part in local than federal politics. A demand for a genuine mayoral election could create a platform for Mr Prokhorov, who won more votes in the presidential election than any liberal in the past decade has managed. Mr Putin instead suggested that Mr Prokhorov might join his incoming government, an option the tycoon had earlier ruled out. 88

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Mr Putin is already seen by many as weaker than a decade ago. His popularity rating, pumped up before the election, is likely to deflate as discontent spreads. The Kremlinÿs tepid agreement to decentralise power and bring back elections of governors, made to mollify the December protesters, means politics is likely to get more regional, allowing some parts of Russia to develop faster than others. This could produce politicians who see more advantage in exploiting discontent with Mr Putinÿs system than in trying to save it. Mr Dmitriev says the dip in the protestersÿ mood was inevitable. He compares it to short spells of depression during Mikhail Gorbachevÿs perestroika in the 1980s. Such mood swings do not change the trend. ĀRussia is geographically so vast that any turn of the wheel has an enormous time lag,ā he says. This does not mean that the changes set in motion in December will dissipate. But the course they follow may be longer and less linear. The French elite

Old school ties ENA still has a strong hold on French public life

IT IS an unwritten rule of French politics that presidents must distance themselves from the Paris elite. François Mitterrand had roots in Cognac and then Burgundy; 89

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Jacques Chirac planted them in rocky Corrèze, in south-central France. So it is for today ÿ s candidates. François Hollande, a Socialist, has also adopted Corrèze, where he is a deputy. Nicolas Sarkozy, the centre-right incumbent, who hails from the posh Paris suburb of Neuilly, has a Hungarian background and did not go to the best French schools. It is odd, then, that four of this yearÿs presidential aspirants graduated from the same elite training college, the Ecole Nationale d ÿ Administration (ENA): Mr Hollande, Dominique de Villepin on the independent centre-right and two fringe candidates. Stranger still, Mr Hollande and Mr de Villepin are both from the class of 1980, known as the promotion Voltaire ü as is Ségolène Royal, Mr Hollande ÿ s ex-partner and the Socialistsÿ defeated candidate in 2007. (The three are circled in the picture, above. above.) That a single graduating class of about 80 French students has such a political grip shows how the country manufactures its ruling class. Other 1980 ENA alumni include Jean-Pierre Jouyet, head of the financial-markets regulator, who is tipped for a senior post in a Hollande presidency; Henri de Castries, head of AXA, an insurance giant; Pierre Mongin, head of the Paris metro; and a clutch of mere ex-ministers and ambassadors. So-called énarques, who tend to be fiercely clever and answer questions with the phrase ĀThere are three points,ā shrug off accusations of elitism. The college selects its students on merit in a competitive exam, and tuition is free. ENA was set up in 1945 as a meritocratic institution meant to produce a post-war administrative elite. Yet since about 1980, fewer people from poorer backgrounds have got in. The share of working-class students at the top four grandes écoles, including ENA, fell from 29% in the 1950s to 9% in the mid-1990s, finds one study. stu All countries have ivy-league schools, but the hold of ENA on top jobs in France is breathtaking. Seven of the past 12 prime ministers were énarques. Senior officials shuffle into business too. Of 600-odd French senior bosses, 46% come from one of three grandes écoles, including ENA, according to research by two academics. Alexandre de Juniac, ex-chief of staff for Christine Lagarde as finance minister, is head of Air France; another ex-chief of staff, Stéphane Richard, runs France Telecom. François Pérol, former chief of staff to Mr Sarkozy, runs Banque Populaire Caisse dÿEpargne. Several grandes écoles have tried to widen their intake. In 2009 ENA set up a scheme to prepare low-income students for the entrance exam. But progress is 90

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slow. The first student from the course has only recently won a place. Meanwhile, ENA alumni are not only resurgent in the presidential race. Mr Sarkozy ÿ s government, which five years ago had just two énarques, is ending with six. The Netherlands and the euro

A very un-Dutch deficit The normally upright Dutch face a fiscal axe ü and possibly an early election IT WAS a far cry from the bright autumn day in 2010 when the smiling leaders of the three right-of-centre Dutch parties came together to announce a deal to run the country. The Liberals, the largest party, would form a minority coalition with the Christian Democrats. Outside support from Geert Wildersÿs Freedom Party would give the government a slim majority in parliament. This year, on a foggy March morning, the same three leaders looked sombre in the face of a daunting task: how to cut another 噠9 billion ($12 billion) from the budget for 2013 when the economy is already in recession. The extra cuts are needed to deal with what forecasters say would otherwise be a 2013 budget deficit of 4.5% of GDP, way over the 3% limit enshrined in the euro zone ÿ s new fiscal pact. Yet Mr Wilders is likely to object. Indeed, he is in an objecting mood: this week he presented a report commissioned from British researchers making the case for Dutch withdrawal from the euro. Mr Wilders, who wants a referendum on the matter, claims that the country has not profited and may even have lost from its membership of the single currency. Mark Rutte, the Liberal leader and prime minister, said the cuts were desirable anyway. Not everyone agrees. The head of the employersÿ organisation called on the government to Ā focus on the mid- to long term ā instead. Mr Wilders denounced what he called Ānumbers fetishismā. The left chimed in. Yet having been among the most vocal advocates of tighter fiscal discipline in the euro zone, Mr Rutte is hardly in a position to seek leniency from Brussels. The president of the European Council, Herman Van Rompuy, told the Dutch that a rich country should find it easy to make cuts worth 1.5% of GDP. He noted that his own country, the normally profligate Belgium, managed it when the European Union insisted. The negotiations will be fraught politically as well as economically. Fresh cuts to 91

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health or education would be immensely unpopular. Putting up taxes could aggravate the recession. Yet not only will the coalition struggle to avoid all this, it may have to look at structural reforms such as raising the pension age further. Housing-market subsidies may be cut, possibly prolonging the Dutch housing slump. Mr Wilders will seek to take credit for cuts in areas like development aid, culture, immigration and integration. And he has hinted that the sacrifices expected of his voters must be offset by, for example, a further tightening of immigration policy. If the three parties cannot agree the coalition could fall apart, triggering an election. That might be welcomed not just by Mr Wilders but by the Socialist Party, which despite finishing fifth in the 2010 election has lately been topping the polls. Others may not do so well. The more moderate Labour Party, in the throes of changing its leader, has been losing popularity. The Christian Democrats have slumped. The years of easy prosperity, support for fiscal orthodoxy and quiet backing for Europe and its currency are over. r Spainÿs budget deficit

A two-finger salute alu to Brussels ᗵ Itÿs Rajoyÿs country, and heÿll spend if he wants wa to MARIANO RAJOY is an unlikely revolutionary. Spainÿs new centre-right prime minister has always talked like a typical European austerity hawk. On March 2nd, however, he rebelled. Mr Rajoy told Brussels and the rest of the world to forget the budget-deficit target that Spain had agreed to hit this year. Rather than 4.4% of GDP it would aim for a significantly looser 5.8%. The EU could like it or lump it. (Mr Rajoy promised that the 2013 target of 3.0% would still be met.)

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A few weeks ago such an act of defiance might have sparked market turmoil and severe reprimands from Brussels. It could still push the euro zone back to the brink, and the European Commission has threatened reprisals. But for the moment Mr Rajoy has got away with it. Spainÿs ten-year bond yield remains lower than it was for most of the past year (although it has now overtaken Italyÿs again). Despite muttering in Brussels and elsewhere, there has been no arm-twisting from the Germans. More importantly, Mr Rajoy is sailing in a calmer sea than his Socialist predecessor, José Luis Rodríguez Zapatero, or other prime ministers ousted last year by external pressure, like Italyÿs Silvio Berlusconi. The euro zone has been flooded with cheap three-year money from the European Central Bank. It has doled out 噠 1 trillion ($1.3 trillion) to banks in two months. Some has gone into Spanish sovereign debt, helping keep yields down. Indeed, there were worries that this liquidity splurge could encourage profligate governments to relax. Mr Rajoyÿs decision seems to be evidence of this. In fact, the easing of bond-market pressure gives him space to look beyond the short term and tackle Spainÿs chronic problems of low growth and soaring unemployment. To excuse its slippage the government points to Spainÿs shoddy fiscal performance last year (mostly under Socialist rule). The budget deficit for 2011 was 8.5% of GDP, some way over the EU-agreed target of 6% (see chart). Cutting that to 4.4% this year, amid a recession, would require a ferocious 噠45 billion adjustment. ĀIt just wasn ÿ t realistic, ā says Jesús Fernández-Villaverde of the Penn Institute for Economic Research. The Spanish economy could shrink by 1.7% this year, squeezing tax revenues and forcing up benefit costs as unemployment hits 24%. Some in Brussels and Berlin suspect the government has exaggerated last yearÿs figures to make its job this year look more difficult. But even the reduced 噠 29 billion adjustment the government will have to make to meet its own target looks tough. Details of how it will be done remain scant: Mr Rajoy is waiting until after regional elections in Andalusia and Asturias later this month to announce a budget. Just as Mr Rajoy is set targets, he also sets them. Spainÿs regional governments are supposed to cut their budget deficits to 1.5% of GDP this year. But their track record is awful. Last year they failed, dismally, to meet a 1.3% limit. Mr Rajoyÿs Peopleÿs Party (PP) rules 11 of Spainÿs 17 regions and may win the two that are up for grabs this month. His word should carry weight. But the regions ÿ past behaviour makes their promises to obey hard to believe.

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Catalonia, run by a Catalan nationalist party, has set a worrying precedent. Last year, in a move that resembles Mr Rajoyÿs announcement in Brussels, it rebelled against Madridÿs targets, declaring that it would aim at a deficit of 2.6% before hitting 1.3% this year. But it turns out that its deficit was 3.7% in 2011. Mr Rajoy sees himself as a pragmatist rather than a rebel. But Spainÿs 18% sales tax is low by EU standards. How soon before others start shouting that this is unfair? And if he misses his own deficit target, his reputation will be in tatters. d and Lithuania Poland

Bad blood 䉘 Polish-Lithuanian ties s are ancient but increasingly acrimonious danger BAFFLINGLY bad and getting dangerously worse. That is how Polish-Lithuanian ties seem to outsiders. The two countries share six centuries of overlapping history (and sometimes geography), but remember it differently, Lithuanians, some 3m of them, think Poland is arrogant and interfering. Poland, 12 times larger, thinks Lithuania mistreats its ethnic Polish minority around 8% of the populationüand fails to keep its promises. The rows are long-running and seemingly arcane. One is about spelling: Lithuanian law says official documents, such as passports and birth certificates, may be written only in the Lithuanian alphabet, which lacks the letter W and most of the diacritical marks of Polish. That is a nuisance for those with non-Lithuanian names. Polandÿs president, Bronislaw Komorowski, who visited Lithuania last month, would spell his name Komorovski if he chose to live there. A law to change the alphabet restriction foundered in 2010: another sign of bad faith, says Warsaw. Another dispute is about Lithuaniaÿs Polish-language schools: they must now teach more subjects in Lithuanian. The supposed aim is to improve school-leaversÿ flaky command of the national language and to improve their chances in the job market. But Poles in Lithuania decry this. They organised a strike in September, and plan a big protest on March 17th. A third row is about restitution of property in the Vilnius region confiscated in the Soviet era. The ethnically Polish district was ruled by Poland before the war (Āoccupiedā, say the Lithuanians). That complicates land titles. Other squabbles 94

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concern rules about using Polish in advertisements and street signs. With goodwill, the problems would be trivial. None of them amounts to discrimination, let alone persecution. Poles in Lithuania are still poor, but they have flourished since the country regained independence in 1991. Instead the issues have poisoned diplomatic relations. The Polish and Lithuanian foreign ministers, Radek Sikorski and Audronius Azubalis, do not speak. ĀThere is unanimity among top personalities that Lithuania has behaved unacceptably, ā says Eugeniusz Smolar, a foreign-policy expert in Warsaw. For their part Lithuanians see blatant interference in their domestic affairs, particularly in the close ties between Warsaw politicians and the local Polish leadership. Its administrative competence and loyalty to the Lithuanian state is, they feel, often questionable. Poland is, in effect, involved in the Lithuanian elections due in October. The result is deadlock. Each side feels it is owed an apology by the other. Both say they want a Āresetā of relationsübut each thinks it should consist of the other backing down. The row risks affecting genuinely important areas, such as energy and transport links, or even military security (NATO ÿ s defence plans against a theoretical Russian threat in the region depend on deploying a chunk of the Polish army in Lithuania). In April Polish warplanes based at a Lithuanian airfield will start policing Baltic airspaceüa job that rotates among NATO allies. That, at least, has not been politicised, so far. Outsiders (including America), neighbours (chiefly Sweden), NATO and the European Commission are worried. They are backing mediation started last year by the Organisation for Security and Co-operation in Europe (OSCE). In a coded reference to the Balkan wars in the 1990s, the OSCEÿs commissioner for national minorities, Knut Vollebaek, says, Ā history in Europe shows that inter-ethnic tensions can spill over into problems between countries and even regionsā. But he has got nowhere. Lithuanians tell him not to demand changes that the parliament won ÿ t vote for. Polish politicians ÿ patience with their smallest neighbour is at breaking point. Public concern is growing. A new factor in all this is Poland ÿ s rise to heavyweight status in Europe. Its neighbours need to get used to that. But so do Polish politicians.

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German baby hatches

Thinking inside the box Should the state allow mothers to abandon their newborn babies?

๊ FOUNDLINGS? In 2012? Yes, mothers still dump unwanted newborns in boxes and steal away. Foundling wheels were an artefact of medieval times; but they reappeared in 2000 in Hamburg, where a lot of abandoned babies were dying. Now Germany has around 200 places where a mother can either leave her babyüheated Ābaby hatchesā, usually with an alarm to summon a carer or where she can give birth anonymously. They have taken charge of around a thousand babies, many of whom will never know where they came from. Such refuges are Ā a last chance to give an opportunity to save a life, ā says Gabriele Stangl, chaplain of the Waldfriede hospital in Berlin, which runs one. But there is a problem: abandoning children is illegal. The German constitution gives citizens a right to Āknowledge of their originsā and fathers a right to help bring up their children. Both are breached when a mother gives birth anonymously. Baby hatches are tolerated, but operate in a legal grey area. Ever since the Hamburg hatch opened, there have been arguments over whether to ban or sanction them. The debate intensified in February with the publication of a study by the German Youth Institute, which found that the anonymous services had lost trace of a fifth of all abandoned babies. Foes have long insisted that baby hatches do not save lives (neonatal deaths have not dropped). They compete with 96

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services that offer more responsible care, argues Terre des Hommes, a child-care charity. In 2009 the German Ethics Council, an independent body, said baby hatches and other anonymous birth services should be replaced by Āconfidential child deliveryā with a limited anonymity right. Since the Youth Institute findings such demands have grown louder. That is not good enough, says Mrs Stangl. The mothers are nameless out of fear, perhaps of parents or partners. Many deny their pregnancy even to themselves; some who use the hatches are so desperate that they deliver their own babies. More than 90% of the women who come to her hospital seeking anonymity accept disclosure after counselling. But denying them the right to remain unknown would drive some away. Mrs Stangl would not go as far as France, which is relaxed about anonymous delivery (and has plenty of angry parentless children). She wants German baby hatches regulated but protected, and will fight to keep hers open. Charlemagne

Mario, put on your toga Italyÿs impressive prime minister has changed domestic and European politics

SUCH is the reverence for Mario Monti that some compare him to Lucius Quinctius Cincinnatus, the patrician recalled from retirement to save ancient Rome. Legend recounts how Cincinnatus was working in his fields in 458BC when he was approached by messengers, told to don his toga and informed that he had been appointed dictator for six months to confront the Aequi, who had trapped a Roman army. Having defeated the foes, Cincinnatus surrendered his absolute powers and returned to the plough, refusing all spoils and gifts. So when Italy faced disaster last year, with bond markets about to push it into 97

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insolvency, Mr Monti was summoned from his tranquil existence as president of Milanÿs Bocconi university and sage on matters European. Appointed senator for life, he took power from the dissolute Silvio Berlusconi on November 16th. He appointed a small cabinet of technocrats and, naming himself finance minister, refused a salary for his cabinet jobs. In three months he has pulled Italy back from catastrophe. Spending cuts, tax rises and pension reformsüplus a high-profile campaign against tax evasionühave put the public finances back on track to balance the budget next year and, with luck, to start paying down the colossal debt thereafter. To help revive growth Mr Monti wants to liberalise closed professions such as pharmacists and notaries, and to simplify bureaucracy. The next step is harder: reform of Italyÿs sclerotic two-tier labour market. The threat of bankruptcy has receded as yields on Italian bonds have dropped. This has much to do with another Italian: the president of the European Central Bank, d Euro Mario Draghi, who has hosed Europeÿs banks with liquidity. But Mr Draghi was able to act in part because Mr Monti had restored Italyÿs credibility. Tellingly, Italian yields have just dipped back below those of Spain, which wants to breach its EU-mandated deficit target this year (see article). Barely 100 days in office, Mr Monti has overseen many reforms that Mr Berlusconi shrank from. And the professor has kept his support from parties of left and right. If Mr Montiÿs economic competence was to be expected, his diplomatic agility has been a pleasant surprise. Italy, a founder member of the European Union, has returned to the centre of policy-making after the marginalisation and mockery of the Berlusconi years. Having signed the fiscal compact on budgetary discipline, Mr Monti wants the EU to adopt an Āeconomic compactā to pro promote growth, ne dip especially by releasing the potential of the single market. As one diplomat puts it, ā Mr Monti seeks Āmore Europe in Italy, and more Italy in Europe.ā st o Mr Monti is a darling of Eurocrats, having served two terms as a big beast of the European Commission. But he is courted beyond Brussels. He has been invited for talks with Barack Obama. Chancellor Angela Merkel will visit Rome on March 13th. Suddenly EU politics has become fluid. For Germany, Mr Monti vindicates the idea that fixing the euro mainly needs reform in troubled countries. For France he is an ally in his demands that Germany do more (eg, enlarge the rescue fund). For Britain he offers help to rejoin the fold after its isolation at the EU summit in December. For smaller countries he offers freedom to manoeuvre between the big four. ĀIt is good to have Italy back,āsays another diplomat. ĀEurope is now a chair 98

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with four legs.ā Tellingly, Mr Monti has signed up to a letter sponsored by Britain, the Netherlands and other liberal countries urging stronger enforcement of single-market rules, including the naming and shaming of countries that fail to abide by commitments to open up energy and services. Italians may be less enthusiastic about some of the letterÿs other demands, notably for freer trade (Italy has often been a loser in globalisation). But Mr Montiÿs belief in the single market is beyond doubt: it is a strong source of new growth, it builds ties between troubled southern and dynamic northern economies and it preserves unity between euro-zone Āinsā and Āoutsā . It also discomfits Mrs Merkel. Germany may resist demands to stump up more bail-out funds. But is it too much to ask it to open up its markets, as it demands of others? The new prominence of Italy is not all the result of Mr Montiÿs innate skills. The EU was bound to rejoice in anybody but Mr Berlusconi, and leaders are keen to strengthen Mr Montiÿs hand. Much could still go wrong. Mr Monti has yet to show he can cure Italyÿs most serious affliction: its chronic slow growth. The economy is forecast to contract by more this year than the latest budget allows for. Resistance to austerity and reforms may grow, especially if a deep recession undermines Mr Montiÿs fragile cross-party support. His balancing act is delicate: Britain may find his integrationism hard to bear, France may resent his liberalising instinct and even Mr Montiÿs authority may not divert Germany from its self-defeating obsession with austerity. Remember to step down Above all, Mr Monti is short of time. Fixing Italy could take a decade, but his mandate ends next year. He would not be the first Italian technocrat to see his work undone by feckless politicians. Yet long-term reforms need a clear democratic mandate. Some in Mr Berlusconiÿs People of Freedom party think they should enlist Mr Monti to lead them in the 2013 election. That would be a mistake: his prestige relies on non-partisanship. Having seen off the crisis, Mr Monti should retire. That is not to say that the professor has no political future. He would be a good candidate in 2014 for president of the European Commission or the European Council (representing leaders). And just as Cincinnatus was recalled a second time, to prevent a plot to overthrow the Roman republic, Mr Monti may yet be summoned to serve as Italyÿs presidentüif only to dispel any risk of Mr Berlusconi getting the job. 99

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Britain The government after Steve Hilton

A radical departure ⁒ 䃒

ᗘ

The loss of David Cameronÿs closest adviser will trim, but not undo, the nttÿs commitment to remake the state governmentÿs

㏨ IN 1996 an advertising man called Steve Hilton was among 165,000 people in a field in Knebworth for a concert by the rock band Oasis. The gig captured a national mood that was classless, brashly hedonistic and eager to vote out a tired Conservative government the following spring. Mr Hilton had other plans. While there, he sent the Tories his idea for a poster depicting Tony Blair, the then Labour Party leader, with glowing demon eyes. The posters flopped, and Labour trounced the Tories. But the ad man went on to reshape the Conservative Party quite profoundly. In the early years of David Cameronÿs leadership, Mr Hilton orchestrated the Toriesÿre-branding as a greener, kinder party. He went on to champion policies that thrilled the right: competition in public services, elected mayors and police commissioners, welfare reform and business deregulation. His behaviour at Knebworth was instructive: he combines the image and cultural sensibilities of a liberal hipster with a fierce conservatism and a Thatcheriteÿs hatred of the state. 100

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Now the radical is off. On March 2nd Mr Hilton announced that he would take a year ÿ s sabbatical in California. His wife ÿ s job is partly based there, but his frustrations with office are the main reason for leaving. Mr Hiltonÿs restless zeal to reform the state has come up against bureaucratic inertia, political caution and the constraints of European law. Will the government become less radical in his absence? The current pace of change, which Mr Hilton found disappointing, is nonetheless fearsome by almost any other standard. Mr Blair was considered a reformer but only managed modest tweaks in education, delayed tackling welfare and left the management of policing alone. By 2015 most secondary schools will be free of state control, the benefits system will be tighter and police forces will have undergone the biggest overhaul in their history. Not all Mr Cameron ÿ s reforms are wise (elected police commissioners are questionable) but only his health-care plan has run into serious trouble. The government is now moving from policymaking to implementation, which might suggest a lesser role for a bold thinker. But Mr Hilton has been involved in this too. He is uniquely licensed to harangue civil servants on the details of delivery. He has helped radical ministers including Michael Gove, the education secretary, and Iain Duncan Smith, the work and pensions secretary, get their way against what he calls the Whitehall Āmachineā. Moreover, implementation is increasingly a creative process. Insiders say the government wants to spend the second half of this parliament Āstimulating a social responseā to the policies it put in place in the first half. This means persuading charities and companies to run free schools and welfare-to-work schemes, and prodding non-politicians to run for office. Mr Hilton might have been better at this than the Downing Street technocrats. Yet he is not the only radical in government. The elegant emollience of Sir Jeremy Heywood, the cabinet secretary, is often mistaken for caution. But the mightiest of all civil-service mandarins makes common cause with Mr Hilton on deregulation, decentralisation and shrinking Whitehall. He is behind the governmentÿs plans to reform the civil service, which will be published in May. Bigger roles are also mooted for allies of Mr Hilton, such as Greg Clark, the cities minister, and Rohan Silva, a Downing Street adviser. The style counsel

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Above all, there is the mutating figure of George Osborne, the chancellor of the exchequer and virtual co-prime minister. He has always been known for political calculationüthe hard-headed sceptic who balanced Mr Hiltonÿs raging iconoclasm. But he is increasingly the driver of daring policies. As well as his austerity programme, he is finding extra money for Mr Gove ÿ s free schools, shredding planning restrictions and signalling an end to national pay standards in the public sector. On March 6th he hinted that he would scythe labour laws in the way Mr Hilton had demanded since last year. fferenc between Mr Hilton and the likes of Sir Jeremy and Mr Osborne lies in The difference style rather than vision. The departing rebel believes only incendiary personal force can achieve change; the chancellor and cabinet secretary say systems and processes must be put in place. Mr Cameron realised both were required, which is why he gave Mr Hilton the freedom to exhort and evangelise. The Conservative Party has never been divided between left and right so much as between establishment types, who seek to manage the British state as it is, and insurgents who want to shake it up. The split between patrician Ā wets ā and Thatcherite Ādriesā of 30 years ago was along this fault line. Despite being a scion of the establishment, Mr Cameron generally sides with the dry insurgent wing. his apo The influence of Mr Hilton partly explains this apostasy. But it should persist without him. Confrontation with the glacial bureaucracy of government has had a radicalising effect on Mr Cameron, as it did on Mr Blair. And Mr Osborne, the Toriesÿ election strategist, understands the political utility of possessing radical ideas. He believes that governments must go into elections looking as if they have unfinished business. Austerity cannot be the only song the government has to sing. At his fiercest, Mr Hilton would talk of Āsmashing up the machineā. His exit is a profound setback for the governmentÿs plan to remake and prune the state. It need not be a fatal one.

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The Church of England

Hot and bothered The rise of evangelicalism is shaking up the established church

EVER since the 18th century, England ÿ s established church has harboured a suspicion of religious enthusiasm. Anglicanismÿs cosy ubiquity as a reassuring, if vestigial, presence in every English suburb and village is regarded as a defence against the sort of fanaticism that leads to social or ethnic conflict. But every so often in English church history, compromise and emollience have triggered a countervailing reaction: an upsurge in faith of a more passionate kind. Such a change may be under way now. As the number of people who are actively committed to the Church of England falls, the proportion of churchgoers who are serious about their faith ü and its implications for private and public life ü is growing. Peter Brierley, a collector of statistics on faith in Britain, reckons that 40% of Anglicans attend evangelical parishes these days, up from 26% in 1989. That is against a background of overall decline; he thinks the number of regular worshippers in the Church of England will have fallen to 680,000 by 2020, down from about 800,000 now and just under 1m a decade ago. The lukewarm are falling away, leaving the pews to the more fervent. A handful of big evangelically-minded parishes now exercise huge influence, far beyond their immediate patch. Saint Helenÿs in Bishopsgate reaches out to workers in Londonÿs financial district; it has Āplantedā a dozen new communities in other places, using an American model of religious expansion. Holy Trinity, Brompton has exported a charismatic brand of Christianity via the Alpha course. Meanwhile All 103

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Souls in Langham Place, which shares a neighbourhood with department stores, broadcasters and arty bohemians, radiates forth a more sober brand of evangelism. What all these churches have in common is a reluctance to do the Church of Englandÿs traditional job of marrying, baptising or burying people who have no real religious commitment. That is a break with Anglicanismÿs familiar role as the undemanding Ādefault modeā of faith for a secular country. The Church of Englandÿs own number-crunchers confirm the picture of falling attendance at Sunday services in mainstream churches. They say the decline is counterbalanced by the number of people who drop into church on weekdays or are drawn in by y fresh expressionsā of faithüministries in places of work or recreation. Another bright point, they point out, is the steady number of people being ordained, around 500 each year. Of the 515 people accepted as candidates for ordination in 2010, fully 108 were under 30, up from 74 the previous year. Compare that with the Catholic church in France, which ordained only 83 priests in 2010. üp Yet many of the budding clericsüperhaps a thirdüare firm evangelicals. There is no mistaking the rising profile and confidence of training institutions like Wycliffe Hall in Oxford, a conservative evangelical outfit with strong American links; or Oak Hill in north London, where Archbishop Rowan Williams, the thoughtful, moderate head of the church, has often been denounced as a dangerous backslider. At present the archbishopÿs strongest challengers engers are liberals outraged by his compromises on women bishops and by his opposition to the governmentÿs plans to allow gay marriage. (It is now certain there will be women bishops; the question is how generously to accommodate clergy or parishes who will not submit to their authority.) But when the current generation of ordinands hit their stride, the balance may swing in a conservative direction. They are likely to give their bishops a hard time. Many of the rising generation of keen young clerics already make it clear they wish to work in large evangelical churches, ripe for American-style mission, rather than in slums or charming villages where social views are relaxed and doctrinal purity is not prized. Still, as Simon Barrow, of the liberal religious think-tank Ekklesia, points out, the Anglican evangelical movement is a mixed bag. It ranges from the Alpha-course founders who are happy to deal with Catholics, Orthodox Christians and other denominations, to more sectarian types who are keener on erecting high doctrinal fences. Evangelicalism, like Anglicanism as a whole, is a fairly broad church. So powerful is the nationÿs resistance to Ānarrownessā that even religious fervour rests on compromises. 104

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Higher education

Pretty polys The new universities are 20 years old, and still spry LIKE many towns built on iron and steel, Middlesbrough ÿ s fortunes have fallen since its heyday in the early 20th century. Yet the down-at-heel conurbation enjoys one institutional advantage. Since 1992 Teesside University, located in the middle of town, has more than doubled in size. Middlesbrough now boasts a growing population with swanky modern buildings to accommodate the students. The university is still itching to grow. Two decades ago this week, a former Conservative government enabled polytechnics to become universities. Once controlled by local authorities and vocationally orientated, they were freed to compete for students on the same playing field as much older institutions. There were worries that allowing them to award their own qualifications could devalue degrees, besmirch Britain ÿ s reputation for educational excellence and dilute their distinctive purpose. But they have proven popular. In 1995 the former polytechnics enrolled 35,300 fewer students than old universities; now they enroll 20,500 more. Much of the innovation in higher education has come from them. Teesside University has long offered courses broken down into modules that are assessed every term, rather than having students sit annual exams; modules are now widespread in Britain. Teesside also tries to reconcile what students want with what employers demand. Courses such as ĀCrime and Investigationā repackage the physics and chemistry sought by firms in a way that makes them palatable to students. Instead of asking potential students to await the start of the academic year, courses can start at short notice. The number of foreign students attending the former polytechnics and university colleges has more than doubled since 1992 ü faster than the growth at older universities. Universities UK, a pressure group, reckons that export earnings from international students totalled £8 billion ($12 billion) in 2009 and could grow to £17 billion by 2025. A British Council study due to be published on March 13th predicts that, by 2020, some 585,000 students from China and 296,000 from India will seek a university education overseas. Britainÿs new universities will compete for them, assuming the government can resist over-tightening student visas. 105

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Some new universities are also poised to benefit from the coalition governmentÿs attempts to create a market in higher education. Because the state subsidises student loans, ministers have imposed caps not only on the tuition fees universities can charge but also on the number of students they can admit. But it has provided a little wiggle room for two sorts of institution: cheap ones, and ones that recruit students who gain excellent grades at A-level, the exam normally sat at the age of 18. On March 7th David Willetts, the universities minister, announced that 20,000 places had been removed from the system and redistributed. Half were given to former polytechnics charging annual tuition fees of less than £7,500; the rest went to cheap further-education colleges. Additional growth could come from part-timers, who tend to study locally in the wth cou new universities. From September many will be eligible for student loans, which should increase demand for places (though it has also had the effect of pushing up the price of tuition). Over the past two decades many former polytechnics have played to their old strengths: building links with industry, liaising with employers and preparing youngsters for the job market. That strategy looks smart as Britain struggles with high youth unemployment and as recent graduates drift into lowly jobs (see box). Others, though, have gone head-to-head with traditional universities. The University of Greenwich, for example, quit its Woolwich Polytechnic base for the splendour of the former Royal Naval College buildings. Its tuition fees are too high for it to gain any of the 20,000 places doled out by the pen pushers, so it will need to attract many more high-fliers if it is to avoid contraction. n. That looks unlikely: just 3% of its usual intake of British students gain excellent A-level gr grades. Over the next few years higher education in Britain is likely to divide. The government ÿ s reforms will nurture high-quality provision in the dozen or so universities that attract large numbers of top applicants. Institutions that can run courses cheaply should succeed, too. Those stuck in the middle, whether former polytechnics or established universities, have some work to do.

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Education and jobs

Room at the bottom The latest shock-horror figures about underemployed graduates are more depressing for non-graduates ONE person out of every three who graduated from university in the past six years is in a job requiring only the skills of a school-leaver, up from one in four a decade ago. A 21-year-old graduate is about as likely to be unemployed in the year he leaves full-time education as a 16-year-old school-leaver with only GCSEs. The official figures make depressing reading for young people hoping that the better job higher education is meant to assure them will pay back the sums they have borrowed for college. This is not all a consequence of the recession. As the chart shows, the proportion of newish graduates in lower-skilled jobs was rising even before economic growth reversed in 2008; the downturn just steepened the slope. The laws of supply and demand are one reason. The number of recent graduates rose by almost half between 2001 and 2011; it is not surprising that some moved downmarket to find work. And though higher-skilled jobs have grown faster than lower-skilled ones over time, burger-flipping and the like are more available at the moment. Such jobs turn over frequently and are heavily advertised in job centres.

But if the outlook for graduates is dim, it is far worse for their less-educated counterparts. Though about a quarter of both new graduates and GCSE-holders are 107

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unemployed for a while when they leave full-time study, in two years less than 9% of graduates are still looking for work, compared with almost 27% of school-leavers. Overall, graduates earn more too. The push to send more young people to university does, in most cases, improve their chances. But it also increases the pressure on those left behind. Graduates, no less than migrants and older people working on, are taking jobs that less-skilled young Brits might once have had, notes Jim Hillage of the Institute for Employment Studies. es. IIt is an unintended consequence, but an important one. Bootleg tobacco

Smoke signals ㏿

❸ Efforts to stub out tobacco cco co smoking sm could boost smuggling THEY can be disguised as parcels of toys or board games, or hidden among kiwi fruit, oranges or tea. More than 20 billion smuggled cigarettes and 2,700 tonnes of rolling tobacco have been seized in Britain since 2000. Anti-smuggling agencies boast successes: bootleg cigarettes have shrunk from 21% to 10% of the market, says Her Majestyÿs Revenue and Customs. But the decline in black-market tobacco has stalled in recent years. And nearly half of all loose tobacco leaves, a product that has resisted the general decline in tobacco consumption, are contraband. Smuggling costs the exchequer around £2.2 billion ($3.5 billion) a year in lost revenues. By blunting the effect of price increases, it may also affect attempts to stub out smoking. But tobacco companies are shouting the loudest about inst tw smuggling, using the threat of contraband tobacco to lobby against two looming changes.

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The first will come in this monthÿs budget, when cigarette duty is likely to increase by 5%. Tax already accounts for three-quarters of the price of a typical packet of cigarettes, among the highest in Europe. This is supposed to discourage smoking, but tobacco firms argue that the government risks encouraging a different vice: stiff levies increase incentives to bypass legal sellers. Sales of bootleg cigarettes increased in Ireland after large tax increases in 2006-07. Britainÿs previous, Labour, government stepped back from steep tax rises in 2001 for fear that smuggling would surge. A second possible change is more radical. This spring the government will consult on the possible effects of introducing plain packaging for tobacco products. Australia has already passed such a law. From December 2012 all tobacco will be sold in generic olive-green packs with a product name in a plain, uniform font alongside graphic health warnings. France, Finland and Canada are also considering this idea. Tobacco firms are fuming at the prospect. After years of increasingly tight regulation, cigarette packets are now the main form of product differentiation, a Āsilent salesmanā to customers. Most advertising was halted in 2003. From April all tobacco products sold in supermarkets must be hidden from view; that constraint will apply to small retailers from 2015. Industry figures argue that plain packs are easily forged, boosting the counterfeit trade. This is unlikely, largely because of the way the illicit cigarette market has evolved. A few years ago most bootleg tobacco was duty-free produce that had been legally on sale somewhere, hawked in Britain for a profit. Now it is counterfeit cigarettes and Ācheap whitesā, brands not legally on sale, often from China. The gangs that have been drawn by high profit margins to import these sticks are sophisticatedü certainly capable of faking branded packs. After all, a paper carton is considerably easier to copy than a handbag. Mind Candy

Monstrous success An online games site for children seeks more hits in the real world ON APRIL 2nd Ā Music Rox ā , a compilation album, will go on sale. The debut collection of Zack Binspin, Dr Strangeglove, Zommer and others will probably do 109

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pretty well. The musicians already claim to have more than 50m registered fans, a third of them in Britain and another third in America. Many of these fans will consider ĀMusic Roxā an excellent use of their moneyüor of their parentsÿ. The album is the latest foray into the real world by Moshi Monsters, an online games site for children aged about six to 12. The monsters are the creation of Mind Candy, an eight-year-old company based in Shoreditch, a district of London that is home to dozens of other technology start-ups. Few of these hopefuls will make much money. Moshi Monsters are Shoreditchÿs star turn. Kids who join the site can adopt one of six types of monster. By solving puzzles they can earn rox,, the c currency of Monstro City, and buy monster treats. Monstro City is crowded: monsters have pets, called Moshlings; and other characters are dotted about. Some of this cast, such as Simon Growl, a talent scout, Lady Goo Goo (pictured) and Dustbin Beaver, may be vaguely familiar. The site also serves as a social network for its human visitors. A basic version is free. Subscribers may visit the Moshling Zoo or see their art in the Googenheim gallery. ÿs s fou Michael Acton Smith, Mind Candyÿs founder and chief executive, sees his company as a Disney of the digital age. Whereas the Magic Kingdom created its characters and stories on celluloid and then branched out into magazines and other merchandise, Mind Candyÿs plan is to start with online monsters and turn them into offline money-spinners. A year ago it launched Moshi Monsters, which has become becom the bestselling childrenÿ s magazine in Britain, shifting nearly 163,000 copies a month in the second half of 2011. ĀMoshling Zooā tops Amazonÿs list of the most popular games in Britain for the Nintendo DS handheld console. There are also trading cards, toys and costly silver charms. Last year more than $100m-worth (£64m) of Moshi Monsters merchandise was sold worldwide. Mr Acton Smith claims that Mind Candy would be profitable with either its online subscription revenues or its merchandising sales alone. ĀBoth are very high margin,ā he says. One advantage of starting with online content rather than film is that the fixed costs are much lower. It is also far cheaper to introduce new characters in an online world than in a cinematic sequel. And it is easy to tell how popular they are with customers. The monsters do not have everything their own way. Monstro City has a cyber-rival, Club Penguin, also wildly popular, where children can create flightless birds, play 110

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games and socialise. It is owned by Disney, which paid $350m for it in 2007. (Mr Acton Smith has no plans to sell, though Āsome time in the futureā a public share offering Āwould make senseā.) And Lady Goo Goo will not, alas, sing on ĀMusic Roxā. Her musical career was cut short in October when Lady Gaga, a real (though admittedly cartoonish) singer, won an injunction banning the release of any work by her near-namesake. Bagehot

A wit may also be wise In praise of an unconventional democrat and guardian of the original Bagehotÿs memory

HIS foes saw only snobbery and a peacockÿs weakness for dazzle and colour. In truth Norman St John-Stevas, who died on March 2nd, aged 82, drew delight and succour from pageantry and tradition as others take warmth from the sun. An important memory dated back to his teenage years, when the future academic, journalist and Conservative politician watched the wedding procession of Princess Elizabeth and Prince Philip. In middle age, an Icarus-like government career (a shimmering rise, cut short by incaution) already behind him, he recalled the strength and comfort that he derived from that glimpse of royalty in a glass coach: a Āshaft of lightā amid the Āphysical and spiritual greynessā of post-war Britain. Yet Lord St John of Fawsley, as he became, saw more than glitter in the great institutions of state. He saw a valuable, oak-beam solidity beneath their gilded 111

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sheen. And he was convinced that though the British public are a mistrustful lot, deep down they share that yearning for strong constitutional structures. His beliefs were reinforced by study of Walter Bagehot, a Victorian writer and editor of The Economist. St John-Stevas, who was a correspondent at this newspaper before entering Parliament in 1964, spent two decades editing Bagehotÿs complete works, in 15 volumes. (He also tracked down the great manÿs 89-year-old nephew, who fondly remembered his uncle and how he pronounced his name. Itÿs with a soft Āgā, as in badger.) g Both men saw the monarchy as embodying the Ādignifiedā parts of the state, conveying serene continuity while politicians squabble. A paternalist, St John-Stevas shared his hero ÿ s view that to be a member of Parliament was a splendid thingüat least when an MP was free to follow his judgment, rather than instructions from constituents (St John-Stevas spent years defying his Essex electors, notably voting to abolish the death penalty, to outlaw racial discrimination and to legalise homosexuality). hat the essence of Toryism is enjoymentā. Rather He loved to cite Bagehotÿs view that more furtively, he quoted Bagehotÿs faith in the Āstupidityā of the English, by which he meant a stolid resistance to novelty, and thus to the wilder excesses of ideology. St John-Stevas was an elitist, sometimes outrageously so. He was also a democrat and much concerned with social justice. Out of that tangle of beliefs came his greatest legacy: the system of MPs ÿ select committees overseeing each government department that he established in his brief time as Leader of the House of Commons. To achieve it, he had to fight fellow-ministers, who rightly foresaw Āa o rig shock to the systemā and a huge increase in scrutiny, says Lord Fowler, a former cabinet minister. But St John-Stevas was willing to fortify tradition with a dose of progress, says Lord Lamont, a former chancellor of the exchequer and a friend for 40 years: Ā He was above all a Tory romantic. He loved Victoriana, he loved Parliament, Disraeli and Gladstone, but he saw the good things in modernity.ā Many tributes have dwelt on his personal contradictions. They describe a boundless immodesty redeemed by self-mocking witüon being accused of name-dropping, St John-Stevas is said to have sighed: Ā The queen said the exactly same to me yesterday. ā Obituarists recount his bleakest hour, when indiscretion and an inability to resist a dissenting quip saw him sacked from the cabinet by Margaret Thatcher, his beloved ĀLeadereneā. With more or less delicacy, the press linked his 112

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dramatic personal style (he had a weakness for purple shirts, cherished his friendships with princesses and owned a framed pair of Queen Victoriaÿs stockings) to his unacknowledged homosexuality. St John-Stevas was an unusual man, who would struggle to be selected as a Tory now (for one thing, he was a committed pro-European). But a focus on quirks misses a larger lesson to be drawn from his passing. As an MP, St John-Stevas enjoyed political and moral constraints and freedoms that would have been broadly recognisable to Bagehot, a century earlier. By the time of his death, those constraints had turned through 180 degrees. Donÿt mention Burke Entering politics in the 1950s, St John-Stevas had little choice but to conceal part of who he wasüa gay manüalbeit beneath a carapace of campness, a form of hiding in plain sight. Today four Tory government ministers are openly gay. A far bigger risk would now be run by voicing that which St John-Stevas believed: that an MP should obey his judgment rather than voters or his local party. Though loyal to his seat of Chelmsford, St John-Stevas did not relish pavement politics. It is related that, under pressure at one election from Liberal activists counting each night he spent in the seat, the MP found a flat above the railway station, allowing him to be seen heading to bed in Chelmsford before discreetly catching the London train. A lynching might await an MP who quoted St John-Stevas (who was in turn quoting Bagehot) that a key role for Parliament is Āeducating the nationāüchewing over hard questions with greater knowledge and information than the common voter, then disseminating that wisdom via the reporting of debates. A new survey by YouGov, a pollster, finds that only a quarter of Britons think Parliament does a good job of discussing issues of concern to them, and thatüby two to oneüthey want MPs to be not representatives but delegates, voting according to constituents ÿ wishes. More voters think that big policy decisions should be determined by referendum than by parliamentary debate. Ironically, Parliament ÿ s best counter-argument may rest in select committees, which have in recent months held police chiefs, press barons and ministers to squirming account. St John-Stevas was hardly a populist (another ministerial legacy was doubling MPsÿ salaries). But distrustful, angry Britain should salute him.

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International Agricultural biodiversity

Banking against Doomsday ⁒ Gene banks represent an overdue push to preserve crop biodiversity. It also needs conserving on farms

㏨ WITH a heavy clunk, the steel outer doors of the Svalbard Global Seed Vault closed on February 28th, shutting out a howling Arctic gale and entombing a tonne of new arrivals: 25,000 seed samples from America, Colombia, Costa Rica, Tajikistan, Armenia and Syria. For Cary Fowler, the vaultÿs American architect, the Syrian chickpeas and fava beans were especially welcome. Opened in 2008, the Svalbard vault is a backup for the worldÿs 1,750 seed banks, storehouses of agricultural biodiversity. To illustrate the need for it, the Philippinesÿ national seed bank was destroyed by fire in January, six years after it was damaged by flooding. Those of Afghanistan and Iraq were destroyed in recent wars. Should the conflict in Syria reach that countryÿs richest store, in Aleppo, the damage would now be less. Some 110,000 Syrian seed samples are now in the Svalbard vault, out of around 750,000 samples in all. ĀWhen I see this,ā says Mr Fowler, looking lovingly at his latest consignment, ĀI just think, þthank goodness, theyÿre safe.ÿā

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The Svalbard vault is protected by two airlocks, at the end of a tunnel sunk 160 metres into the permafrost of Norway’s Arctic archipelago, outside the village of Longyearbyen, one of the world’s most northerly habitations. It is maintained at a constant temperature of -18°C. This is serious disaster preparedness: if its electricity were cut, Mr Fowler reckons the vault would take two centuries to warm to freezing point. He also enthusiastically points to its concave tunnel-head, designed to deflect the force of a missile strike. Such precautions have spawned the facility’s nickname: the Doomsday Vault. Mr Fowler, who manages it on behalf of Norway’s government, an association of Nordic gene banks and an international body, the Global Crop Diversity Trust, reckons the vault contains samples of around two-thirds of the world’s stored crop biodiversity. To augment this, he will also soon embark on a project, funded with $50m from Norway, to collect the seeds of many crops’ wild ancestors. A seedy business Most seed banks were created in the 1970s and 1980s, towards the end of a global surge in crop yields, wrought largely through the adoption of hybridised seed varieties, known as the Green Revolution. The idea was born of a realisation that a vast amount of agricultural biodiversity was being lost, as farmers abandoned old seeds, often locally developed over centuries, for the new hybrids. The extent of the loss, which continues today, is poorly documented. The extinction of non-human species is generally better studied than the loss of the genetic material that sustains humanity. Yet, largely on the basis of named crop varieties that are no longer extant, the UN’s Food and Agriculture Organisation estimates that 75% of crop biodiversity has been lost from the world’s fields. India is reckoned to have had over 100,000 varieties of rice a century ago; it now has only a few thousand. America once had around 5,000 apple varieties, and now has a few hundred. Such measures probably underestimate the scale of the losses, because a single traditional seed variety often contains a lot of genetic diversity.

It is hard to quantify how much this matters; but the long-term risks are potentially huge. Agricultural biodiversity is the best hedge against future blights, including pests, diseases and climate change. That is why plant breeders, from poor smallholders to the world’s biggest biotech firms, masters of the genetically modified organism (GMO), continuously update their genetic stock, often from obscure sources. 115

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gene banks are too small and too concentrated on a handful of commercial crops. Their urge to make profits is not necessarily aligned with the wider cause of feeding mankind. Hence a recent push to boost national gene banks, of which the Svalbard vault is a product.

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It is a heartening display of international co-operation. In the vault’s frozen sanctum, North Korean seeds, in neat brown wooden boxes, sit alongside stocks from South Korea—and from Congo, Bangladesh and Peru. In many such developing countries, gene banks are impoverished and badly managed, which is another threat to their stocks. Pondering one of the risks, Mr Fowler warns “a millennium of agricultural activity can disappear one night in a bowl of porridge.”

“If we ignore genetic diversity while we develop GMO products, we risk a disease or pest emerging that will wipe those types out,” says John Soper, head of crop genetics research at Pioneer Hi-Bred, the seed division of DuPont, a chemicals giant. He says the firm has drawn genetic material from its stock of wild American sunflower seeds three or four times in the past decade, in a bid to make its commercial varieties resistant to broomrape, a parasitic blight of southern Europe. It also has plans to cope with climate change, having recently opened a research outfit in chilly western Canada. It is trying to develop local varieties of maize (corn) and soyabean, which are not grown there commercially, but may be as the temperature climbs.

m wither wi Let them on the vine Yet seed banks are not the only answer to saving crop biodiversity: it also needs conserving in fields. This is because seed banks rarely store varieties of crop that do not produce seeds, including cassava, bananas and many other fruits and berries. They also rarely record local knowledge of their deposits, which can be almost as important as the seeds themselves. Unlike seed banks, moreover, nature is anything but ossified: it is gloriously adaptable. Over the past 15 years in West Africa, for example, populations

Yet biotech firms cannot be relied upon to look after crop biodiversity. Their 116

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of traditional sorghum varieties have been observed shortening their growth cycle by two weeks in response to a curtailed rainy season. The best way to harness this adaptability is simply to let nature get on with it. Farmers’ eagerness to jettison their wily old landraces is understandable. Improved varieties of seed are estimated to have boosted yields by 21-43%, independently of fertilisers and other inputs. To conserve crop biodiversity amid the inevitable rush for hybrids, seed banks have an important role. But another solution—as to many climate-related problems—is to make drastic improvements in land-use planning, and then encourage strategically placed farmers to dedicate a small area to traditional crops. Ways of doing this include developing niche markets for their endearingly old-school vegetables and grains or even, as in Nepal, with the national equivalent of a harvest festival. Its government regularly dishes out prizes to those farmers with the most biodiverse land. Such measures are less glamorous and more troublesome than depositing seeds in an Arctic bunker kindly paid for by Norwegian taxpayers. That is why they are too rarely taken, which is a great shame. If the world did a better job of tending crop biodiversity in its fields, the feared Doomsday after which the vault is nicknamed would be even less likely to come. Cybercrime

Doxed by Sabu An indictment casts some interesting light on recent hacker attacks HIS seven online aliases ü which include Anarchaos, POW and yohoho ü suggest that Jeremy Hammond, as somebody who spends much of his time at a keyboard talking to other people with aliases online, is a distrustful man. He now has even more reason to be. According to indictments revealed this week, Mr Hammond and four other hackers were betrayed by one of their own: Hector Xavier Monsegur, a 28-year-old unemployed programmer known mainly as Sabu, who spent months as an FBI informant. Mr Hammond is said to be the man who last December hacked into Stratfor, a private intelligence firm, and stole a large swathe of internal e-mails, which are now being published in dribs and drabs by WikiLeaks ü to the embarrassment of Stratforÿs government and corporate clients and to the mirth of everyone else. Mr 117

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Monsegur, who is being indicted along with the others, was allegedly the leader of LulzSec, a short-lived, small band of hackers (with names like Topiary, Avunit and Pwnsauce) that gained notoriety last summer by bringing down various websites, including that of the CIA, and breaking into a few computer systems, including one belonging to the United States Senate. He is also accused of previous hacks as a member of a hitherto unknown group called the Internet Feds, and of some cases of petty thievery such as using other peopleÿs eÿs credit cards. But in early June, at the height of LulzSecÿs activities, the real Feds reportedly caught up with him after he made a basic security mistake, and he is said to have agreed to co-operate. So he was allegedly already working for the FBI when, later in June, LulzSec announced that it was joining forces with Anonymous, a loose-knit global hacker coalition (whose Italian arm took down the Vaticanÿs website on March 7th, see article), to launch an operation called AntiSec. While LulzSec claimed to be hacking Āfor the lulzā (ie, for fun), AntiSec was supposedly a more political effort. mies. Lu But Sabu had already made enemies. LulzSec had a scattergun approach, targeting entertainment firms, a pornography site and especially galling to other hackers üseveral games companies. The group began to come under attack itself. A former member is said to have posted a log of online chats between LulzSecÿs members, its own site was briefly brought down and a group calling itself the A-Team Ādoxedā üie, revealed personal information aboutüten people it claimed were members of LulzSec (though some have since denied it). The same post ridiculed LulzSec as amateurs and offered to provide more data on them to any law enforcement agency that wanted it. The next day LulzSec announced it was disbanding. Fear and loathing AntiSec, though, continued, and over the following months, dozens of da databases and websites in America and abroad, mainly belonging to government age agencies, were broken into. Some of the attacks disturbed even other hackers. Last month a statement purporting to be from Anonymous suggested that the hacking of a law firm defending an American soldier over the Haditha massacre in Iraq might be the work of government provocateurs who were trying to discredit Anonymous. Critics of AntiSec also pointed out that its main achievement was likely to be more government security, not less. The claim of Mr Monsegur ÿ s treachery invites more than one question. Could 118

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AntiSec have been conceived at first as some sort of sting operation? Could Mr Monsegur have contributed to the arrest of 25 other people on cybercrime charges in Spain and Latin America last month? Who else might have been betrayed? Whatever the truth, the hacker world must now be seething with suspicion. Migration and religion

Holy rollers Christians comprise a third of the world's people but half its migrants, according to a report from the Pew Research Centre. They make up three-quarters of foreigners living in America, and 56% in the EU. Jews are the most footloose of all: one in four live outside their country of birth. Only 27% of immigrants are Muslim, who most commonly move to Saudi Arabia or Russia. Migrants favour countries that are both economically vibrant and culturally familiar—fewer tempting destinations may be one reason why Muslims are less inclined than

Christians to up sticks.

Poaching

Black ivory Last year was dreadful for African elephants. This year may be worse IT IS a bad time to be an elephant, particularly in Africa. Almost 24 tonnes of illegally harvested ivory were seized by investigators in 2011 ü the largest haul since records began in 1990 and more than twice the amount in 2010. Traffic, a wildlife watchdog, reckons around 2,500 elephants must have died to produce so much ivory. This year could be worse. More than 200 elephants were killed in a 119

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single state of Cameroon in the first six weeks of 2012. This threatens to return African elephants to the crisis times of the 1970s and 1980s, when poaching was rampant and extinction loomed for many populations. This led to an ivory trade ban, in 1989, and in turn to a collapse in demand for ivory. Elephant populations have since recovered. Yet the effects of the ban seem to be wearing thin, especially in east, west and central Africa, where wildlife protection is generally weak and the poaching heaviest. Illegally gathered ivory typically leaves Africa from Kenya or Tanzania in shipping containers. It often passes through Malaysia, where forged papers disguise its origins. Most is then dispatched to China or Japan. Some tusks also pass through the bazaars of Cairo, where Chinese traders are the biggest buyers China is the biggest recipient of poached African ivory; and the countryÿs demand for the stuff is surging. A study of two Chinese cities for Traffic, by Esmond Martin and Lucy Vigne, concluded that since 2004 the number of ivory items for sale there had grown by 50%. Some ivory can be traded legally, forr example when the elephant that grew it died exam of natural causes or was shot to protect people or crops. Some African countries have stocks that predate the ban, which they can also sell. Such legal ivory sells for around $900 a kilogram in China ÿ s wholesale market, with the average tusk weighing between five and nine kilograms. A cheaper sort comes from extinct woolly mammoths, which are periodically excavated ed from Siberiaÿs tundra. In southern Africa, where there is relatively little poaching, support for lifting the trade ban is strong. But east African countries, especially Kenya, which led the original campaign for it, say this would increase demand for ivory, which would often be met by poachingügiven how easy it is to pass off illegal ivory as the legal kind. The collapse in demand for ivory that followed the trade ban supports that argument. So does the recent research by Mr Martin and Ms Vigne. Though legal ivory in Chinaÿs markets is meant to be marked as such, they found this was true of less than half the ivory for sale in Guangzhou in January 2011. Only a tenth of shops selling ivory had the necessary licenses. Yet if the trade ban is losing its force, what will save the elephants? Iain Douglas-Hamilton, the founder of Save the Elephants, an advocacy group, says educating Chinese shoppers about the bloody origins of their purchase would help. There is currently an advertising campaign in China to do so. It features Chinese 120

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celebrities, like Yao Ming, a basketball star, and Ding Junhui, a snooker player, urging people not to buy products from endangered species. ĀWhen the buying stops,ā they say, Āthe killing can too.ā Vatileaks

Rocking the Holy See A string of leaked documents is shaking things up at the Vatican On March 7th, Anonymous, a hackers ÿ network, took credit for temporarily bringing down the Vatican ÿ s website, calling the Catholic church "corrupt" and "retrograde". But the more dangerous attacks come from within the Holy See. Its police force, the Gendarmerie, is hunting for the source of an unprecedented string of leaks, most of them apparently intended to get Pope Benedict XVI to dismiss Tarcisio Bertone, who as secretary of state is the Vaticanÿs most senior official. The stakes are high. The pope will be 85 next month. And whoever is secretary of state when Benedict dies will play an important, perhaps decisive, role in choosing his successor. Cardinal Bertone, who rose in the Vaticanÿs hierarchy as a close ally of Benedictÿ s, has many enemies within the high walls of the worldÿs tiniest independent state. His appointment in 2006 to head a department staffed by trained diplomats upset many who had come to expect they would be led by one of their own. But nobody, it is said, resented his promotion more than the man he replaced, Cardinal Angelo Sodano, some of whose former aides hold influential posts in the hierarchy. Jovial but brash, Cardinal Bertone has clashed behind the scenes with both the head of the Catholic church in Italy and the boss of the Vatican bank, the Institute for Works of Religion. This second wrangle is particularly unfortunate. The Holy See is waiting to hear in June whether it qualifies for the Āwhite listāof states that meet the European Unionÿs standards of financial transparency. The Vatican bankÿs chief, Ettore Gotti Tedeschi, is credited with a hard line on compliance. Reports of differences with Cardinal Bertone fuel suspicions (unfair or not) that the secretary of state favours laxity. Cardinal Bertone is blamed by adversaries for failing to avert the gaffes that have marred Benedictÿs papacy. He is also criticised for being ill-equipped for the job (he speaks neither English nor French), for a brash ü and seemingly improvised ü 121

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managerial style, and for exceeding his powers. That was the issue behind the latest leak. Il Fatto Quotidiano, a newspaper, printed documents showing that the pope had taken sides against Cardinal Bertone over his attempt to grab control of a powerful institute in Milan. The most sensational revelation came when the same paper published an internal memo quoting one cardinal as saying that Benedict would be dead by yearÿs end. Less dramatic, but more damaging for Cardinal Bertone, was yet another leak showing that he transferred to Washington a prelate who claimed to have uncovered evidence of corruption and cronyism in the awarding of Vatican contracts. Even so, the secretary of stateÿs removal is no foregone conclusion. Were he to get rid of him, the pope would be implicitly admitting he blundered not just in appointing Cardinal Bertone, but also in resisting calls from fellow cardinals three missal. years ago for his dismissal.

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Special report: Nuclear energy

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Special report: Nuclear energy The dream that failed Nuclear power will not go away, but its role may never be more than marginal, says Oliver Morton

THE LIGHTS ARE not going off all over Japan, but the nuclear power plants are. Of the 54 reactors in those plants, with a combined capacity of 47.5 gigawatts (GW, a thousand megawatts), only two are operating today. A good dozen are unlikely ever to reopen: six at Fukushima Dai-ichi, which suffered a calamitous triple meltdown after an earthquake and tsunami on March 11th 2011 (pictured above), and others either too close to those reactors or now considered to be at risk of similar disaster. The rest, bar two, have shut down for maintenance or Ā stress testsā since the Fukushima accident and not yet been cleared to start up again. It is quite possible that none of them will get that permission before the two still running shut for scheduled maintenance by the end of April. Japan has been using nuclear power since the 1960s. In 2010 it got 30% of its electricity from nuclear plants. This spring it may well join the ranks of the 150 nations currently muddling through with all their atoms unsplit. If the shutdown happens, it will not be permanent; a good number of the reactors now closed are likely to be reopened. But it could still have symbolic importance. To do without 123

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something hitherto seen as a necessity opens the mind to new possibilities. Japan had previously expected its use of nuclear energy to increase somewhat. Now the share of nuclear power in Japanÿs energy mix is more likely to shrink, and it could just vanish altogether. In most places any foretaste of that newly plausible future will barely be noticed. Bullet trains will flash on; flat panels will continue to shine; toilet seats will still warm up; factories will hum as they hummed before. Almost everywhere, when people reach for the light switches in their homes, the lights will come on. But not quite everywhere. In Futaba, Namie and Naraha the lights will stay off, and no factories will hum: not for want of power but for want of people. The 100,000 or so people that once lived in those and other towns close to the Fukushima Dai-ichi nuclear power plant have been evacuated. Some 30,000 may never return. The triple meltdown at Fukushima a year ago was the world’s worst nuclear accident since the disaster at Chernobyl in the Ukraine in 1986. The damage extends far beyond a lost power station, a stricken operator (the Tokyo Electric Power Company, or Tepco) and an intense debate about the future of the nation’s nuclear power plants. It goes beyond the trillions of yen that will be needed for a decade-long effort to decommission the reactors and remove their wrecked cores, if indeed that proves possible, and the even greater sums that may be required for g decontamination (which one expert, Tatsuhiko Kodama of Tokyo University, thinks could cost as much as ¥50 trillion, or $623 billion). It reaches deep into the lives of the displaced, and of those further afield who know they have been exposed to the fallout from the disaster. If it leads to a breakdown of the near-monopolies enjoyed by the country’s power companies, it will strike at some of the strongest complicities within the business-and-bureaucracy establishment.

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back to the second world war, otherwise seldom discussed: to the battle of Iwo Jima to describe the heroism of everyday workers abandoned by the officer class of company and government; to the imperial navy’s ill-judged infatuation with battleships, being likened to the establishment’s eagerness for ever more reactors; to the war as a whole as a measure of the sheer scale of the event. And, of course, to Hiroshima. Kiyoshi Kurokawa, an academic who is heading a commission investigating the disaster on behalf of the Japanese parliament, thinks that Fukushima has opened the way to a new scepticism about an ageing, dysfunctional status quo which could bring about a “third opening” of Japan comparable to the Meiji restoration and the American occupation after 1945. To the public at large, the history of nuclear power is mostly a history of accidents: Three Mile Island, the 1979 partial meltdown of a nuclear reactor in Pennsylvania caused by a faulty valve, which led to a small release of radioactivity and the temporary evacuation of the area; Chernobyl, the 1986 disaster in the Ukraine in which a chain reaction got out of control and a reactor blew up, spreading radioactive material far and wide; and now Fukushima. But the field has been shaped more by broad economic and strategic trends than sudden shocks. The renaissance that wasn’t America’s nuclear bubble burst not after the accident at Three Mile Island but five years before it. The French nuclear-power programme, the most ambitious by far of the 1980s, continued largely undisturbed after Chernobyl, though other countries did pull back. The West’s “nuclear renaissance” much bruited over the past decade, in part as a response to climate change, fizzled out well before the roofs blew off Fukushima’s first, third and fourth reactor buildings. Today’s most dramatic nuclear expansion, in China, may be tempered by Fukushima, but it will not be halted.

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For all that, Fukushima is a heavier blow than the previous two. Three Mile Island, disturbing as it was, released relatively little radioactivity and killed nobody. By causing nuclear safety to be tightened and buttressed with new institutions, it improved the industry’s reliability and profitability in America. Chernobyl was far worse, but it was caused by egregious operator error in a totalitarian regime incapable of the sort of transparency and accountability needed to ensure nuclear safety. It put paid to nuclear power in Italy and, for a while, Sweden, but in general it could be treated as an aberration of little direct relevance to the free world’s nuclear programmes. Poor regulation, an insufficient safety culture and human error (without which the Japanese tsunami’s effects might have been very different) are much more worrying when they strike in a technologically advanced democracy working with long-established reactor designs. And if the blow is harder than the previous one, the recipient is less robust than it once was. In liberalised energy markets, building nuclear power plants is no longer a commercially feasible option: they are simply too expensive. Existing reactors can be run very profitably; their capacity can be upgraded and their lives extended. But forecast reductions in the capital costs of new reactors in America and Europe have failed to materialise and construction periods have lengthened. Nobody will now build one without some form of subsidy to finance it or a promise of a favourable deal for selling the electricity. And at the same time as the cost of new nuclear plants has become prohibitive in much of the world, worries about the dark side of nuclear power are resurgent, thanks to what is happening in Iran. Nuclear proliferation has not gone as far or as fast as was feared in the 1960s. But it has proceeded, and it has done so hand in hand with nuclear power. There is only one state with nuclear weapons, Israel, that does not also have nuclear reactors to generate electricity. Only two non-European states with nuclear power stations, Japan and Mexico, have not at some point taken steps towards devel developing nuclear weapons, though most have pulled back before getting there. If proliferation is one reason for treating the spread of nuclear power with caution, renewable energy is another. In 2010 the world’s installed renewable electricity capacity outstripped its nuclear capacity for the first time. That does not mean that the world got as much energy from renewables as from nuclear; reactors run at up to 93% of their stated capacity whereas wind and solar tend to be closer to 20%. Renewables are intermittent and take up a lot of space: generating a gigawatt of electricity with wind takes hundreds of square kilometres, whereas a nuclear reactor with the same capacity will fit into a large industrial building. That may limit the contribution renewables can ultimately make to energy supply. Unsubsidised 126

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renewables can currently displace fossil fuels only in special circumstances. But nuclear energy, which has received large subsidies in the past, has not displaced much in the way of fossil fuels either. And nuclear is getting more expensive whereas renewables are getting cheaper.

Ulterior motives Nuclear power is not going to disappear. Germany, which in 2011 produced 5% of the world’s nuclear electricity, is abandoning it, as are some smaller countries. In Japan, and perhaps also in France, it looks likely to lose ground. But there will always be countries that find the technology attractive enough to make them willing to rearrange energy markets in its favour. If they have few indigenous energy resources, they may value, as Japan has done, the security offered by plants running on fuel that is cheap and easily stockpiled. Countries with existing nuclear capacity that do not share Germany’s deep nuclear unease or its enthusiasm for renewables may choose to buy new reactors to replace old ones, as Britain is seeking to do, to help with carbon emissions. Countries committed to proliferation, or at least interested in keeping that option open, will invest in nuclear, 127

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as may countries that find themselves with cash to spare and a wish to join what still looks like a technological premier league. Besides, nuclear plants are long-lived things. Today’s reactors were mostly designed for a 40-year life, but many of them are being allowed to increase it to 60. New reactor designs aim for a span of 60 years that might be extended to 80. Given that it takes a decade or so to go from deciding to build a reactor to feeding the resulting electricity into a grid, reactors being planned now may still be working in the early 22nd century. Barring major technological developments, though, nuclear power will continue to be a creature of politics not economics, with any growth a function of political will or a side-effect of protecting electrical utilities from open competition. This will limit the overall size of the industry. In 2010 nuclear power provided 13% of the world’s om 18 electricity, down from 18% in 1996. A pre-Fukushima scenario from the International Energy Agency that allowed for a little more action on carbon dioxide than has yet been taken predicted a rise of about 70% in nuclear capacity between 2010 and 2035; since other generating capacity will be growing too, that would keep nuclear’s 13% share roughly constant. A more guarded IEA scenario has rich countries building no new reactors other than those already under construction, other countries achieving only half their currently stated targets (which in nuclear matters are hardly ever met) and regulators being less generous in extending the life of existing plants. On that basis the installed capacity goes down a little, and the share of the electricity market drops to 7%. Developing nuclear plants only at the behest of government will also make it harder for the industry to improve its safety culture. Where a government is convinced of the need for nuclear power, it may well be less likely to regulate it in the stringent, independent way the technology demands. Governments favour nuclear power by limiting the liability of its operators. If they did not, the industry would surely founder. But a different risk arises from the fact that governments can change their minds. Germany’s plants are being shut down in response to an accident its industry had nothing to do with. Being hostage to distant events thus adds a hard-to-calculate systemic risk to nuclear development. The ability to split atoms and extract energy from them was one of the more remarkable scientific achievements of the 20th century, widely seen as world-changing. Intuitively one might expect such a scientific wonder either to sweep all before it or be renounced, rather than end up in a modest niche, at best stable, at worst dwindling. But if nuclear power teaches one lesson, it is to doubt all 128

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stories of technological determinism. It is not the essential nature of a technology that matters but its capacity to fit into the social, political and economic conditions of the day. If a technology fits into the human world in a way that gives it ever more scope for growth it can succeed beyond the dreams of its pioneers. The diesel engines that power the world’s shipping are an example; so are the artificial fertilisers that have allowed ever more people to be supplied by ever more productive farms, and the computers that make the world ever more hungry for yet more computing power.

The way the future was There has been no such expansive setting for nuclear technologies. Their history has for the most part been one of concentration not expansion, of options being closed rather than opened. The history of nuclear weapons has been defined by avoiding their use and constraining the number of their possessors. Within countries they have concentrated power. As the American political commentator Gary Wills argues in his book, “Bomb Power”, the increased strategic role of the American presidency since 1945 stems in significant part from the way that nuclear weapons have redefined the role and power of the “commander-in-chief” (a term previously applied only in the context of the armed forces, not the nation as a whole) who has his finger on the button. In the energy world, nuclear has found its place nourishing technophile establishments like the “nuclear village” of vendors, bureaucrats, regulators and utilities in Japan whose lack of transparency and accountability did much to pave the way for Fukushima and the distrust that has followed in its wake. These political settings govern and limit what nuclear power can achieve.

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A brief history

From squash court to submarine Nuclear reactors and their uses have not changed much over seven decades

THE NUCLEAR AGE began 70 years ago on a squash court in Chicago, under the watchful eye of a man with an axe. A team led by Enrico Fermi, Italy’s greatest physicist since Galileo, had been building a nuclear “pile” for weeks, slotting pellets of uranium and bricks of graphite into a carefully planned geometry through which ran various “control rods” of cadmium. The squash court was the only convenient large space available on the university campus. On December 2nd 1942 the pile had grown large enough to allow a nuclear reaction to take off when the control rods were drawn back from its heart. The axeman was there in case the reaction went out of control. If it did he would chop through a rope, sending the main control rod crashing back into place, absorbing the neutrons driving the reaction and restoring stability. Like many of Fermi’s ideas, it had the charm of simplicity. Today every commercial power reactor has control rods poised to shut it down at a moment’s notice, a procedure called a scram—in honour, so it is said, of Chicago’s “safety control rod axeman”. On that first occasion, nothing went wrong. As the pile’s other control rods were mechanically withdrawn, radiation counters ticked up. Once Fermi was satisfied that they were showing a true chain reaction, he had the rods reinserted. A celebratory bottle of Chianti was opened. A coded phone call informed the head of the National Defence Research Committee that “the Italian navigator has landed in 130

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the new world.” The axeman put down his axe. The energy output of that first reactor was tiny: just half a watt. Today’s most powerful reactors produce ten billion times as much energy in the form of heat, about a third of which can be converted into electricity. Five gigawatts is an amount beyond easy comprehension, the daily equivalent of the energy given off by six bombs like the one that destroyed Hiroshima. Imagine that energy coursing through a few swimming pools-worth of water at three times the normal boiling point, trapped in a steel cylinder under pressures found a mile below the sea, and you have a sense of the hellish miracle that is a modern reactor. If flights had lasted a billion times longer 70 years after the Wright brothers’ first one took off, they would have gone a thousand times round the world and taken centuries; a billion times faster, and they would have run up against the speed of light. Even at the heady rates of progress that Moore’s law ascribes to the computer industry (stating that the number of transistors on a chip doubles roughly every two years), things take 60 years to get a billion times better. Fermi and his nuclear family But such comparisons flatter nuclear technology. The Wright brothers wanted their first aircraft to fly as far and as fast as it could; the first reactor was designed to do things in as small and safe a way as possible. At the time Fermi demonstrated the first controlled chain reaction, the uncontrolled ones that would devastate Hiroshima and Nagasaki were already being planned. Reactors capable of generating hundreds of megawatts of heat were on his colleagues’ drawing boards. Nuclear power did not grow steadily over decades the way aircraft and computers have done. It blossomed fast, then held strangely steady. Using reactors to generate electricity was not an early priority. The reactors of the Manhattan Project—the wartime nuclear programme begun in earnest shortly after Fermi’s success—were designed to further the project’s only goal: making bombs. A nuclear chain reaction, whether in a reactor or an exploding bomb, comes about when the splitting of a “fissile” nucleus by a neutron produces neutrons that will go 131

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on to split further fissile nuclei. The fissile nuclei in Fermi’s reactor were of a particular type or “isotope” of uranium, U-235. In natural uranium, only seven nuclei in every 1,000 are of this fissile sort. That was not a problem for Fermi’s reactor. The addition of graphite—a “moderator”—slowed down the neutrons that were being given off, which made them better at splitting other nuclei and enabled a chain reaction to take place even when fissile nuclei were scarce. Bombs are not the place for moderation: to make a uranium bomb you need a core that is almost entirely U-235. As separating out U-235 is extremely difficult, the Manhattan Project’s ct’s t’s physicists were not sure they could provide it on the scale that bomb-makers would require.

That created a need for an alternative source of fissile material, and reactors provided it. When a neutron hits one of the non-fissile uranium nuclei— the vast majority—it can turn it into a new element: plutonium. Plutonium nuclei are fissile, and getting a bit of plutonium out of uranium that has been sitting in a reactor is far easier than separating uranium isotopes. Reactors could thus serve as plutonium factories, and the early ones were used exclusively for that purpose. By the mid-1950s some reactors in Britain and France were generating electricity as well; they needed to be cooled anyway, and using the gas that cooled them to drive steam turbines was good public relations. But their main purpose was still to provide fuel for bombs. Rickover’s killer app Almost all of today’s nuclear power plants have a different lineage. Hyman Rickover, a redoubtable American submariner, saw a niche for nuclear power plants in submarines. The diesel-powered sort needed to take on air through a snorkel; nuclear-powered ones would be able to stay submerged indefinitely. But a graphite-moderated reactor would never be compact enough for submarines. 132

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Rickover eventually settled on a reactor design that economised on space by using water as both moderator and coolant—a pressurised water reactor, or PWR. In many ways this is a poor compromise. Water cannot be heated much above 350°C, even under pressure, and still stay liquid. That limits the efficiency of energy conversion (the hotter the better in such matters). And normal water is not a very good moderator. So-called “heavy water”, which contains a different hydrogen isotope, is better, but a lot harder to come by than the “light” type.

Admirable admiral To make up for poor moderation, a light-water reactor needs fuel enriched in U-235. It does not have to be enriched as much as uranium for bomb-making does, but the enrichment systems used to make fuel for such reactors can almost as easily be used to make the weapons-grade uranium that bomb-makers need. This is the technological basis of the stand-off with Iran, which has claimed unconvincingly that its enrichment facilities are just for reactor fuel. Other combinations of fuel and moderator would have allowed the use of non-enriched uranium, and could indeed have got by without producing plutonium as a waste product, thus establishing a much clearer dividing line between nuclear power and nuclear weapons. But they would not have powered the submarines of the 1960s. In the early 1950s nuclear physicists were for the most part unexcited by the light-water reactor’s potential. By the time the nuclear age was just ten years old they already knew of many kinds of fuel, various moderators (as well as designs that needed no moderation) and many ways of getting heat out of reactors. They were excited by “breeder” reactors that both burned and created plutonium. America’s first was built in 1951, and the assumption 133

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was that any nuclear-energy economy worth the name would make use of the technology’s miraculous ability to produce its own fuel. The fascination continued for decades. Breeder reactors have been built in Russia, Britain, Germany, India, China, France and Japan as well as America. But they have not proved remotely attractive enough for commercial development in a world which seemed to have plenty of uranium. By 1952 bomb-makers had also massively multiplied the power of their wares by adding nuclear fusion, in which energy is liberated by adding together small nuclei rather than splitting apart large ones. Schemes to make reactors on the same principle sprang up immediately. Sixty years on, this line of research continues, at great expense, without any prospect of commercial plausibility. Make mine a PWR The navy did not need exciting ideas; it needed submarine power plants that used available technologies. In Rickover it had an organisational genius capable of creating the industrial base needed to provide them, choosing and training the naval engineers needed to operate them, and instilling in that cadre the meticulous safety culture needed to stop the reactors from going haywire. Under Rickover’s tutelage American industry learned to make PWRs, which it went on to offer to electrical utilities. So PWRs became the mainstay of America’s nuclear-power industry as it grew up in the 1960s, with the boiling-water reactor (BWR)—a similar light-water design, less efficient and unseaworthy but in some ways simpler and possibly safer—providing an alternative. BWRs currently make up 21% of the world’s nuclear capacity, but that figure is set to diminish, not so much because the simila imila setting would not Fukushima reactors were of that kind (old PWRs in a similar necessarily have fared better) but because the few countries s that th ever went for the technology on any scale have little appetite for new plants (America) or none at all (Germany and Japan). The 68% of the world’s nuclear electricity from PWRs is thus set to increase, with other technologies trailing way behind. Such homogeneity in a 70-year-old high-technology enterprise is remarkable. Seven decades after the Wright brothersÿ first flight there were warplanes that could travel at three times the speed of sound, rockets that could send men to the moon, airliner fleets that carried hundreds of thousands of passengers a day, helicopters that could land on top of skyscrapers. Include unmanned spacecraft, and there really were flights a billion times as long as the Wright brothersÿ first and lasting for years. But aircraft were capable of diversity and evolution and could be developed cheaply by small teams of engineers. It is estimated that during the 134

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1920s and 1930s some 100,000 types of aircraft were tried out. Developing a nuclear reactor, on the other hand, has never been a matter for barnstorming experimentation, partly because of the risks and partly because of the links to the technologies of the bomb. And whereas there are lots of things you can do with aircraft, more or less the only practical things you can do with a reactor are to make plutonium for bombs, power submarines, produce isotopes used in medicine and generate heat and electricity. Only the last is big business, and it can easily be done by other means. So options have been closed down and eggs have been piled into single baskets. The world went with pretty much the first sort of reactor it saw deployed at scale, contenting itself with increasing its size and trying, over the years, to render it ever less in need of the attentions of the axeman. Safety

Blow-ups happen Nuclear plants can be kept safe only by constantly worrying about their dangers

FOR THE SURFERS offshore the wall will be almost invisible, hidden behind the existing sand dunes and pine trees. From the land it will tower 10-12 metres above the Hamaoka nuclear power plantÿs perimeter road. It will be 1.6 kilometres long and two metres thick; its foundations will be deeper than the wall itself is tall. It will weigh the best part of 1m tonnes. This is what Japanÿs Chubu Electric Power thinks it will take to stop a tsunami a touch bigger than the one that hit Fukushima, which is slightly farther from Tokyo to the north-east than Hamaoka is to the south-west. Chubu expects to have the wall finished by the end of this year. Until then 135

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Hamaokaÿs three reactorsütwo of them similar to those at Fukushimaüremain shut down. At Fukushima the 14-metre tsunami easily topped the inadequate defences. It flooded all but one of the plantÿs back-up diesel generators and trashed the pumps meant to dump the reactorsÿ waste heat into the sea. The plantÿs reactors had been scrammed 40 minutes before the wave hit, but although shutting down a reactor ÿ s chain reaction lowers its heat output by about 97% almost instantaneously, the other 3% takes some time to drop to negligible levels, and that still amounts to a lot of heat. With no electricity either from the grid or from diesel generators to pump the heat away, all that was available were back-up systems powered by steam from the reactors themselves. In part because of human error, they failed. The fuel in the reactors’ cores got hot enough to melt. The cladding on the fuel rods reacted with steam to produce hydrogen. Systems that should have flushed the potentially explosive hydrogen out of the containment vessels around the reactors also failed, so the gas started to accumulate in the buildings housing the reactors. One after the other, three of the buildings blew up, releasing radioactive material and contaminating an area that in he 20some directions went well beyond the 20-kilometre evacuation zone. The reactors at Fukushima were of an old design. The risks they faced had not been well analysed. The operating company was poorly regulated and did not know what was going on. The operators made mistakes. The representatives of the safety inspectorate fled. Some of the equipment failed. The establishment repeatedly played down the risks and suppressed information about the movement of the radioactive plume, so some people were evacuated from more lightly to more heavily contaminated places. The outcome could quite easily have been even worse. Fukushima had a lot of used fuel in spent-fuel ponds, which keep it cool and absorb its radiation. The explosion in building 4, which had no fuel in its reactor but whose spent-fuel pool was full, led some to believe that the water in the pool had drained away and the spent fuel was melting, though in fact the explosion seems to have been caused by hydrogen from building 3. A worst-case analysis by Japan’s Atomic Energy Commission, not published at the time, suggested that if the hot fuel was indeed left high and dry, people as far away as parts of Tokyo would need to be evacuated and everyone in the capital would have to stay indoors. And there are a number of big cities—London, New York, Hong Kong, Los Angeles—that are closer to ageing nuclear plants than Tokyo is to Fukushima. 136

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Just in case The governing principle of nuclear safety is “defence in depth”. Seek first to prevent failure, then to correct failures not prevented, then to control the consequences of failure, then to deal with emergencies beyond normal control. The mighty wall at Hamaoka provides a good example. It should, in itself, protect the plant from the worst that the sea can throw at it. But if the wall should fail, new pumps installed in watertight buildings will make sure the plant can still dump heat in the sea. The three reactor units are being reinforced to keep the sea from ever reaching the locomotive-sized diesel generators on their ground floors. More diesel generators are mounted on the roofs, well above any conceivable tsunami; on the bluff behind the reactor buildings there is a gas turbine to provide further back-up, not to mention a fleet of small trucks with their own little pumps, ready to go where they are needed. This is not the first revamping of Hamaoka. The plant sits on top of the Nankai Trough, where two tectonic plates grind together. This action can produce powerful earthquakes such as that of March 11th last year or the one that caused the Boxing Day tsunami in 2004. In the past decade Chubu has revamped the Hamaoka plant to make sure that it could ride out a big earthquake, reinforcing various parts of the plant and closing the two oldest reactors. On paper, at least, there is no plant in the world more earthquake-proof than Hamaoka.

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There are, though, plants with greater claims to a safe design overall. Two of the reactors at Hamaoka, commissioned in 1987 and 1993, are what is known as “generation II” designs, dating from the period after the industry settled on certain standards in the late 1960s but before Chernobyl. The third, switched on in 1999, is one of Toshiba’s Advanced Boiling Water Reactors, the first of the post-Chernobyl “generation III” designs. Modelling based on experience with previous plants suggests that the risk of a significant radiation leak from generation I reactors was between one in 1,000 and one in 10,000 per reactor year. For generation II it is between one in 10,000 and one in 1m. For generation III it should be between one in 1m and one in 100m. These calculations do not reflect the absolute risks as experienced in the real world; there have been five major releases of radioactivity (Three Mile Island, Chernobyl and the three reactors at Fukushima) in only 14,000 reactor years of operation. But the trend towards safety seems to be real. Two generation III designs thought to be particularly advanced are currently under construction. The AP1000 from Westinghouse (now owned by Toshiba) is being built in China and America, and the EPR from Areva, a French company resulting from a merger between French and German nuclear-plant-builders, in China, Finland and France. The EPR is the biggest plant ever designed and has safety systems galore, which means more pipes, more wiring, more concrete and higher capital costs. The AP1000 aims instead for simplicity, with fewer valves, pumps and wires and a greater reliance on “passive” safety systems that use basic physics to provide emergency cooling and other safety functions. A French insider, unwilling to be named, considers the AP1000 to be a far more creative piece of engineering. The Union of Concerned Scientists, an American ginger group critical of most real-world nuclear programmes (though not of the technology per se), prefers the safety concept of the EPR, with its multiple back-ups. Proponents of generation III reactors, which is to say pretty much the entire nuclear establishment, think—with some reason—that they would have fared much better at Fukushima. Indeed some feel that the circumstances at Fukushima—a freakishly large wave, an old set of reactors with insufficient safety equipment and a poor operator, poorly regulated—limit its relevance elsewhere. Those operating reactors with lower risks of flooding or earthquake, better emergency cooling systems and more robust power supplies might see themselves as having little to learn from it. Philippe Jamet, of France’s nuclear regulator, the ASN, insists on a broader view; that Fukushima demonstrates a shortfall in imagination, not just in Japanese regulators but also in people like himself. “If you had asked me a year ago about an accident in which multiple units were left without power and cooling,” he says, “I 138

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would have said it was not credible.” The ASN has introduced new requirements for nuclear plants based on the Fukushima accident that go beyond safeguards against earthquakes and flooding. A report from America’s Nuclear Regulatory Commission reflects similar concerns. As well as suggesting new rules, it calls for a new coherence in the regulatory “patchwork” that has grown up to deal with highly unlikely events. Never be satisfied The need to keep questioning things—from the details of maintenance procedures to one’s sense of the worst that could go wrong—is at the heart of a successful safety culture. Mr Jamet gives the example of a worker noticing that a diesel generator has been switched off. It is not enough to switch it back on. You also have to ask how and why it got switched off, and what other consequences that may have had. When you have got to the root of it, you not only have to change procedure but also to make sure that all other similar plants know about the problem and how to solve it. It was to help with this kind of effort that, after Three Mile Island, the American nuclear industry set up its Institute of Nuclear Power Operations. INPO, headquartered in Atlanta, regularly inspects power plants, using its own staff as well as engineers from other operators, and offers lessons learned from mistakes throughout the industry so that all plants benefit from what happens at any one of them. INPO brings fresh eyes and high standards, and its reports can be scathing. Phil Sharp, a former congressman who now heads a think-tank, Resources for the Future, and sits on the board of a power company, Duke Energy, says that INPO meetings at which the bosses of nuclear operating companies are called to account for their plants’ failings in front of their peers are unlike anything he knows of in the private sector. But despite the attentions of the NRC and INPO, things can still go wrong at American plants. In the late 1990s Davis-Besse, a nuclear plant in Ohio, had less downtime than almost any other plant in America. Various signs of incipient trouble—air filters clogging up too frequently, borate salts of unusual consistency and rusty colour building up—were not fully investigated. When the reactor was opened for maintenance in 2002, it was discovered that boric acid had eaten a head-sized hole pretty much all the way through the top of the reactor vessel. Only a thin layer of stainless steel was holding things together. As the plant’s operator, FirstEnergy, later reported, “there was a focus on production, established by management, combined with taking minimum actions to meet regulatory 139

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requirements, that resulted in the acceptance of degraded conditions.” Disaster was only narrowly avoided. George Felgate, a veteran of Rickover’s nuclear navy who spent almost three decades at INPO before joining the World Association of Nuclear Operators, points to a seeming paradox at the heart of nuclear safety: if, having made every provision for safety, you think for a minute that an accident is not possible, you put yourself at risk of being proved disastrously wrong. This stress on constant vigilance means that nuclear safety can never be a technological given, only an on operational achievement. In many places, and particularly in Japan, the industry has felt a need to tell the public that nuclear power is safe in some absolute way. This belief is clearly no longer sustainable. The only plausible replacement is to move from saying “it is safe” to saying “trust us to make it as safe as it can be,” and accepting that in some situations and some communities that trust will not always be given. Japan’s government is trying to restore the trust its people are now unwilling to give. It is moving nuclear regulation from the industry ministry, where civil servants were devoted to building up the industry, to the environment ministry. But the response to Fukushima has, so far, been inadequate. Many question marks remain. One of the more worrying is how much damage the earthquake did to the reactors. It is claimed that they weathered the quake, but some experts, such as Masashi Goto, a retired nuclear engineer, argue that there is evidence of significant damage that speeded up the subsequent meltdown. Analysis of the spread of fallout suggests that the first releases came very soon after the tsunami hit, if not before. With quakes a more constant threat than monster tsunamis, these are the sort of lessons that Japan’s “nuclear village” needs to learn. If the Japanese nuclear establishment—industry and regulators alike—wants to earn trust, it must be seen to be learning every lesson it can. It must admit how little it previously deserved trust and explain clearly how it will do better in future. Even then, such trust will not always be given. 140

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That is why Hamaoka, for all the tsunami protection and earthquake-proofing it has undertaken, is unlikely to reopen. It is too close to Tokyo, and too close to the expected epicentre of a very big earthquake that might happen one day, for people ever to think it truly safe. Oddly, this may be the world’s only nuclear power station that could benefit from a quake. Only if the big one comes and goes, and Hamaoka rides it out unscathed, might it be able to build some trust. Meanwhile, its engineers are trying to work out why, when the plant was being shut down last summer, a pipe in a heat exchanger in the most advanced of the reactors burst in a peculiar way, damaging other plumbing so that a few tonnes of seawater got into the reactor proper. The damage it may have done has yet to be assessed. It was something that nobody had expected. Nuclear waste

Leave well alone The best thing to do with nuclear waste is to stash it away, not reprocess it

OF ALL THE difficulties nuclear power is at Fukushima, hit by the tsunami, show heir to, that of waste has most fired the no sign of having leaked) and can be public imagination. Building power maintained indefinitely. It takes space plants that last a century is one thing; and needs to be guarded, but it can creating waste that will be dangerous provide an adequate solution for a for 100 times as long is another. For century or more. decades America has failed to create a long-term repository for the waste from its civilian reactors at its chosen site, Yucca Mountain in Nevada. Most other countries have similarly failed, so the waste from today’s reactors piles up. As it happens, long-term waste disposal is among the more tractable nuclear problems. Temporary storage is a good start. Once fuel has cooled down in spent-fuel pools for a while, it can be moved to “dry cask” storage. Such storage appears robust (dry casks That is if you do not want to reprocess the fuel to recover the plutonium inside it. If 141

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you are a nuclear engineer you may find reprocessing rather appealing, partly to show that your nuclear programme is as sophisticated as any and partly because it gets around the offensive inefficiency of light-water reactors. If all the uranium in reactor fuel was either split or turned into plutonium which itself was then split, you would get 170 times more energy than you get from just using the fuel once, and would have opened the way to technically intriguing breeder systems. You will not, though, be attracted to reprocessing if you are an accountant. It costs a great deal, and the plutonium produced is for the most part more of a liability than an asset. If you are a plant operator you will also have your doubts. Burning fuel to which plutonium has been added has various drawbacks, one of which is that it is much hotter when it comes out of the reactor, straining the capacity of your spent-fuel pools. Nor will you be that eager if you are concerned about the local environment; reprocessing plants have a bad contamination record. And if you are sceptical about the merits of nuclear proliferation, you will want to keep reprocessing to a minimum. Having avoided reprocessing, in the long term you will want to find a safe deep underground repository for the waste in your dry casks. This need not be too hard. Find a community that may be willing to take on the challenge (one that already has ties to the nuclear industry might be thus predisposed) and that has access to a suitable geological setting. Then have an open discussion of the issues, look at people ÿ s concerns and offer ways to lessen them while recompensing the community for its trouble. Set up arrangements by which local people can reassure themselves about any threats to their health, perhaps with free medical treatment and tests. Donÿt scrimp on investment in the community. Then let them choose. The chances are that they will say yes. This kind of approach seems to be working in Sweden and Finland, and Britain is trying something similar. This is more or less the opposite of what was done at Yucca Mountain. What some now refer to as the Screw Nevada act of 1987 imposed the choice of site and schedule. Nevada politicians objected. Geological surveys threw up some problems. Nevadaÿ s caucuses moved up the electoral calendar, meaning that presidential candidates were greatly helped by an anti-Yucca stance. Moreover, the state ÿ s senior senator, Harry Reid, became Senate majority leader. President Obama drew a line under the episode by finally abandoning the project in 2010, 12 years after the facility was meant to have entered service. But as well as providing a textbook example of how not to handle long-term storage, America also boasts a success. The Waste Isolation Pilot Plant in the salt caverns of 142

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Carlsbad, New Mexico, started taking shipments of waste from the country ÿ s military programme in 1999. Throughout the life of the project the local community has been consulted and, on occasion, recompensed. WIPP is not entirely trouble-free, but it has achieved enough social and political stability to make the best of its geological gifts. Costs

Bandwagons and busts Nuclear plants are getting ever more expensive. But Asian countries may build them more cheaply

IN HAIYANG, ON the northern Chinese coast, and at Sanmen, farther south, an international consortium led by Westinghouse is well into building two AP1000s, with two more in the works; China plans eventually to have 12 split between the two sites. If the plans go ahead, each site will have as much capacity connected to the grid as the whole of Nigeria has today. Yet the two plants represent only a small fraction of China ÿ s nuclear ambitions. Its pre-Fukushima plans to increase its nuclear capacity from 10GW to 80GW by 2020 may fall behind schedule, but China still looks certain to build more new nuclear plants than any other country over the decade to comeüand possibly more than all others combined. By nuclear standards, this is a big deal; China will add more nuclear capacity in those ten years than France has in total. But for China itself it is less big; nuclear will go from generating less than 2% of the countryÿs electricity to less than 5%. Ming Sung, who works for the Clean Air Task Force, an American think-tank in 143

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Beijing, points out that China is not betting on nuclear; it is betting on everything that offers an alternative to coal. China consumes half the worldÿs annual coal output, and has the supply problems, dirty air and huge death toll (hundreds of thousands a year from respiratory diseases) that go with it. Junda Lin of the China Greentech Initiative points out that the 2020 target for nuclear has to be seen in the context of a 200GW target for wind and an extra 100GW of hydropower. The idea is to try everything and see what works best. Most of the plants China is currently building are generation IIs derived from a French design it bought in the 1980s and now built by Chinese companies, but there are also Russian PWRs in Tianwan and Canadian Candus in Qinshan. In Taishan two EPRs are being built by Areva and the China Guangdong Nuclear Group, which has a long-standing relationship with the French industrial base from which its domestic designs ultimately derive. And then there are the AP1000s. Westinghouse won that contract in large part by promising to transfer the technology in full to local companies, but it hopes that its expertise will allow it to keep a prominent role in the Chinese industry. After Fukushima the state council stopped approving new power stations and called for re-evaluations of the seismic and flooding risks faced by those already built and under construction. A new law expected later this year will take nuclear regulation away from the National Development and Reform Commission, the state’s industrial planners, and hand it over to the environment ministry, thus splitting the role of cheerleading from that of invigilation. Part of what passes for the Chinese government’s legitimacy comes from the perception that it can manage large-scale technology well. The backlash against China’s high-speed train programme after last year’s accident at Wenzhou, which provoked criticism and anger of a sort that Chinese leaders fear, would be dwarfed by what could be expected from a nuclear accident. A sincerely self-interested desire to avoid accidents, though, will not necessarily translate into a model regulatory infrastructure. A safety culture of constant questioning will not be easy to instil. And China’s nuclear regulatory workforce is already more stretched than that of other big economies in terms of employees per gigawatt under regulation. Beside the seaside Another new law will outline future plans for the industry. Some expect China’s nuclear boom to slow down in the wake of Fukushima, with new capacity perhaps 144

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reaching only 40GW by 2020. And China could get proportionally more AP1000s and fewer of its own home-made designs, the safety of which may be less assured. All China’s current plants are by the sea, both because it is convenient for cooling and because that is where the demand is. There have been plans for nuclear plants inland, cooled by rivers, but concerns about the availability of water in drier years to come and the risk of contaminating it may cause these plans to be shelved. China’s expansion into nuclear power is hardly a market-driven development, but it helps that the plants involved look comparatively cheap. There are two ways of measuring the cost of a nuclear power plant: the “overnight” cost, which counts up the material and labour that goes into a new plant as if it had all been purchased simultaneously, and the “levellised” cost, which is a measure of the total amount of energy a plant provides over its life divided by the total expenditure—construction, operation, maintenance, fuel and, eventually, decommissioning. One is the cost of the capacity to produce electricity, the other the cost of the electricity produced. The 2010 edition of the IEA/NEA Costs of Generating Electricity study puts overnight costs for Chinese generation II plants at $1,700 for every kilowatt of capacity, giving a gigawatt plant a price tag of less than $2 billion. For the AP1000s the estimated costs are higher ($2,300/kW), and by the time the projects are finished they may be higher still; these are the first AP1000s being built anywhere, so its wise to expect surprises. Schedules are being stretched, and the Chinese contractors for key parts of the third and fourth AP1000s are falling behind a bit, according to Westinghouse. Still, almost anywhere else in the world, these figures would today be a source of envy—or incredulity. When companies were beginning to pitch generation III reactors ten years ago, they claimed that better, standardised designs and improved construction techniques would make them both safer and cheaper. In Western countries that second claim has gone by the board. British studies in 2004, 2006 and 2008 put the overnight cost of new PWRs at $2,233/kW, then $2,644, then $3,000. Estimates from the Massachusetts Institute of Technology (MIT) rose from $2,208/kW to $4,000 over roughly the same time. The NEA quotes costs for an EPR in Belgium (now cancelled) at $5,400 per kW. Capacity fired by gas turbines, for comparison, can cost less than a fifth of that. Real construction costs, which include the cost of borrowing the money needed, are even higher than overnight costs. Construction costs for the two AP1000s that Progress Energy has planned for its Levy site in Florida have recently been reported at about $20 billion, which works out at about $9,000 per kW and strongly suggests that the reactors will not be built. 145

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Cost escalation has been the rule throughout the industry’s history. In the late 1960s what is now called the “great bandwagon market” took off in America. Companies selling plants they had no real experience of building offered fixed prices to make them attractive. Utilities keen to reduce their reliance on coal in an age of clean-air standards took the bait. As orders flooded in, costs started to climb. Projects meant to be completed in years dragged on for more than a decade, in part because of new environmental concerns, in part because designs were revised as lessons were learned. At the Vogtle plant, in Georgia, a pair of reactors originally priced at $660m in 1971 came in at $8.87 billion 16 years later. Half the projects ended up cancelled.

The French experience is often quoted as a positive counter-history to the American mess. France had long been keen on energy security. When it made PWRs based on a Westinghouse design a national priority in the early 1970s, it brought a thorough-minded discipline to the matter, building its capacity region by region, improving the designs as it went along and increasing the size of its plants to reap economies of scale. Having the same contractor and customer for so many plants allowed the system to learn from mistakes and to refit older plants to newer standards. Even so, according to calculations by Arnulf Grübler of IIASA, a think-tank near Vienna, each of the six designs France has fielded has cost more per kilowatt than the previous one had. He estimates that the four reactors built in the 1990s cost between $2,267 and $3,252/kW in 2010 dollars, more than twice the real cost of capacity built in the 1970s and early 1980s. The first two EPRs to be built in Europe, in France and Finland, have both gone extravagantly over schedule and budget. A decade ago the nuclear industry hoped that the combination of safe, low-cost generation III reactors and governments eager to encourage lower carbon-dioxide emissions would lead to a “nuclear renaissance”. In the West those low costs have 146

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failed to materialise, so the renaissance is largely stalled. Whereas a few years ago Britain was talking of building eight new reactors to replace its ageing fleet, only two are likely to make it in the near term. Steve Thomas, an economist at the University of Greenwich, argues that even with a fixed carbon price of €36/tonne and a guaranteed price for the electricity (both features of a currently planned re-regulation of Britain’s energy market; today’s EU carbon price is under €10), those plans remain vulnerable. In a capital-intensive industry such as the nuclear one, the cost of capital is always crucial, and higher overnight costs magnify the problem. Calculations of the levellised costs of energy by UBS, a bank, show clearly that the cost of capital dominates the picture. For a plant costing $5,500 per kW, capital makes up 75% of total costs in Europe and America. UBS reckons the levellised cost of such a plant in Europe is 11% higher than the cost of a gas plant. It would take a quintupling of the carbon price to wipe out that differential. And those calculations assume that it is as easy to borrow to finance a nuclear plant, with all its uncertainties and regulatory risk, as it is to finance a gas plant, which is probably unrealistic. Step on the gas In eastern Europe, where Russian dominance of gas markets is a political issue and electricity markets are still quite regulated, governments may consider such a differential acceptable. The Czech Republic is about to tender for new generation III PWRs, and Poland has plans along those lines too. But in America things look very different. Asked if Fukushima put America’s nuclear renaissance on ice, Ernest Moniz of MIT replies succinctly: “No. Shale gas did.” For all the production incentives, loan guarantees and indemnity for costs due to regulatory change offered by government, the sharp drop in gas prices caused by new sources of supply ruled out new nuclear plants in any market where the two energy sources compete freely. According to UBS, the advantage of gas over nuclear in America is roughly twice what it is in Europe. John Rowe, CEO of Exelon, an energy company that has ten nuclear power plants in its portfolio, says that companies like his no longer have any reason to build nuclear plants. All plans to build nuclear plants in parts of America where the electricity market has been deregulated are coming to naught. Some American plants will still be built, but only in the south-east, where regulators allow the cost of increasing a utility’s asset base to be passed on directly—indeed pre-emptively—to its captive customers. Thus electricity consumers in Georgia are already paying for two new AP1000s which in February got clearance from the NRC 147

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to complement the two reactors at Vogtle. In Sumner, South Carolina, two more AP1000s are under contract. Those four will probably be all the renaissance America sees for some time. If the West could build new reactors as cheaply as China can, things would look different. That it cannot is in part due to labour costs. But the Chinese must have other advantages too. The levellised costs of modern Chinese coal-fired power stations are lower than the competition’s even when the power stations are not built in China. The same is true for cement works; Chinese companies operating outside China cannot build them as cheaply as they do at home, but they still easily beat the international competition. nterna Further evidence that a different industrial approach can cut costs comes from ce tha South Korea. Like Japan, the country has little by way of indigenous energy supplies, and it too decided on nuclear power to solve that problem and bring new technological skills to its industrial base. It gets some 30% of its electricity from nuclear plants, much the same as Japan did before Fukushima, and more than any large economy other than France. In 2010 KEPCO, the South Korean power company, sold its reactors overseas for the first time, beating the French to a contract in the United Arab Emirates; at home its overnight costs for such generation II reactors are calculated at just over $1,500/kW. The true costs in South Korean business can be hard to make out. It would not be at all surprising if, working abroad for the first time and having been keenly competitive in its bidding, KEPCO failed to deliver the UAE reactors on budget. And given that nuclear prices have gone up everywhere else, it is fair to expect that they will do so to some extent in Asia, too. But if China and South Korea can build reactors abroad at prices not much higher than those at home, nuclear may see its fortunes tick up elsewhere, argues David Victor, of the University of California. Both Westinghouse and EDF have plans for new reactors in the export market that would be designed and sold in collaboration with Chinese partners. Russia is keen to export PWRs too, but its costs are not clear. Inviting the Chinese to come in and build a nuclear plant is an unlikely step for a Western government (though the South Koreans are bidding on a Finnish contract). Some developing countries, though, may be interested. This is a matter of concern for backers of the American nuclear industry with an eye to national security issues, such as Pete Domenici, a former senator. If America is not engaged in the market, how can it use its influence to deter proliferation? And it will indeed have less scope for such influence. But even at Chinese prices, 148

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nuclear energy is expensive compared with coal, and if other countries gain easier access to gas, as America did, that will reduce demand too. Vietnam is enthusiastic about nuclear reactors; other Asian countries, especially those in tectonically active places—such as the Philippines and Indonesia—may be less keen than they were before the great tsunami. South Africa is talking of buying nuclear reactors. India has big plans on paper, but a law that makes the designers (rather than the operators) of power stations liable in case of accidents gets in the way (and buying Chinese reactors might be anathema anyway). There is interest in the Middle East, but as Charles Ebinger of the Brookings Institution, a think-tank, points out, the countries talking about buying nuclear power in response to runaway electricity demand might do better to curb their handsome consumer subsidies. They might also do well to invest in alternative energy. The sun’s nuclear reactor has been going for 4.5 billion years, and extracting power from it is getting cheaper every year. The prospects

Over the rainbow If there are better ways to split atoms, they will be a long time coming

After the dream, the humdrum reality

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ĀTHERE IS ONLY one reason for America to subsidise nuclear,ā says Ernest Moniz, of MIT, Āand that is the climate.ā He has a point. By 2020, carbon emissions since the start of the 21st century will have surpassed those of the entire 20th. There is a real risk that emissions on such a scale will bring disaster to humans, or to the natural world, or both. Nuclear power, which produces no direct carbon-dioxide emissions, should be able to make things better. Robert Socolow, of Princeton University, and his colleagues calculate that if the world were to replace 700GW of coal-fired plant with nuclear reactors over 50 years ch would wou more or less triple its current nuclear capacityüit could reduce its üwhich annual emissions of carbon dioxide by 3.7 billion tonnes. Allowing for the need to replace most of the current fleet over the same period, that would mean deploying nuclear reactors at three times the speed of China ÿ s planned record-breaking deployment between now and 2020, and doing it for five decades straight. But even that would make only a minor dent in the problem. In 2010 the amount of carbon dioxide emitted by industry was about 30 billion tonnes, and was growing at 3% a year. At that rate, the savings from such a beefed-up nuclear-power programme would compensate for just four years of emissions growth. No technology can solve the climate problem on its own. Even in combination, todayÿs remediesürenewables, nuclear and energy efficiencyühardly seem up to the job. To have a reasonable chance of keeping down the rise in temperature to less than 2eC, industrial economies need to reduce emissions by 80% by 2050. The true scale of this challenge is not widely understood. A thorough study of options for such cuts in California, long a leader in energy efficiency, concluded that with todayÿs technology and plausible extrapolations of it, 60% was the best that could be done. If California canÿt do better than that, says Jane Long, of Lawrence Livermore National Laboratory, who led the study, Āneither can anyone else Even getting close to such goals, though, is easier with more technologies than fewer. Even if nuclear can make only a small contribution, it could be worth having. The IEAÿs 2011 World Energy Outlook calculates that, between now and 2035, an emissions path that keeps the 2eC limit plausible would cost $1.5 trillion more if OECD countries were to stop building nuclear plants and other countries halved their nuclear ambition, largely because much more would have to be spent on renewables. Germany, long keen on renewables and squeamish about nuclear, provides an example. Its decision after Fukushima to phase out nuclear power entirely will mean that most of the lost capacity will need to be made up with even more 150

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renewables, though it will also build new fossil-fuel plants and import electricity from nuclear plants in France. As the new fossil-fuel plants will probably run on gas, emitting less carbon dioxide than do coal plants which are also due for retirement, this may keep the carbon in check. But electricity prices for industrial customers, according to an analysis by UBS, will rise by more than 60% in real terms by 2020. Ottmar Edenhofer of Berlin ÿ s Technical University says this is a pretty middle-of-the-road projection. The market, too, will probably need some re-engineering. Systems with a lot of renewables make life hard for fossil-fuel generators, which have to shut down when it is sunny and windy and take up the slack when it is not. To get the fossil-fuel investment it needs, Germany may well have to pay for the capacity built even if it stands idle, or guarantee rates of return. But though renewables are expensive, so is building new nuclear plants; the bills Britain will face as it tries to meet carbon goals with new nuclear should keep any Schadenfreude in check. The cheap new supply-side route to lower carbon-dioxide emissions is to replace old coal-fired stations with new gas-fired ones, which emit half as much carbon dioxide per megawatt hour. Plumping for renewables or nuclear will cost a lot more. Still, renewables are getting cheaper, through technological change and through the benefits of mass production and market competition. In the long run, technologies that get cheaper can be expected to edge out a technology that has only ever got more expensive. In a low-emissions world, the role for nuclear will be limited to whatever level of electricity demand remains when renewables are deployed as far as possible.

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That is a large enough role for some Greens to have become nuclear converts. For the most part, though, they are thinking about a nuclear programme more exciting than the slow, expensive and only marginally helpful deployment of PWRs. There are many alternative reactor designs, and each has its champions. An international body called the Generation IV International Forum (GIF), co-ordinated by the NEA, is drawing up plans for prototypes using such ideas, all claiming to offer improvements over the current crop. Yet the problems these new reactors solve are for the most part those that the he p industry wishes it had, rather than those it actually faces. The GIF designs, and others, are mostly “fast” reactors that use highly fissile fuel and unmoderated neutrons; they can both burn plutonium and create it in copious amounts. If fissile material were in short supply that might be an advantage. But uranium is not currently in short supply, and it makes up only a small part of nuclear energy’s costs. The ability to make new nuclear fuel solves a problem that reactors will run into only if their use becomes massively more widespread. What new reactors need is an advantage that will make them popular in the first place. Indeed, at present the ability to make plutonium is a disadvantage. Dissuading countries with nuclear programmes, or that want nuclear programmes, from reprocessing their fuel to produce plutonium is one of the core priorities in anti-proliferation work (the other is trying to keep newly nuclear countries from developing their own enrichment systems). If established nuclear powers were to stop reprocessing (as Britain is doing), it might help to persuade others, such as South Korea, that it is better not to start. A new generation of plutonium breeders would completely undermine that effort. Admittedly, other kinds of breeders are available. Molten-salt reactors, which keep their fuel in liquid form, could be used to turn thorium, of which the world has an abundant supply, into a type of fissile uranium not found in nature, U-233. This would be rather unsuitable for bomb-making and gets round the continuing use of U-235 or plutonium, so thorium molten-salt reactors offer the possibility of breeding fuel in a way that does not facilitate proliferation. Like some of the other GIF designs, molten-salt reactors also have novel safety features; but although safety is a condition of getting into the game, it is hardly a means of winning it. If generation III reactors, well operated, prove safe, why upgrade? If they are not safe, who would trust generation IV? The way to win will be on price.

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At the moment, those who want to bring down the cost of nuclear power are not, for the most part, looking at big generation IV reactors that will not be built for 20 years, if ever. Instead, they are thinking small. Particularly in America, small modular reactors (SMRs) of up to 300MW are all the rage. Some, such as the 100MW mPower reactor offered by Babcock and Wilcox, are scaled-down PWRs. Others are more exotic. Think small Such reactors can reach markets which today’s big reactors cannot. Many utilities—and smaller countries—have little interest in gigawatt-scale plants: they prefer to build around 100MW of capacity at a time. Small reactors might also open up new applications, perhaps in desalination, district heating or even transport. He Zuoxiu, a Chinese physicist critical of his government’s rush to build lots of big PWRs, has suggested that SMRs for ships, both military and merchant, would be a good way to train up a cadre of engineers and designers. SMRs can also be slotted into underground silos, which cuts down on civil engineering costs. Perhaps most promising of all, they would be built in factories, not on site. That should make them less subject to delay than manufacture in the field. And a factory building ten such reactors a year for years on end might be able to make significant cost reductions through incremental improvements—economies of number as opposed to economies of scale. But these advantages do not add up to a conclusive case for a small modular future. Babcock and Wilcox claim overnight costs per kilowatt of capacity for the mPower roughly on a par with those of big PWRs like the AP1000. But in an industry that has long pursued economies of scale, many are unconvinced that smaller reactors can deliver the same costs per kilowatt. Atam Rao, who led the design of an advanced generation III reactor, GE’s ESBWR, describes such claims as “complete BS”. Things like control systems are needed for all reactors, big or small. Providing them for each small reactor is bound to push up costs. Will any utility really think it makes sense to field ten SMRs with ten control systems and ten safety systems rather than one big PWR? Only if it has seen it done economically elsewhere. In the end, that is the biggest problem for proponents of new approaches to nuclear energy. If a radically new technology, as opposed to an incremental one, is to take off, it needs not only to be researched and developed; it needs to be deployed, and industry will not do this until it has seen the technology work. It was the American navy’s deployment of nuclear reactors that convinced the world that they could be 153

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used as power generators. And it was the experience of deploying them that allowed Admiral Rickover, in the 1950s, to sum up the gap between ideas that might work and those that are in fact working, in a way that still seems spot on 60 years later: An academic reactor or reactor plant almost always has the following basic characteristics: (1) It is simple. (2) It is small. (3) It is cheap. (4) It is light. (5) It can be built very quickly. (6) It is very flexible in purpose. (7) Very little development will be required. It will use off-the-shelf components. (8) The reactor is in the study phase. It is not being built now. On the other hand a practical reactor can be distinguished by the following characteristics: (1) It is being built now. (2) It is behind schedule. (3) It requires an immense amount of development on apparently trivial items. (4) It is very expensive. (5) It takes a long time to build because of its engineering development problems. (6) It is large. (7) It is heavy. (8) It

Innovators need to be able to take risks, to try variations on their ideas and to be able to learn. They flourish in unregulated markets. They frequently depend on venture-capital funds which are dwarfed by the cost of even a single utility-scale power plant. They also need rewards. Yet makers of nuclear reactors cannot take risks that might compromise safety, and they cannot try lots of different things because it would be too expensive. And even if they succeed, all they will be making is commoditised electricity. Power stations are not conducive to radical innovation. Nuclear reactors, as Philippe Jamet notes, last for centuries; the technology is, by its own standards, still young. Longevity and inertia ensure that even a disaster like Fukushima cannot wipe it from the world. But they also ensure that it cannot grow fast. In energy in general, technologies mature and succeed each other over decades. Nuclear seems likely to lag behind even in this slow field. That does not mean it will not, eventually, play a larger role, but that it will get there slowly. Inside a reactor, things can change in milliseconds. Outside, it takes lifetimes.

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Business Manufacturing

The end of cheap China What do soaring Chinese wages mean for global manufacturing?

TRAVEL by ferry from Hong Kong to Shenzhen, in one of the regions that makes China the workshop of the world, and an enormous billboard greets you: ĀTime is Money, Efficiency is Lifeā. China is the world ÿ s largest manufacturing power. Its output of televisions, smartphones, steel pipes and other things you can drop on your foot surpassed America ÿ s in 2010. China now accounts for a fifth of global manufacturing. Its factories have made so much, so cheaply that they have curbed inflation in many of its trading partners. But the era of cheap China may be drawing to a close. Costs are soaring, starting in the coastal provinces where factories have historically clustered (see map). Increases in land prices, environmental and safety regulations and taxes all play a part. The biggest factor, though, is labour. On March 5th Standard Chartered, an investment bank, released a survey of over 200 Hong Kong-based manufacturers operating in the Pearl River Delta. It found that wages have already risen by 10% this year. Foxconn, a Taiwanese contract manufacturer that makes Apple’s iPads (and much more besides) in Shenzhen, put up salaries by 16-25% last month. 155

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“It’s not cheap like it used to be,” laments Dale Weathington of Kolcraft, an American firm that uses contract manufacturers to make prams in southern China. Labour costs have surged by 20% a year for the past four years, he grumbles. China’s coastal provinces are losing their power to suck workers out of the hinterland. These migrant workers often go home during the Chinese New Year break. In previous years 95% of Mr Weathington’s staff returned. This year only 85% did. Kolcraft’s experience is typical. When the American Chamber of Commerce in hai asked as Shanghai its members recently about their biggest challenges, 91% mentioned “rising costs”. Corruption and piracy were far behind. Labour costs (including benefits) for blue-collar workers in Guangdong rose by 12% a year, in dollar terms, from 2002 to 2009; in Shanghai, 14% a year. Roland Berger, a consultancy, reckons ns the comparable figure was only 8% in the Philippines and 1% in Mexico.

Joerg Wuttke, a veteran industrialist with the EU Chamber of Commerce in China, predicts that the cost to manufacture in China could soar twofold or even threefold by 2020. AlixPartners, a consultancy, offers this intriguing extrapolation: if China’s currency and shipping costs were to rise by 5% annually and wages were to go up by 30% a year, by 2015 it would be just as cheap to make things in North America as to make them in China and ship them there (see chart). In reality, the convergence will probably be slower. But the trend is clear. If cheap China is fading, what will replace it? Will factories shift to poorer countries with cheaper labour? That is the conventional wisdom, but it is wrong. Advantage China Brian Noll of PPC, which makes connectors for televisions, says his firm seriously considered moving its operations to Vietnam. Labour was cheaper there, but 156

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Vietnam lacked reliable suppliers of services such as nickel plating, heat treatment and special stamping. In the end, PPC decided not to leave China. Instead, it is automating more processes in its factory near Shanghai, replacing some (but not all) workers with machines. Labour costs are often 30% lower in countries other than China, says John Rice, GE’s vice chairman, but this is typically more than offset by other problems, especially the lack of a reliable supply chain. GE did open a new plant in Vietnam to make wind turbines, but Mr Rice insists that talent was the lure, not cheap labour. Thanks to a big government shipyard nearby, his plant was able to hire world-class welders. Except in commodity businesses, “competence will always trump cost,” he says. Sunil Gidumal, a Hong Kong-based entrepreneur, makes tin boxes that Harrods, Marks & Spencer and other retailers use to hold biscuits. Wages, which make up a third of his costs, have doubled in the past four years at his factories in Guangdong. Workers in Sri Lanka are 35-40% cheaper, he says, but he finds them less efficient. So he is keeping a smaller factory in China to serve America and China’s domestic market. Only the tins bound for Europe are made in Sri Lanka, since shipping costs are lower than from China. Louis Kuijs of the Fung Global Institute, a think-tank, observes that some low-tech, labour-intensive industries, such as T-shirts and cheap trainers, have already left China. And some firms are employing a “China + 1” strategy, opening just one factory in another country to test the waters and provide a back-up. But coastal China has enduring strengths, despite soaring costs. First, it is close to the booming Chinese domestic market. This is a huge advantage. No other country has so many newly pecunious consumers clamouring for stuff. Second, Chinese wages may be rising fast, but so is Chinese productivity. The precise numbers are disputed, but the trend is not. Chinese workers are paid more because they are producing more. Third, China is huge. Its labour pool is large and flexible enough to accommodate seasonal industries that make Christmas lights or toys, says Ivo Naumann of AlixPartners. In response to sudden demand, a Chinese factory making iPhones was able to rouse 8,000 workers from their dormitory and put them on the assembly line at midnight, according to the New York Times. Not the next day. Midnight. Nowhere else are such feats feasible. Fourth, China’s supply chain is sophisticated and supple. Professor Zheng Yusheng 157

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of the Cheung Kong Graduate School of Business argues that the right way to measure manufacturing competitiveness is not by comparing labour costs alone, but by comparing entire supply chains. Even if labour costs are a quarter of those in China to make a given product, the unreliability or unavailability of many components may make it uneconomic to make things elsewhere. Dwight Nordstrom of Pacific Resources International, a manufacturing consultancy, reckons China’s supply chain for electronics manufacturers is so good that “there is no stopping the juggernaut” for at least ten to 20 years. This same advantage applies to low-tech industries, too. Paul Stocker of Topline, a shoe exporter with dozens of contract plants in coastal China, says there is no easy alternative to China. It is fashionable to predict that China’s inland factories will supplant its coastal ones. Official figures for foreign direct investment support this view: some inland provinces, such as Chongqing, now attract almost as much foreign money as Shanghai. The reason why fewer migrant workers from the hinterland are returning to coastal factories this year is that there are plenty of jobs closer to home. hifting inland in search of cheap labour. For one But manufacturers are not simply shifting thing, it is not much cheaper. Huawei, a large Chinese telecoms firm, reports that salaries for engineers with a master’s degree are not even 10% lower in its inland locations than in Shenzhen. Kolcraft considered shifting to Hubei, but found that total costs would end up being only 5-10% lower than on the coast. Topline looked into moving inland, but found huge extra costs there. Infrastructure for exports is still shoddy or slow (shipping by river adds a week), logistics are not fully developed and Topline’s entire supply chain remains on the coast. It decided to stay put. Inland revenue? Moving inland brings all sorts of unexpected costs. Newish labour laws in wealthy places such as Shenzhen make it costlier to shut down plants there, for example. It can cost more to ship goods from the Chinese interior to the coast than from Shanghai to New York. Managers and other highly skilled staff often demand steep pay rises to move from sophisticated coastal cities to the boondocks. Chongqing has more than 30m people, but it’s not Shanghai. A recent anti-corruption campaign there grew so violent that it terrified legitimate businessfolk as well as crooks. 158

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The firms investing in China’s interior are chiefly doing so to serve consumers who live there. With so many inland cities booming, this is an enticing market. But when it comes to making iPads and smartphones for export, the world’s workshop will remain in China’s coastal provinces. In time, of course, other places will build better roads and ports and supply chains. Eventually, they will challenge coastal China’s grip on basic manufacturing. So if China is to flourish, its manufacturers must move up the value chain. Rather than bolting together sophisticated products designed elsewhere, they need to do more design work themselves. Taking a leaf out of Germany’s book, they need to make products with higher margins and offer services to complement them. A few Chinese firms have started to do this already. A visit to Huawei’s huge corporate campus in Shenzhen is instructive. The firm was founded by a former military officer and has been helped by friends in government over the years, but it now more closely resembles a Western high-tech firm than it does a state-backed behemoth. Its managers are top-flight. Its leaders have for several years been learning from dozens of resident advisers from IBM and other American consultancies. It has become highly professional, and impressively innovative. In 2008 it filed for more international patents than any other firm. Earlier this year, it unveiled the world’s thinnest and fastest smartphones. In a sign that at least China’s private sector is beginning to take intellectual-property rights seriously, Huawei is locked in bitter battles over patents, not only with multinationals but also with ZTE, a cross-town rival that also wants to shift from being a low-cost telecoms-equipment maker to a creator of sexy new consumer products. China does not yet have enough Huaweis. But it attracts plenty of bright young people who would like to build one. Every year another wave of “sea turtles”—Chinese who have studied or worked abroad—returns home. Many have mixed with the world’s best engineers at MIT and Stanford. Many have seen first-hand how Silicon Valley works. Indeed, Silicon Valley veterans have founded many of China’s most innovative firms, such as Baidu.

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The pace of change in China has been so startling that it is hard to keep up. The old stereotypes about low-wage sweatshops are as out-of-date as Mao suits. The next phase will be interesting: China must innovate or slow down. Women in business

Waving a big stick ⁒ Quotas for women w on boards in the European Union are moving a little closer

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Do it voluntarily, or else Ā I DON ÿ T like quotas, but I like what quotas do, ā says Viviane Reding, the European Unionÿs justice commissioner. A year ago she invited publicly listed firms to sign a pledge to increase the proportion of women on their boards to 30% by prog progr 2015 and 40% by 2020. If there was no significantt progress within a year, she said at the time, Āyou can count on my regulatory creativity.ā ty. y.ā ā So S far only 24 firms have signed. So on March 5th Ms Reding (pictured) announced the launch of a three-month public consultation to ask what kind of measures the EU should take to get more women into boardrooms. The commission will then decide on further action later this year. There is no mention of quotas yet, but the consultation document seems to be paving the road to them. Among other things, it asks: ĀWhich objectives (eg, 20%, 30%, 40%, 60%) should be defined for the share of the underrepresented sex?ā Only 13.7% of board members of large firms in the EU are women, up from 8.5% in 2003. Female presidents and chairwomen are even rarer: just 3.2% of the total now, compared with 1.6% in 2003. Women account for 60% of new graduates in the EU, and enter many occupations in roughly equal numbers with men. But with every step up the ladder more of them drop out, and near the top they almost 160

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disappear. Plenty of research suggests that companies with lots of women in senior positions are more successful than those without (even if there is no proof of a causal relationship). So it seems to make sense to get more women on boards. But how? Norway, which is not a member of the EU, introduced a quota for women on boards a decade ago, which catapulted their share from 9% in 2003 to the required 40% now. Several EU countries have recently followed suit. France brought in legislation just over a year ago under which listed and large unlisted companies must reserve at least 20% of board seats for members of each sex by 2014 and 40% by 2017. This has boosted the number of women on French boards from 12% to 22%. Italy and Belgium have mandated a minimum one-third representation. Spain and the Netherlands have introduced new laws, but without stiff penalties. Germany is debating quotas. Some European countries regulate the sex balance on the boards of state-owned companies. Rules vary, but opinion seems to be converging on a near-term target of 25-30% and a longer-term one of 40%. Europe’s population at large seems to be all for it. A special Eurobarometer poll commissioned by Ms Reding’s directorate-general, published this week, found that three-quarters were in favour of laws to ensure sex balance on boards. More than four respondents out of ten thought that a 50% share for women would be realistic. Business generally opposes quotas, fearing that they will encourage tokenism and make it harder to appoint the best people. Critics of the Norwegian scheme suggest that it has put less experienced women on boards who may not be up to the job, and that some of the more obviously suitable ones tend to hold numerous directorships, defeating the aim of widening the circle of top women. In Britain an official report about women on boards, published a year ago, came out against quotas and in favour of voluntary commitments by companies. A growing number of companies in the EU are setting their own targets. If Ms Reding were to decide later this year that stronger medicine is needed, what 161

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might she do? Fraser Younson of Berwin Leighton Paisner, an international law firm, thinks that she might start by asking individual member countries to commit themselves to robust voluntary targets over a set period, say two or three years. If those fail to produce results, she might then introduce a binding directive. That would require the agreement of the Council of Ministers and the support of the European Parliament. But her hope may well be that the threat of quotas would make voluntary targets seem less onerous. Some think that the whole debate about the composition of boards is e experts ex something of a distraction from the main problem: that so few women reach the upper echelons of management from which board members are typically drawn. McKinsey, a consultancy which has been making the business case for more women in senior management jobs for some years, has just come out with a new study of 235 large European companies which shows that most of them take the issue seriously. Some 90% have at least one diversity programme in place; often lots of them. Yet many of these programmes are poorly implemented. Even if the boss is enthusiastic, senior and especially middle managers are often less keen. To get the pipeline of female internal talent to fill up, what is needed is a change in mindsets at every level in the workforce. That could take time. But McKinsey’s Emily Lawson says she feels a “sense of inevitability” that women in senior management are coming into their own. And once a larger number of “boardable” women starts to fill the pipeline, a 30% or 40% share of board seats may no longer look fanciful. Cotton exports

Knickers in a twist India bans cotton exportsüconfusing everyone, including its government WHEN Mahatma Gandhi began spinning Indian cotton on a wheel in 1918, it symbolised his desire for national self-sufficiency. Too much of the fibre was exported to Japan and Britain, on exploitative terms, he felt. Almost a century on, India ÿ s cotton industry is still integrated with global production chains. Thus a decision on March 5th by the countryÿs commerce ministry to ban exports sent markets around the world into a tizz. Derivative prices leapt on New Yorkÿs trading floors. Panicky Y-front makers the world over worried if their contracts were void. Excited stockbrokers in Thailand told their clients to buy the shares of polyester 162

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firms. India, after all, is the world ÿ s second-largest exporter of cotton, after America. The commerce ministry seems to have been worried that short-term export commitments were more than India could comfortably meet. It feared a spike in domestic cotton prices, followed by hoarding. This would hurt India’s textiles industry, which uses cotton as a raw material, is not in the best financial health and is a huge employer. India temporarily banned cotton exports in 2010 in response to similar concerns. And there is a troubling backdrop, too. The world cotton market went nuts in 2011, with supply blips in some countries and high demand (partly from China) pushing global prices last year to their highest since the American civil war. After years of declining raw-material prices, clothes firms such as Gap announced profit warnings and saw their shares whacked. The agricultural divisions of two big trading firms, Glencore and Noble Group, were caught with their trousers down and lost money. Prices have collapsed since mid-2011, but after a roller-coaster ride everyone is jittery. China has been stockpiling a mountain of cotton, presumably to insulate its textile makers from shocks. India may in turn be worried that its own surplus is being whisked away to create a safety buffer for the Middle Kingdom. Hence the ban. A vicious circle of price rises, stockpiling and export bans does not make sense in the medium term for any commodity, whether cotton, onions or iron ore. It erodes confidence in supply chains and may dent overall production. Behaviour that may be rational for individual actors can cause chaos if everyone copies it. No one expects a nation to act for the common good, but it seems doubtful that India’s ban is even in its own narrow interests. Trying to keep prices low favours textile makers but is bad for farmers who grow the stuff. India’s agriculture minister says he was not consulted about the ban. Narendra Modi, the powerful chief minister of Gujarat, a state in west India, wrote to the prime minister, Manmohan Singh, that the ban was anti-farmer. Mr Singh has promised an immediate review. That seems likely to repeal the ban. But there may be damage to India’s reputation as a reliable supplier. As the news of the ban came out Australia’s agriculture minister had just launched a report predicting that Australia would double its cotton exports between 2010 and 2013. His view on India’s ban? “It’s an opportunity.” Social media and job titles

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A pixelated portrait of labour LinkedIn offers a new way to look at employment OFFICIAL statistics can tell you how many workers were jobless last month, how many had college degrees and how many worked in construction. But they cannot tell you how many know Hadoop, a software for managing data that is much in demand these days. LinkedIn, however, says it knows that, and much else gleaned from the profiles of its millions of members. The social-media website for professionals can tell you that one of the fastest-growing job titles in America is “adjunct professor” (an ill-paid, overworked species of academic). One of the fastest-shrinking is “sales associate” (see chart).

Researchers already mine the internet for hints about bout out disease d outbreaks, the national mood or inflation. LinkedIn thinks its data can n do the th same for the job market. It has more than 150m members worldwide, 60m of them in America. That should be enough to draw accurate inferences about the entire American labour force. At the request of the White House Council of Economic Advisers, it calculated which industries and job titles were experiencing the biggest gains and losses. Scott Nicholson, a Ādata scientistā for the firm, says LinkedIn can potentially track such changes in real time, rather than the weeks or months government surveys take. It can also follow occupations and industries, such as e-learning, that donÿt have their own category in government tallies. It can trace shifts between regions, sectors and occupations. Are people quitting law firms to become law professors, moving from Arizona to North Dakota, or what?

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The firm hopes to be able to track the nation ÿ s evolving skills base. Members routinely pick up new skills and add them to their profile. LinkedIn can see how often job-changers mention a particular skill, such as Hadoop. Jeff Weiner, the firmÿ s boss, imagines that eventually every job opening and its requisite skills will be digitally searchable by every potential candidate, reducing the friction that lets millions of vacancies co-exist with high unemployment. Such granularity could revolutionise economic research, says Erik Brynjolfsson of MIT. But for consistency and longevity, you can ÿ t beat the government. As Mr Brynjolfsson notes, ĀWeb companies donÿt tend to have the same lifespan as the US Census Bureau.ā Appleÿs cash pile

How to spend it The tech giant should give cash back to shareholders NOT long after Steve Jobs died last year, wags eulogised the Apple co-founder with a joke: ĀTen years ago we had Steve Jobs, Bob Hope and Johnny Cash. Now we have no jobs, no hope and no cash.ā Apple may no longer have Jobs, but it fills investors with hope and is brimming with cash. Its market capitalisation recently passed $500 billion, and it has a whopping $100 billion or so of cash on its balance-sheet. That mountain of money is about to get higher. Apple aficionados are poised to snap up the new gadgets that the company unveiled on March 7th. These include a new iPad, the latest in the firmÿs wildly popular range of tablet computers, and a revamped Apple TV device. If the new iPad, which boasts a super-sharp screen and lightning-fast connectivity, wins friendly reviews, it will give a big boost to Tim Cook, Jobs ÿ s handpicked successor. But the extra cash it delivers will also increase pressure on Appleÿs boss and board to explain what they plan to do with the companyÿs embarrassment of riches. Last month Mr Cook admitted that the firm has more cash than it needs for its operations. Itÿs a nice problem to have. The obvious solution would be to give cash back to shareholders, either via dividends or share buybacks. This is a surprisingly sensitive subject. Mr Jobs was 165

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obsessed with hoarding cash, not least because of Appleÿs near-bankruptcy in the mid-1990s. Returning money to shareholders would mark a big departure from the revered founderÿs philosophy. Another reason Mr Cook will want to tread carefully is that some pundits see a tech firmÿs decision to start paying dividends as a signal that its glory days are behind it. One oft-cited example is Microsoft, whose growth slowed after it began returning cash to shareholders in 2003. Apple is unlikely to suffer a similar fate. Demand for its iGizmos seems insatiable. That is why it needs to come up with ways to invest more of its cash sensibly. Tim Bajarin of Creative Strategies, a consulting firm, reckons Apple could ramp up its forward purchases of components and set up its own semiconductor factories, to give it a tighter grip on a critical link in its supply chain. It could open more physical stores though their sales would only add to its cash pile. And it may have to fork out more on lawyers fees to fight patent lawsuits and deal with other problems, including allegations that it colluded with publishers to fix the price of digital books. On the acquisition front, the firm has long shunned megadeals, preferring to swallow smaller firms with technology and people it covets. That policy is unlikely to change, though Apple may well accelerate its deal-making tempo. Among its likely targets are firms that offer video and other entertainment content, and others with data that could enhance services such as Siri, its virtual personal servic assistant. None of this would put much of a dent in $100 billion. So Apple will probably start handing cash back to shareholders later this year. Working out how to do so will take time, not least because the firm holds much of its money outside America in order to avoid hefty US corporate-tax rates. Some Apple fans fret that if the company decides to pay regular dividends, it could end up regretting it. ĀApple needs to watch out for dividend addicts, says Aswath Damodaran, a finance professor at New York University who owns Apple stock. Such shareholders, he adds, will be obsessed with extracting as much cash as possible from Apple rather than with its mission of making mind-blowing products. Perhaps. But the point of shares is that they confer ownership. They are valuable only because shareholders expectüand are entitled toüa share of profits. Apple may have trouble finding a good use for its cash, but its shareholders will not.

Lady Gagaÿs internet strategy

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Little monster mash Can Lady Gaga help Exxon Mobil crack social media? LADY GAGAÿS business manager, Troy Carter, will judge an eight-hour hackathon at the SXSW festival in Austin, Texas, on March 11th. Geeks will vie to create new ideas to do with digital music distribution. The event will be hosted by Backplane, a tech start-up co-founded by Mr Carter, which has just launched its first product, a web community for Lady Gaga called LittleMonsters.com (after the pop starÿs pet name for her fans). The goal is to create a one-stop shop for everything Gaga. Fans will be able to download her music, buy tickets for her shows and chat with each other (and even, perhaps, with the singer herself). It will feature Āsocial ticketingā, which will make it easy for fans to find concert seats near their friends and even start conversations beforehand with strangers they will be sitting with. Translation software will allow fans without a language in common to chat about changing the world one sequin at a time. For now, LittleMonsters is by invitation only (just 10,000 Āsuper fansā have been chosen from around 1m applicants) but it is expected soon to open to all. Mr Carter says the data generated by the site will be valuable. He will be able to identify mouthy fans to whom others listenüĀkey influencersā, in the jargonüand court them for their insights. Facebook will remain the biggest social network for a while. Backplane is a bet that parallel communities will emerge, connecting people who share a particular passion. The plan is to apply lessons learned from Lady Gagaÿs fans to a wide range of interests, from music to sports to who knows what. Backplane has just closed a fundraising round in which several Silicon Valley venture capitalists took part. The idea is hot, but Backplane is competing in what is fast becoming a crowded field. Backplane is exploring the possibilities for mainstream brands, from Nike to ExxonMobil, to create virtual communities that foster deeper relationships with customers. (In the case of ExxonMobil, the likeliest passion for the firm to tap is not for petroleum itself, but for the different brands of car it powers.) The trick is to find those key influencers and amplify their voices. Mr Carter says that experience with Lady Gaga has taught him that what a super fan says can sometimes have a bigger 167

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impact on fellow fans than a word from the Lady herself. Schumpeter

Slaves to the smartphone The horrors or of hyperconnectivityüand how to restore a degree of freedom

ĀTHE SERVANTā (1963) is one of those hose films f that it is impossible to forgetüa merciless dissection of the relationship between a scheming valet (played by Dirk Bogarde) and his dissolute master (James Fox). The valet exploits his masterÿs weaknesses until he turns the tables: the story ends with a cringing Fox ministering to a lordly Bogarde. The film was an indictment of the class structure of Harold y with Macmillanÿs Britain. But it is hard to watch it today without thinking of another fraught relationshipüthe one between businessfolk and their smartphones. Smart devices are sometimes empowering. They put a world of information at our fingertips. They free people to work from home instead of squeezing onto a train with malodorous strangers. That is a huge boon for parents seeking flexible work hours. Smartphones and tablets can also promote efficiency by allowing people to get things done in spare moments that would otherwise be wasted, such as while queuing for coffee. They can even help slackers create the illusion that they are working around the clock, by programming their e-mail to be sent at 1am. But for most people the servant has become the master. Not long ago only doctors were on call all the time. Now everybody is. Bosses think nothing of invading their employees ÿ free time. Work invades the home far more than domestic chores invade the office. Otherwise-sane people check their smartphones obsessively, even during pre-dinner drinks, and send e-mails first thing in the morning and last 168

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thing at night. This is partly because smartphones are addictive: when Martin Lindstrom, a branding guru, tried to identify the ten sounds that affect people most powerfully, he found that a vibrating phone came third, after the Intel chime and a giggling baby. BlackBerrys and iPhones provide relentless stimuli interspersed with rewards. Whenever you check the glowing rectangle, there is a fair chance you will see a message from a client, a herogram from your boss or at least an e-mail from a Nigerian gentleman offering you $1m if you share your bank details with him. Smartphones are the best excuse yet devised for procrastination. How many people can honestly say that they have never pruned their e-mails to put off tackling more demanding tasks? Hyperconnectivity exaggerates some of the most destabilising trends in the modern workplace: the decline of certainty (as organisations abandon bureaucracy in favour of adhocracy), the rise of global supply chains and the general cult of flexibility. Smartphones make it easier for managers to change their minds at the last moment: for example, to e-mail a minion at 11pm to tell him he must fly to Pittsburgh tomorrow. The dratted devices also make it easier for managers in one time zone to spoil the evenings of managers in another. Employees find it ever harder to distinguish between Āon-timeā and Āoff-timeā üand indeed between real work and make-work. Executives are lumbered with two overlapping workdays: a formal one full of meetings and an informal one spent trying to keep up with the torrent of e-mails and messages. None of this is good for businesspeopleÿs marriages or mental health. It may be bad for business, too. When bosses change their minds at the last minute, it is hard to plan for the future. And several studies have shown what ought to be common sense: that people think more deeply if they are not constantly distracted. What can be done to keep smartphones in their place? How can we reap the benefits of connectivity without becoming its slaves? One solution is digital dieting. Just as the abundance of junk food means that people have to be more disciplined about their eating habits, so the abundance of junk information means they have to be more disciplined about their browsing habits. Banning browsing before breakfast can reintroduce a modicum of civilisation. Banning texting at weekends or, say, on Thursdays, can really show the iPhone who is boss. Together we can outsmart our phones 169

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The problem with this approach is that it works only if you live on a desert island or at the bottom of a lake. In ĀSleeping with Your Smartphoneā, a forthcoming book, Leslie Perlow of Harvard Business School argues that for most people the only way to break the 24/7 habit is to act collectively rather than individually. She tells the story of how one of the world ÿ s most hard-working organisations, the Boston Consulting Group, learned to manage hyperconnectivity better. The firm introduced rules about when people were expected to be offline, and encouraged them to work together to make this possible. Many macho consultants mocked the exercise at first ü surely only wimps switch off their smartphones? But eventually it forced people to work more productively while reducing burnout. Ms Perlowÿs advice should be taken seriously. The problem of hyperconnectivity will only get worse, as smartphones become smarter and young digital natives take over the workforce. People are handing ever more of their lives over to their phones, just as James Fox handed ever more of his life over to Dirk Bogarde. You can now download personal assistants (such as Appleÿs Siri) that tell you what is on your schedule, and virtual personal trainers that urge you take more exercise. Ofcom, Britainÿs telecommunications regulator, says that a startling 60% of teenagers who use smartphones describe themselves as Āhighly addictedā to their devices. So do 37% of adults. The faster smartphones become and the more alluring the apps that are devised for them, the stronger the addiction will grow. Spouses can help by tossing the darned devices out of a window or into a bucket of water. But ultimately it is up to companies to outsmart the smartphones by insisting that everyone turn them off from time to time.

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Finance and economics Oil and the world economy

The new grease? How to assess the risks of a 2012 oil shock

WITH the euro crisis in abeyance, high oil prices have become the latest source of worry for the world economy. ĀOil is the new Greeceā is a typical headline on a recent report by HSBC analysts. The fear is understandable. Oil markets are edgy; tensions with Iran are high. The price of Brent crude shot up by more than $5 a barrel on March 1st, to $128, after an Iranian press report that explosions had destroyed a vital Saudi Arabian oil pipeline. It fell back after the Saudis denied the claim, but at $125, crude is still 16% costlier than at the start of the year. Assessing the dangers posed by dearer oil means answering four questions: What is driving up the oil price? How high could it go? What is the likely economic impact of rises so far? And what damage could plausible future increases do? The origins of higher prices matter. Supply shocks, for instance, do more damage to global growth than higher prices that are the consequence of stronger demand. One frequent explanation of the current rise is that central-bank largesse has sent oil prices higher. In recent months the world’s big central banks have all either injected liquidity, expanded quantitative easing (printing money to buy bonds) or promised to keep rates low for longer. This flood of cheap money, so the argument goes, has sent investors into hard assets, especially oil. But since markets are 171

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forward-looking, the announcement rather than the enactment of QE should move oil prices; indeed, the chairman of the Federal Reserve, Ben Bernanke, disappointed markets last month by not signalling another round of QE (see Buttonwood). Moreover, if rising prices are being driven by speculators you should see a rise in oil inventories—exactly the opposite of what has happened. Central banks may have affected oil indirectly, by raising global growth prospects, which in turn buoy expectations for oil demand. Circumstantial evidence supports this thesis. The recent rise in oil prices has coincided with greater optimism about the world economy: a euro-zone catastrophe and a hard landing in China both appear less likely and America’s recovery seems on stronger ground. But slightly rosier growth prospects are only part of the story. A more important driver of dearer oil has been disruptions in supply. All told, the oil market has probably lost more than 1m barrels a day (b/d) of supply in recent months. A variety of non-Iranian troubles, from a pipeline dispute with South Sudan to mechanical problems in the North Sea, have knocked some 700,000 b/d off supply. Another 500,000 b/d or so of Iranian oil is temporarily off the market thanks both to the effects of European sanctions and a payment dispute with China.

The cushion of spare supply is thin. Oil stocks in rich countries are at a five-year low. The extent of OPEC’s spare capacity is uncertain. Saudi Arabia is pumping some 10m b/d, a near-record high (see chart 1). And there is the threat of far bigger supply disruptions if Iran were ever to carry out its threat to close the Strait of Hormuz, through which 17m barrels of oil pass every day, some 20% of global supply. Even a temporary closure would imply a disruption to dwarf any previous oil shock. The 1973 Arab oil embargo, for instance, involved less than 5m b/d. Separating out these various factors is not easy, but Jeffrey Currie of Goldman Sachs reckons that the fundamentals of supply and demand have pushed oil prices to around $118 a barrel. He thinks the remaining increase is down to fears about 172

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Iran. If so, should relations with Iran improve, the oil price might go down by a few dollars, but stay close to $120. Globally, the damage from price increases to date is likely to be modest. A rule of thumb is that a sustained 10% rise in the price of oil shaves around 0.2% off global growth in the first year, largely because dearer oil shifts income from oil consumers to producers, who tend to spend less. For now any impact is almost certainly outweighed by improvements elsewhere, particularly in the easing of the euro crisis. Despite dearer oil, the prospects for global growth are still better than they were at the beginning of the year. But the impact on growth and inflation in individual countries will differ. In America, a net importer which taxes fuel lightly, the standard rule is that a $10 increase in oil prices (which corresponds to a 25-cent rise in the price of petrol) knocks around 0.2% off output in the first year and 0.5% in the second year. That would slow, but hardly fell, an economy that is widely expected to grow by more than 2% this year. There are in any case several reasons why America may be more resilient to dearer oil than in recent years. The jump in petrol prices has been far smaller than in 2011 or 2008. Rising employment gives consumers more income with which to pay for fuel. And America’s economy is becoming ever less energy-intensive, and less dependent on imports. Oil consumption has fallen in the past two years, even as GDP has risen. Americans are driving less, and they are buying more fuel-efficient cars. Net oil imports are well below their 2005 peak, which means more of the money Americans spend on costlier oil stays within its borders. The development of copious amounts of natural gas means gas prices have plunged. That, coupled with an unusually mild winter, has kept bills for home heating unusually low. In January the share of consumers’ spending on energy products was the second-lowest in 50 years. These factors do not imply that America is impervious to spiking oil, but they do suggest the impact of price rises to date will be modest. Europe is more exposed. European countries, which tax oil more heavily than America, have typically seen a smaller impact on growth from changes in the oil price. But this time they may be relatively more affected, because most economies 173

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are already stagnant or shrinking. Worse, Europe’s weakest peripheral economies are also some of the biggest net importers (see chart 2). Greece, for instance, is highly dependent on imported energy, of which 88% is oil. Even the price rises to date will worsen the euro-zone recession; a big jump could spawn a deep downturn and fracture the confidence of markets. Britain is relatively insulated. Although it is a net oil importer, it has significant resources in the North Sea. Any losses to the consumer from dearer fuel are partially offset by gains in the oil and gas sector itself. But even in Britain the net effect of price increases to date could be more damaging than usual, particularly since they reduce the odds of sharply falling inflation. Lower inflation, and a rise in real incomes, are one reason British policymakers hoped to see the economy improve this year. Barrels, no laughs e picture pict In emerging economies the is even more disparate. Oil exporters, from Venezuela to the Middle East, are gaining; oil importers will see worsening trade balances. In 2008 and 2011, the main effect of dearer fuel in emerging economies was on inflation. That is less of a worry now, largely because food prices, which make up a much bigger part of most emerging economies’ consumption basket, are stable. But some countries will face problems. In the short term, some of the hardest-hit emerging economies will be in eastern Europe. They will suffer not only from more expensive oil but also from the weakening of European export markets. India is also a concern. Fuel is a big component of its wholesale-price index, for example, so inflation will rise as higher oil prices are passed through to domestic fuel costs. To the extent they are not, the budget will be hit. India regulates—and heavily subsidises—the price of diesel and kerosene. According to Deutsche Bank, e p diesel prices have risen by only 31% since January 2009, whereas the price of crude oil in rupees is up by 180%. The difference is a result of subsidies, frustrating India’s efforts to reduce its budget deficit. So oil is not the new Greece. More expensive oil is, for now, doing little harm to global growth. But it is not helping Europe’s more fragile economies. And if the Strait of Hormuz is threatened, the resulting surge in oil prices will spell the end of the global recovery.

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Ray Dalio

Man and machine The economic ideas of the world’s most successful hedge-fund boss ĀTHE most beautiful deleveraging yet seenā is how Ray Dalio describes what is now going on in Americaÿs economy. As America has gone through the necessary process of reducing its debt-to-income ratio since the financial crash of 2008, he reckons its policymakers have done well in mixing painful stuff like debt restructuring with injections of cash to keep demand growing. Europeÿs deleveraging, by contrast, is Āuglyā. Mr Dalioÿs views are taken seriously. He made a fortune betting before the crash that the world had taken on too much debt and would need to slash it. Last year alone, his Bridgewater Pure Alpha fund earned its investors $13.8 billion, taking its total gains since it opened in 1975 to $35.8 billion, more than any other hedge fund ever, including the previous record-holder, George Sorosÿs Quantum Endowment Fund.

Mr Dalio, an intense 62-year-old, is following in the footsteps of Mr Soros in other ways, too. Mr Soros has published several books on his theories, and is funding an institute to get mainstream economists to take alternative ideas seriously. Mr Dalio, too, is now trying to improve the public understanding of how the economy works. His economic model Āis not very orthodox but gives him a pretty good sense of where the economy is,ā says Paul Volcker, a former chairman of Americaÿs Federal Reserve and one of Mr Dalio ÿ s growing number of influential fans. 175

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Whereas Mr Soros credits the influence of Karl Popper, a philosopher who taught him as a student, Mr Dalio says his ideas are entirely the product of his own reflections on his life as a trader and his study of economic history. He has read little academic economics (though his work has echoes of Hyman Minsky, an American economist, and of best-selling recent work on downturns by Carmen Reinhart and Kenneth Rogoff) but has conducted in-depth analysis of past periods of economic upheaval, such as the Depression in America, post-war Britain and the hyperinflation of the Weimar Republic. He has even simulated being an investor in markets in those periods by reading daily papers from these eras, receiving data and Ātrading as if in real time. In the early 1980s Mr Dalio started writing down rules that would guide his investing. He would later amend these rules depending on how well they predicted what actually happened. The process is now computerised, so that combinations of scores of decision-rules are applied to the 100 or so liquid-asset classes in which Bridgewater invests. These rules led him to hold both government bonds and gold last year, for example, because the deleveraging process was at a point where, unusually, those two assets would rise at the same time. He was right. What Mr Dalio calls the Ātimeless and universalā core of his economic ideas is set out in a 20-page ĀTemplate for Understandingā that he wrote shortly after the collapse of Lehman Brothers in 2008 and recent recently updated. The document begins: Ā The economy is like a machine. ā This machine machin may look complex but is, he insists, relatively simple even if it is Ānot well understoodā. Mr Dalio models the macroeconomy from the bottom up, by focusing on the individual transactions that are the machineÿs moving parts. Conventional economics does not pay enough attention to the individual components of supply and, above all, demand, he says. To understand demand properly, you must know whether it is funded by the buyersÿ own money or by credit from others. A huge amount of Bridgewaterÿs efforts goes into gathering data on credit and equity, and understanding how that affects demand from individual market participants, such as a bank, or from a group of participants (such as subprime-mortgage borrowers). Bridgewater predicted the euro-zone debt crisis by totting up how much debt would need to be refinanced and when; and by examining all the potential buyers of that debt and their ability to buy it. Mr Volcker describes the degree of detail in Mr Dalioÿs work as Āmind-blowingā and admits to feeling sometimes that Ā he has a bigger staff, and produces more relevant statistics and analyses, than the Federal Reserve.ā

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Two sorts of credit cycle are at the heart of Mr Dalio ÿ s economic model: the business cycle, which typically lasts five to eight years, and a long-term (Ālong waveā) debt cycle, which can last 50-70 years. A business cycle usually ends in a recession, because the central bank raises the interest rate, reducing borrowing and demand. The debt cycle ends in deleveraging because there is a Āshortage of capable providers of capital and/or a shortage of capable recipients of capital (borrowers and sellers of equity) that cannot be rectified by the central bank changing the cost of money. ā Business cycles happen often, they are well understood and policymakers are fairly adept at managing them. A debt cycle tends to come along in a country once in a lifetime, tends to be poorly understood and is often mishandled by policymakers. An ordinary recession can be ended by the central bank lowering the interest rate again. A deleveraging is much harder to end. According to Mr Dalio, it usually requires some combination of debt restructurings and write-offs, austerity, wealth transfers from rich to poor and money-printing. A Ābeautiful deleveragingā is one in which all these elements combine to keep the economy growing at a nominal rate that is higher than the nominal interest rate. (Beauty is in the eye of the beholder: Mr Dalio expects Americaÿs GDP growth to average only 2% over a 15-year period.) Print too little money and the result is an ugly, deflationary deleveraging (see Greece); print too much and the deleveraging may become inflationary, as in Weimar Germany. Although Mr Dalio says he fears being misunderstood as saying Ā print a lot of money and everything will be OK, which I don ÿ t believe, all deleveragings have ended with the printing of significant amounts of money. But it has to be in balance with other policies.ā Mr Dalio admits to being wrong roughly a third of the time; indeed, he attributes a big part of his success to managing the risk of bad calls. And the years ahead are likely to provide a serious test of whether the economic machine is as simple as he says. For now, he is in a more optimistic mood thanks to the European Central Bank ÿ s recent moves, in effect, to print money. Although he still expects debt restructuring in Spain, Portugal, Italy and Ireland, on top of that in Greece, he says that the Ārisk of chaos has been reduced and we are now calming ourselves down.ā Hereÿs hoping he is right again.

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Buttonwood

Pausing for breath The rally in risk assets is running out of steam kn n IT IS known as the Āreflation tradeā. The theory is that rich-world central banks will do whatever it takes to revive their economies, even if that means tolerating a o what period of above-target inflation. As a result, investors feel an incentive to buy Āreal assetsā, those linked to nominal economic growth (notably equities) or to rising odities) prices (commodities). From October 4th to March 1st, the MSCI World equity index rose by 21.4% and the S&P GSCI commodity index rose by 23.8%, vigorous rallies by any standard. Bullish sentiment was driven by a sense that quantitative easing (QE), the creation of money to buy assets like government bonds, had become a competitive sport. America and Britain had been in the vanguard but in September the Swiss central bank pledged to create sufficient money to peg the franc against the euro; and in February the Bank of Japan added {Yen}10 trillion ($128 billion) to its asset-purchase programme and unveiled a target inflation rate of 1%. For its part the European Central Bank has lent more than 1 trillion ($1.3 trillion) in three̢ ase se of o QE by the back door. year loans to banks, in what is widely seen as a case But the reflation trade took a bit of a dent on February 29th when Ben Bernanke, the Federal Reserve’s chairman, gave no hint of a third round of QE in testimony to Congress. Admittedly, there was a bullish underpinning to Mr Bernanke’s speech: a better performance by the American economy means there is less need for further action. Nevertheless, the Fed is seen as “pump-primer in chief” by many in the markets. Gold fell by $100 an ounce after Mr Bernanke’s statement. A setback was probably inevitable after such a strong rally. A bigger question, however, is whether the rationale behind the reflation trade makes any sense. Central banks have undoubtedly expanded their balance-sheets during the crisis. Back in 2008 the monetary base of the euro zone (in effect notes and coins plus reserves held at the region’s central banks) was around 10% of GDP; the equivalent figures for the Federal Reserve and the Bank of England were in the 4-6% range. Now the monetary base in all three places is between 16% and 18% of GDP. 178

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However, expansion of the monetary base does not necessarily lead to growth in broad money, which measures the supply of credit to businesses and consumers and which ultimately drives inflation. Money-supply growth still looks sluggish in Britain, Japan and the euro zone (see chart). Only in America does it look robust. The problem is that many banks remain unwilling to extend credit given the need, among other things, to shore up their capital. Figures show that total euro-zone lending to households and non-financial firms has declined in recent months, despite the ECB’s actions. Dhaval Joshi of BCA Research says that “banks have destroyed money just as fast as the ECB has created it.” Jennifer McKeown of Capital Economics concludes from the data that “bank lending remains extremely weak, suggesting that a lack of credit will continue to hold back economic activity.” In short, the reflation trade may be based on a false premise. The rally may well have been driven by a lifting of the intense economic gloom that enveloped the markets in the autumn of 2011 and a sense that the European authorities had removed the immediate threat of a banking collapse, while simultaneously halting the rapid rise in Italian and Spanish government-bond yields. But now that investors have paused for breath, they can see that the economic outlook is still pretty murky. On March 5th, for example, China lowered its growth target to 7.5% (see later story); survey data on activity in the euro area’s services sector were also weaker than expected. Furthermore, the markets are starting to lose a key source of support. As the global economy emerged from recession in 2009, profit margins surged thanks to falls in borrowing costs and weak wage growth. But European profits are down by 7% compared with the previous year, according to HSBC. Even in America, which is doing rather better, Bank of America Merrill Lynch is expecting corporate profits for S&P 500 companies to grow by just 6.4% in 2012, down from 14.8% last year. It all looks remarkably like 2011, when an early-year rally also ran out of steam. So long as the yields on other assets like bonds and cash are so low, it is hard for 179

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stockmarkets to collapse. But those yields are so low because central banks are frightened about the economic outlook. That makes it very hard for a bull run to be sustained. Inter-bank interest rates

Fixing LIBOR ⁒ A financial cial al benchmark b be that badly needs an overhaul EVERY weekday, at around 11.30am UK time, trading screens update with that dayÿs new London inter-bank offered rates (LIBOR). The numbers are supposed to measure the interest rates banks pay when they borrow from each another. Along with other benchmarks like central-bank rates and government-bond yields, LIBOR rates are one of the foundations of finance. Contracts worth around $360 trillion, five times global GDP, are based on them. o be rock solid, and there are concerns that Something this important needs to LIBOR is not. A 2008 study by the Bank for International Settlements, for instance, spotted days when financial risks spiked but LIBOR did not. Given that lending rates should be highly influenced by credit risk, such disconnects have led some to suspect foul play. The Canadian antitrust watchdog is searching for evidence of collusive conduct between banks, including price-fixing. Competition authorities in Switzerland, America and the European Union are likely to probe the same thing. Financial regulators in America, Britain and Japan are also investigating LIBOR; they may look at whether banks have acted alone to manipulate LIBOR to their advantage.

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LIBOR was developed in the 1980s to simplify the pricing of interest-rate derivatives and syndicated loans. Such loans blend funds provided by several banks; a common yardstick for the cost of cash was needed. In response the British Bankers ÿ Association (BBA) started publishing LIBOR rates in 1986 and they quickly became a vital reference point for the pricing of financial instruments. Libor is set, or Āfixedā, every day. Unlike other benchmarks it is not based on actual borrowing costs. Instead, each bank estimates the rate it would be charged if it borrowed cash that day, across 15 maturities in ten different currencies. The amount borrowed in this hypothetical contract is not specified, it just has to be a Āreasonableā amount. This process ensures that full LIBOR coverage is available every day, even in lesser-used currencies. Up to 20 banks submit their best guesses of lending costs. Once these are all in, Thomson Reuters, on behalf of the BBA, ranks them, removes the top and bottom 25%, averages the rest and then publishes the dayÿs LIBOR fixing. At this stage every bankÿs individual estimate is revealed, too. So LIBOR is subjective by design. It is a bankersÿ poll, not a statistical measure. And there are reasons to believe that banks have an incentive to cook the numbers. Banks whose actual borrowing costs are high do not want to admit they are seen as risky by creditors. And some banksÿ liabilities are more closely tied to LIBOR than their assets. By lowering LIBOR, these banksÿ interest costs would fall more than interest revenues, boosting profits. Accurate benchmarks are vital if risk is to be correctly priced. According to Zohar Hod of SuperDerivatives, a derivatives-pricing firm, there has already been movement away from LIBOR towards using overnight index swaps to discount cash flows on certain instruments. In the meantime the BBA is considering a LIBOR revamp. It is needed. Where actual rates are available, these should be used. If estimated rates are required, incentives to report accurately need to be sharpened. Collecting each bankÿs estimates of its rivalsÿ borrowing rates would help identify any over-optimistic self-assessment. Keeping these cross-checks anonymous could promote truth-telling. Such steps could lead to an accurate LIBOR fix, not just a fixed one.

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Chinaÿs new growth targets

Year of the tortoise China seeks (slightly) slower growth HE annual meeting of the National Peopleÿs Congress (NPC) draws almost 3,000 delegates to Beijing to listen to the Chinese government ÿ s progress reports, rubber-stamp its proposalsüand advance its goal of boosting consumption. At Silk Street Market, a Beijing institution, a digital banner welcomes the delegates to town and invites them to go shopping. But if this year s meeting lifted the fortunes of Silk Street stallholders, it dampened the animal spirits of others. They were perturbed by the opening speech, in which Wen Jiabao, Chinaÿs prime minister, set a growth target of just 7.5% for 2012. That is half a percentage point lower than the target set in the previous seven years. It is also below the 8% threshold deemed necessary to preserve social stability by some officials. His announcement was received badly by the regionÿs stockmarkets, especially in Australia, which is getting filthy rich selling its dirt (iron ore, coal, minerals) to Chinaÿs fast-expanding industries.

If the government’s target were likely to be hit, the gloom would be easy to understand. But China routinely surpasses its targets, often by large margins (see chart). In fact, China’s recorded growth has fallen below 8% only twice in the past 20 years. That was in 1998 and 1999, in the wake of the Asian financial crisis. That may also be when the notion took hold that China had to grow by at least 8% to generate enough jobs for the millions entering the labour force each year. China’s labour force is not, however, growing as quickly as it was. From 1991 to 2000, it swelled by 8.7m a year. This year it is projected to grow by less than 5.2m, which should 182

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mean China can get away with slower growth. Unfortunately, China also does not create as many jobs as it did. As Nicholas Lardy of the Peterson Institute for International Economics has pointed out, employment outside agriculture grew faster from 1991 to 2001 than it did from 2003 to 2010, even though GDP growth was slightly brisker over the later period. This is because recent growth has been skewed towards manufacturing, not services, and towards capital-intensive manufacturing, not the labour-intensive kind. According to Mr Lardy, “balanced growth” of less than 8% would raise employment, wages and private consumption faster than unbalanced growth of much more than 8%. By setting a lower growth target, the government may be indicating that it is willing to sacrifice some speed for better balance. That would be in keeping with the government’s longstanding rhetoric, if not its actions. Two years ago, for example, it released “36 guidelines” that were supposed to encourage private investment in parts of the economy, many of them services, traditionally dominated by state-owned enterprises. In this week’s speech, Mr Wen said he would adopt “specific operating rules” that might belatedly give those guidelines some bite. A shift to less capital-intensive growth, if it were to happen, would be bad news for commodity exporters like Australia and good news for China’s neglected service industries, retailers included. In the meantime, Silk Street shopkeepers can be forgiven for caring more about the delegates’ patronage than their proposals. BTG Pactualÿs initial public offering

Better Than Goldman? A Brazilian star heads to market THE announcement on March 1st that BTG Pactual plans an initial public offering (IPO) came after weeks of speculation. André Esteves, the Brazilian investment bankÿs chief executive, had said before that an IPO was a matter of when, not if. A private deal in late 2010 with sovereign-wealth funds and rich families, including the Agnellis and the Rothschilds (both of whom have links with The Economist), had brought in $1.8 billion in return for 18% of the firm. But BTG has spent at least $1.5 billion on a series of takeovers in the past five months, eating up capital. The most recent deal, a cash-and-shares purchase of Celfin Capital, a Chilean brokerage, implied a valuation of $14.8 billion. The moment to list, it seemed, had arrived. With more cash, BTG will be able to continue its shopping spree without overstretch, applauds Ceres Lisboa of Moodyÿs, a ratings agency. And Brazil could do with its own investment bank: global players such as UBS and Credit Suisse have been 183

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active there for some time but have pulled back because of the financial crisis. ĀBTG has advantages right now,ā says Ms Lisboa, Ābecause it has Brazil expertise and a relative lack of global exposure.ā Mr Estevesÿs story is not quite rags to riches but is still impressive. He joined Banco Pactual in 1989 as a systems analyst, worked his way to the top and sold the bank to UBS in 2006 for $3.1 billion. Three years later his new fund, BTG (the initials stand for Banking and Trading Group but also, wags point out, Better Than Goldman), bought it back from the cash-strapped Swiss bank for $2.5 billion. The Celfin deal implies a price many times thatüand, according to São Paulo gossip, three times the bankÿs book value. Talk of such multiples makes level-headed types nervous. Three times the value of assets minus liabilities is what Goldman Sachs listed at in 1999; it now trades below book value. Itaú Unibanco, Brazilÿs biggest private bank, trades at a bit over twice book value; BTGÿs return on equity is little more than at Itaú, although, at 25%, it is still eye-wateringly high by rich-world standards. But the bank is neither dragged down by the rich worldÿs slump nor attached, like its local rivals, to a big, dÿ s s staid retail arm, says Oliver Leyland of Mirae Asset Global Investments. ĀThese guys have sold hundreds of deals; I m sure they can sell themselves.ā The prospectus, when it appears, will be scrutinised not only for growth prospects and strategyüsome of the cash is expected to spent in Asia to capitalise on links o be sp between that region and Latin America ü but also for reassurances regarding minority rights. BTG plans to offer non-voting shares as well as voting ones, a route few Brazilian firms have taken in recent years. The partners clearly have an eye to future offerings (it is expected to sell 10% of its shares this time) and the importance of maintaining control, says Ricardo Almeida of Insp Insper, a São Paulo nsp business school. BTGÿs listing will also be watched for signs of a revival in Brazilÿs moribund IPO market. In 2006 and 2007 companies listed at frothy prices almost weekly, but the most recent IPO was last July, since when a dozen or so planned deals have been postponed or dropped as risk-averse foreign buyers hang on to cash and sellers hold out for higher prices. The sense of urgency is now palpable, says Paulo Sergio Dortas of Ernst & Young, an accounting firm: companies know they cannot keep growing without cash. At least 40 are thought to be ready to list if the mood changes. Few will have a story to match BTGÿsüand as Brazilÿs biggest dealmaker, it will stand ready to profit when they finally do follow suit.

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Finance and economics

Allen Stanford

Arise and fall A guilty verdict for the one-time king of Caribbean finance A MONTH after Sir Fred Goodwin was stripped of his title for leaving the Royal Bank of Scotland shredded, another erstwhile knight of the financial-services realm has been put in his place ü this time a jail cell. Allen Stanford faces decades behind bars after being convicted in Houston, Texas, this week of a $7 billion fraud that snared investors in 113 countries, from Latin America to Libya. In 2008, when the sky fell in on Bernard Madoff, the only fraudster to have taken investors for more, the Texas-born Mr Stanford was still swaggering. He had done so much for Antigua, the Caribbean island where he based his empire, that it made him a Sir (a title that has since been rescinded). He took to the airwaves to tut-tut rivals who had been felled by subprime mortgages. His star rose further when he sponsored an international cricket tournament. He was said to be worth over $2 billion. He certainly lived like he was.

The dark knight

Within a few months, however, the authorities had swooped, seizing his Antigua-based bank and his brokerage operations. Prosecutors accused him of flogging bogus certificates of deposit and of raiding the bank, siphoning deposits to a Swiss account used to finance his passion for yachts, jets and islands. His lawyers tried to have him declared incompetent to stand trial, saying a prison beating had led to loss of memory and an addiction to anti-anxiety drugs. When 185

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that ruse failed, they argued in court that he had been his group ÿ s visionary, uninvolved in its day-to-day running, even as they also claimed the businesses had been viable until they were, as their client put it, Ādisembowelledā upon being seized. Countering this narrative was damning evidence from the prosecution ÿ s star witness, Mr Stanfordÿs former chief financial officer, who testified that he and his boss had falsified documents and that the firm had presented hypothetical returns as the e real rea thing in client pitches. For all Mr Stanfordÿs public bravado, in private he wrestled with how to plug holes in the accounts. When a colleague suggested he raise money from friends, he reportedly said: ĀIÿll go to the Libyans. They love me.ā Victims cheered the verdict but their victory is hollow. Three years on they are yet om the court-appointed receiver, Ralph Janvey. Of the $216m to receive a penny from he had recovered by late last year, more than half had been eaten up by legal and other fees. Lawyers reckon that total recoverable assets may be a mere $500m, or 7% of the account balances shown at the time of Mr Stanfordÿs arrest (though that could increase if lawsuits seeking $600m from Mr Stanfordÿs brokers, customers who extracted more than they paid in and political organisations that received donations from Mr Stanford succeed). Investors also bemoan the hefty cost of litigating jurisdictional issues. Mr Janvey is locked in a fight with a separate receiver in Antigua, who has control over the fraudsterÿs accounts in Switzerland and rÿ ÿs bank b Britain, over how to divide up the estate. Americaÿs Securities and Exchange Commission (SEC) has backed the victimsÿ cause, taking the unprecedented step of suing the Securities Investor Protection Corporation after the congressionally chartered group balked at paying the defrauded up to $500,000 each in compensation (on the ground that Mr Stanfordÿ s operations were based offshore). Too little, too late, scream the SEC s critics. Its district office in Fort Worth, Texas, first concluded that the Caribbean kingpin s businesses were a Ponzi scheme in 1997, only to be ignored then and several times subsequently by enforcement staff. This story has only one true villain, but many others come out looking bad. Genes and investing

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Natural stock selection A new excuse for lousy investors ECONOMISTS work on the assumption that people act rationally. If only life were that simple. Investors certainly donÿt always act as they should. Among other follies, they trade too much, do not diversify their portfolios enough and are loth to discard underperforming stocks. They may have been born to behave that way. A recent study* into investment behaviour by Stephan Siegel of Arizona State Universityÿs WP Carey School of Business, and Henrik Cronqvist of Claremont McKenna College, illuminates the role that genes play in determining investment decisions. The authors examine the investment behaviour of 15,208 pairs of Swedish twins, using data from the countryÿs twin registry and its tax authority, which until 2007 kept comprehensive records on every financial transaction. Controlling for various factors, they find that identical twins, who share all their genes, were more similar in their investing behaviour than fraternal twins, who share about half their genes. The authors calculate that genetic factors account for between a quarter and half of the variations in irrational investment behaviour between individuals. These factors are at work across more dimensions than just investing. Twins who showed a bias towards buying familiar shares rather than taking a punt on unknown ones, for example, also showed a preference for living closer to their place of birth and for marrying a spouse from the same region. Investors with large portfolios were particularly susceptible to genetic influences. If genes explain up to a half of the variations in investment behaviour, what governs the rest? The authors also calculated the impact of shared environmental influences on the twins as well as the effect of experiences unique to one half of a twin pair. Common childhood experiences like schooling were found to have almost no influence on investment behaviour. But individual experiences explain half of the variations between twin pairs—as much as, and often more than, genes. The study has its limitations. It looks at data from only one country during a limited period of time, for example. But it suggests that attempts to nudge people to invest more rationally have some big inbuilt biases to overcome. Free exchange

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Bond shelter Americaÿs ability to issue debt is helped by a resemblance between Treasuries and money IN A financial landscape full of oddities, the prospect of America being paid interest by its creditors when its national debt is rocketing is one of the oddest. The Treasury recently disclosed it is exploring how to let investors enter negative yields when bidding at debt auctions. Clearly, demand for American government debt is driven by much more than a hunger for returns. Financial-market participants use Treasury bonds and bills as collateral to secure lending, for instance. And for risk-averse investors such as foreign central banks, money-market funds and retirees, Americaÿs debt is uniquely suited to storing savings without much due diligence. In short, its government debt is a lot like money. This analogy is not perfect, of course. Treasury bonds are less useful for buying things and government debt carries at least the possibility of default. But in terms of liquidity, risk and returns, few things come closer to money. In a recent paper* Arvind Krishnamurthy and Annette Vissing-Jorgensen of Northwestern University quantify the money-like properties of American debt by comparing its supply from 1926 to 2008 with market-based measures of safety and liquidity. They find that when the supply of Treasuries is lower (as measured by the debt-to-GDP ratio), irr yield yie demand goes up, widening the spread between their yields and those on AAA-rated corporate bonds. The price of safety That, the authors say, is evidence of the higher value investors place on holding something that is 100% safe (a Treasury bond) rather than almost 100% safe (the -rate and AAA-rated corporate bond). At the same time the spread between AAA-rated lower-rated corporate bonds also widens, a sign that the supply of Treasuries has a broader effect on the price of safer assets. Lower amounts of Treasury debt also lead to a wider spread between Treasury-bill yields and the interest paid on federally insured bank certificates of deposit. Since both are guaranteed by the government, the authors attribute the lower relative yields on T-bills to increased demand for their superior liquidity. Mr Krishnamurthy and Ms Vissing-Jorgensen reckon the value that investors place on the safety and liquidity of Treasuries averaged a hefty 73 basis points in forgone yields over the period they studied. 188

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Lower borrowing costs on government debt are a boon for the taxpayer but not necessarily helpful to other debt issuers. When the supply of Treasuries rises investors get all the safety they need from government-debt issuance. That strips higher-rated corporate borrowers of demand. And constraining the supply of Treasuries brings its own problems. If the federal government does not supply enough money-like assets, investors will go elsewhere in search of safety. Private intermediaries may fill the void with cheap imitations such as asset-backed commercial paper and repurchase, or “repo”, loans (a type of secured short-term funding). Jeremy Stein, a professor at Harvard University and a nominee for governor of the Federal Reserve, says excessive private-money creation can leave the financial system too reliant on these forms of short-term debt and vulnerable to a shock. In a paper co-authored with Robin Greenwood and Samuel Hanson, he argues that more government short-term borrowing can reduce harmful private-money creation.

For policymakers, the role of Treasuries as “money” has several implications. The most obvious is that when investors are willing to pay a higher premium for safety and liquidity, the government can safely carry more debt. David Greenlaw of Morgan Stanley notes that since 2008 the safety premium identified by Mr Krishnamurthy and Ms Vissing-Jorgensen appears to have grown for any given level of debt (see left-hand chart). This could be down to increased demand for safe assets from emerging-market central banks or from banks facing new liquidity rules. Or the culprit may be a shrunken supply of other types of safe assets (see right-hand chart). The commercial-paper and repo markets have slimmed, for example, and the spectre of default haunts several euro-zone sovereign bonds.

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With fewer havens to choose from, the surge in Treasury debt since 2008 may have had positive spillovers beyond enabling a generous fiscal stimulus. It has supplied private investors and financial institutions with enough “money” to satisfy their hunger for safety and grease the wheels of the markets. That is analogous to the dollar’s role as reserve currency, which obliges America to issue debt securities in which foreigners can invest those dollars. Another implication is that America could issue more short-term paper than its debt managers, who worry about rolling over too much paper under adverse conditions, would normally deem prudent. Those worries are not baseless: eventually the thirst for the safest of safe assets will ease and the supply of alternative investments will return. As a compromise the Treasury is mulling the issuance of floating-rate notes, whose interest rate would be reset daily and whose maturity of two years or above would limit rollover risk. The final implication is for central banks in America, Britain and Japan that have cen implemented quantitative easing (QE), the purchase of bonds with newly created money. Some of that money has been used to buy up long-term government debt in order to lower long-term interest rates. But in a separate paper Mr Krishnamurthy and Ms Vissing-Jorgensen argue that, by reducing the available supply of sovereign debt, QE raises the premium investors place on the safety and prem liquidity of government borrowers. That does not help riskier private borrowers, however. It would be more effective to focus QE on assets that are not in such demand, like mortgage-backed securities or corporate debt—the ones, in other words, that behave less like money.

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Science and technology Treating prostate cancer

The men’s room The next decade should do for prostate cancer what the past one has done for breast cancer MOST cancers are equal-opportunity killers. Some, though, are perforce sex-specific. Breast cancer is rare in men. And prostate cancer is obviously absent from women. Recent years have seen a plethora of new drugsüstarting in 1998 with Herceptin ü for treating breast tumours that are threatening to get out of control. No such breakthrough has happened with prostate cancer. Though easily treated if caught early, late-stage prostate cancer is serious and often fatal. But that may be about to change. Better understanding of the biology of the disease, and particularly of the role of testosterone in promoting it, has stimulated a new era of drug development, reminiscent of the revolution that ushered in Herceptin. These novel treatments, which are now undergoing clinical trials, were one of the main topics of conversation at the Congress of the European Association of Urology, which took place in Paris on February 24th-28th. Some of the therapies discussed remain conceptual almost to the point of fantasy: a genetically engineered virus that could destroy prostate-cancer cells from within, for example. Several, though, are already available, or are just about to be. Cabazitaxel, made by Sanofi, a French firm, is one. It is a relative of taxol, a drug used to treat breast and ovarian cancer. It works by preventing the formation of structures called microtubules, which pull the chromosomes apart in dividing cells (such as cancer cells). It was approved for use in 2010 after trials showed that it could prolong the lives of men with late-stage disease. A second drug, abiraterone, made by Johnson & Johnson, an American company, was approved in 2011 after a trial was stopped because it had been so successful that the organisers deemed it unfair on those in the control group that they were not receiving the medicine too. 191

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Abiraterone works by interfering with an enzyme involved in the production of testosterone. Crucially, it does so in all testosterone-producing tissues, particularly including the adrenal glands, not just the testes. A common change that occurs when prostate cells turn cancerous is that they become extremely sensitive to testosteroneüso much so that late-stage prostate cancer is often referred to as being Ā castration-resistant ā , because even that drastic testosterone-reducing treatment cannot halt it. But abiraterone can. Testosterone terone poisoning Cutting off the tes testosterone supply is not, however, the only approach possible. MDV3100, made by Astellas, a Japanese firm, and Medivation, an American one, reduces the cancerÿs rÿ sensitivity to what testosterone is already there. This drug, not yet approved for prescription, works by gumming up testosterone receptors on the cancer cellsÿ surfaces, so they cannot react to the hormone. It also cuts the lines of communication between any receptors which are still activated and the cell nucleus, so that the nucleus cannot anno take instructions from the hormone. annot A fourth drug, alpharadin, developed by Algeta, a Norwegian firm, has a completely different mechanism of action. It works not on the primary cancer but on one of its most dangerous consequences, secondary bone tumours. Ironically, its active ingredient is radium, a substance more usually thought of as a cause of cancer than as a treatment. But one reason radium is dangerous is that, as a glance at the periodic table will show, it is chemically similar to calcium, a principal ingredient of bone. It therefore gets absorbed by bones if ingested, rather than being excreted. Algetaÿs researchers have exploited this to produce a drug ug that is taken up by bones. In someone who already has cancer that is a good thing, because the radiation produced kills the cancer cells, and the drug gets concentrated where it is needed most. It sounds desperate, and it is. But it seems to work. A trial at the Royal Marsden Hospital, in London, was stopped last year for the same reasons that the abiraterone trial was stopped: the treatment was too successful to deny it to the control group. Alpharadin is now, therefore, awaiting approval by the authorities. The final proven approach to castration-resistant prostate cancer is a vaccine. This is not a prevention, in the way that most vaccines are, but a treatment for existing disease. Sipuleucel-T, as the vaccine in question is known, is made by Dendreon, an 192

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American firm. The starting point is a culture of human dendritic cells. These are part of the immune system and, if suitably treated with a substance called a fusion protein, can be used to make prostate-cancer cells vulnerable to immune attack. Sipuleucel-Tÿs main drawback is that each treatment has to be handcrafted to the individual receiving it, using dendritic cells from his own body. This is hugely expensiveüalmost $100,000 a course. That is a sum which insurance companies and government health services might understandably be reluctant to fork out. Cost, indeed, is a consideration for others among the new anti-prostate-cancer treatments. Britainÿs National Institute for Health and Clinical Excellence, which assesses the cost-effectiveness of new medicines that might be paid for by the countryÿs National Health Service, reckons, for example, that abiraterone is too expensive to justify the extra months of life it brings. But Herceptin, too, was subject to scrutiny about its cost at the beginning. Now Herceptin treatment is routine, and many womenÿs lives are the better (and longer) for it. With luck, in a few yearsÿ time, men will be able to say the same. Searching for aliens

The wow factor A new citizen-science project will improve the chances of finding ET

EVER since 1993, when funding from Americaÿs space agency, NASA, was cut, the Search for Extraterrestrial Intelligence (SETI), which scans the sky looking for radio signals from intelligent aliens, has been inventive in its methods. In particular, it was one of the pioneers of the field of Ā citizen science ā , in which interested amateurs are recruited to help professionals crunch data. In 1999 it started 193

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SETI@home, an application that uses spare processing power on volunteers ÿ computers to sift the information generated by its radio telescopes. These days, SETI@home boasts more than 1m users. On February 29th the SETI Institute launched another citizen-science project. This time, though, its researchers are less interested in the digital computers on volunteersÿ desks than in the biological ones between their ears. SETILive, as the project is called, hopes to use the pattern-recognition capabilities of brains to distinguish interesting signals from the cacophony of interference generated by the denizens of planet Earth and to do so in real time. The basic idea behind SETI is to look for distinctive radio-frequency emissions that might come from advanced aliens rather than natural sources like stars. To do this, the SETI Institute uses an instrument called the Allen Telescope Arrayüa group of 42 small radio-telescope dishes in California, partly paid for by the eponymous co-founder of Microsoft. Unfortunately, some parts of the radio spectrum are full of signals created by Earthlings, rather than aliens. Everything from passing satellites and tumbling space junk to ground-based radar and even the ignition systems of nearby cars can generate spurious radio waves that confuse the software. Until now, the project has ed d bit dealt with that by ignoring the more crowded bits of the spectrum. But SETILive will bring them into play. It will do so by feeding pictorial representations (known as waterfall plots) of data from these noisy chunks of the spectrum to its users in the hope that they will be able to filter out the noise and spot potentially interesting signals buried behind the radio clutter from Earth. Those interesting signals will not necessarily have come from alien civilisations, says Chris Lintott, an astrophysicist at Oxford University who helps to run Zooniverse, a citizen-science website that manages several projects, including SETILive. But even if they do not, some new astronomical phenomena may be discovered by the project. And as the various sources of interference become better characterised, the results will be fed back into the automated-search algorithms, improving their ability to deal with Earth-generated noise. Other citizen-science projects already use the superior pattern-recognition capabilities of human Ā wetware ā , but SETILive is different from these in one important way. Rather than having its users pore at leisure over stored data, aliens are hunted on the fly. Users logging on to the projectÿs website view information 194

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that is hot from the Allen Array. They have to work quickly, though. Every 90 seconds, the array switches to looking at a different star, or a different frequency range, and a new image is generated. If, however, the humans do spot something interesting, the array can be told within three minutes to switch back to observing the star or range in question, to see if the signal is still there. That is a big advantage, says Dr Lintott. Volunteers working on SETI@home have found plenty of interesting signals, but because the data they analyse are often months old, those signals have usually vanished by the time anyone gets around to checking up on them. The most famous example of such delayed discovery, though it long predates the start of SETI@home, is the so-called ĀWow!ā signal. This signal, which looked exactly like the sort of thing astronomers had theorised aliens might use to get in touch was spotted in telescope printouts in 1977. It was a powerful, finely tuned broadcast at the most important natural frequency for radio astronomersüthe one generated by the flipping spin of the electron in a hydrogen atom (a flip also pertinent to the study of antimatter, see article). But by the time astronomers had noticed it and set their instruments up to double-check, the signal had vanished. If a second Wow! signal were discovered by SETILive, astronomers could focus on it almost immediately. First contact with aliens, then, might take place not in a lab full of computers but late one night in a suburban bedroom. There could be a film in that. Antimatter

Violating the rules Are matter and antimatter truly opposites?

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THAT the universe is made of matter is obvious. What bothers physicists is why. Their best theory of universal fundamentals, known as the Standard Model, suggests that equal amounts of matter and antimatter should have been produced in the Big Bang. Famously, however, matter and antimatter annihilate on contact and disappear in a puff of pure energy. A primordial equity between them would thus have led to a universe filled with light and little else. The reason that did not happen must be that matter and antimatter are not, in fact, perfect opposites—and that something in the asymmetry between them allowed matter to prevail. What that something is, therefore, is a question of great interest. Several groups of experimenters are searching for it and two of them, working at CERN, near Geneva, and Fermilab, outside Chicago, have just announced their latest results. The group at CERN, called the ALPHA collaboration, was looking at antihydrogen—atoms in which a positively charged antielectron, also known as a positron, orbits a negatively charged antiproton. Last year ALPHA used a magnetic trap to hold on to antihydrogen atoms for a record 16 minutes. That is plenty of eir ground gro time for them to relax into their state, the most energetically stable condition they can be in. This, in turn, makes them open to physicists’ probings, because there are no confusing changes happening inside the atoms themselves. Now, as the ALPHA team report in Nature, they have carried out the first of these probings. They used microwaves to nudge the anti-atoms, to see if they behave when nudged like mirror images of ordinary hydrogen atoms. The answer, disappointingly, is that they do. Bombard ordinary hydrogen atom d an or with microwaves of the right frequency and you will lift it out of its ground state by flipping the spin of its electron. Within the limits of accuracy of the experiment, positron spin-flipping seems to happen at the same frequency as electron spin-flipping. No asymmetry there, then. The researchers from the Collider Detector at Fermilab (CDF), however, do seem to have confirmed a discrepancy between matter and antimatter. They have been studying a form of asymmetry called charge-conjugation/parity (CP) violation. The Standard Model allows a whiff of this, but nowhere near enough to explain matter’s cosmic dominance. The CDF team think they have found a bit more of it, in particles known as D0-mesons. When a D0-meson decays, it produces daughter particles called pions and kaons. According to the Standard Model, the matter and antimatter versions of these 196

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mesons should give birth to such daughters in the same proportions. A result that came out of CERN last year suggests they do not—implying a new source of CP violation—and an analysis by the CDF team of previously unstudied data from the now-closed Tevatron accelerator at Fermilab has backed this up. Even this extra CP violation, if confirmed, would be far too tiny to explain the existence of the universe. But it would be a chink in the armour of the Standard Model into which an explanatory crowbar could yet be inserted. Animal behaviour

Smarter than the average bear The first case of ursine tool use PRIMATES apart, few mammals employ tools. Sea otters use rocks to smash clams open, dolphins wrap sponges around their noses to protect themselves while they forage on the seabed, elephants swat insects with branches and humpback whales exhale curtains of bubbles to trap schools of fish. Until now, these four examples had been thought the extent of the non-primate mammalian tool-users club. But a study just published in Animal Cognition, by Volker Deecke of the University of St Andrews, in Britain, has added a fifth and rather surprising one. That epitome of rugged wildness, the grizzly bear, seems to be the only species other than humans to have invented the comb. Dr Deecke made this discovery while studying grizzly-bear behaviour from a small boat in Glacier Bay National Park, Alaska, on July 22nd 2010. After a period of play-fighting with another bear and a short bout of feeding on a beached whale carcass, a bear of between three and five years of age, sex unknown, waded into the shallows of the bay. Once there, it picked up a fist-sized rock and carefully rotated it for about a minute before dropping it back into the water. Moments later, it picked up another, of similar size, and again rotated it. This time, rather than discarding the stone, it held it against its muzzle and started to rub. Using its left paw to press the rock against its skin and its right paw to support the rockÿs weight, the bear rubbed away at its muzzle and face for roughly a minute before dropping the stone back into the water. Then it grabbed a third stone of the same size, rotated it and rubbed its face, muzzle and neck for a further two minutes before discarding it. This done, it spent two minutes grooming its right paw with its teeth before returning to the whale carcass. Dr Deecke found, upon close examination of his photographs, that all three rocks 197

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were encrusted with barnacles and he reckons these were acting as the functional equivalent of the teeth of a comb. He thinks the bear was probably using its makeshift combs for comfort, rather than vanity. But crucially for the concept of tool-use, the animal’s rejection of the first rock it picked up shows a discriminating understanding of what was required to get the right amount of scratching from a comb; which rock, in other words, was the tool for the job. An important question from a biological point of view is whether this animal’s behaviour is unique. Other tool-using mammals are social species. That means one individual’s chance invention is easily copied by others of its group, resulting in a primitive culture. Grizzly bears have not been considered particularly sociable in the past, but if others in Glacier Bay are seen combing themselves in this way that view might have to change. It might, though, be that Dr Deecke’s preening animal is unique. That would suggest it came up with the idea of using rocks as combs by itself, rather than copying someone else—truly smarter than the average bear.

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Books and arts Creating economic wealth

The big why Nations fail because their leaders are greedy, selfish and ignorant of history

Why Nations Fail: The Origins of Power, Prosperity and Poverty. By Daron Acemoglu and James Robinson. Crown; 529 pages; $30. Profile; £25. Buy from Amazon.com, Amazon.co.uk THE rich worldÿs troubles and inequalities have been making headlines for some time now. Yet a more important story for human welfare is the persistence of yawning gaps between the worldÿs haves and have-nots. Adjusted for purchasing power, the average American income is 50 times that of a typical Afghan and 100 times that of a Zimbabwean. Despite two centuries of economic growth, over a billion people remain in dire poverty. This conundrum demands ambitious answers. In the late 1990s Jared Diamond and David Landes tackled head-on the most vexing questions: why did Europe discover modern economic growth and why is its spread so limited? Now, Daron Acemoglu, an economist at MIT, and James Robinson, professor of government at Harvard, follow in their footsteps with Ā Why Nations Fail ā . They spurn the cultural and geographic stories of their forebears in favour of an approach rooted solely in 199

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institutional economics, which studies the impact of political environments on economic outcomes. Neither culture nor geography can explain gaps between neighbouring American and Mexican cities, they argue, to say nothing of disparities between North and South Korea. They offer instead a striking diagnosis: some governments get it wrong on purpose. Amid weak and accommodating institutions, there is little to discourage a leader from looting. Such environments channel societyÿs output towards a parasitic elite, discouraging investment and innovation. Extractive institutions are the historical norm. Inclusive institutions protect individual rights and encourage investment and effort. Where inclusive governments emerge, great wealth follows. Britain, wellspring of the industrial revolution, is the chief proof of this theory. Small medieval differences in the absolutism of English and Spanish monarchs were amplified by historical chance. When European exploration began, Britainÿs more constrained crown left trade in the hands of privateers, whereas Spain favoured state control of ocean commerce. The New World ÿ s riches solidified Spanish tyranny but nurtured a merchant elite in Britain. Its members helped to tilt the scales against monarchy in the Glorious Revolution of 1688 and counterbalanced the landed aristocracy, securing pluralism and sowing the seeds of economic growth. Within a system robust enough to tolerate creative destruction, British ingenuity (not so different from French or Ch Chinese inventiveness) was free to flourish. This fortunate accident was not easily replicated. In Central and South America European explorers found dense populations ripe for plundering. They built suitably exploitative states. Britain ÿ s North American colonies, by contrast, made poor ground for extractive institutions; indigenous populations were too dispersed to enslave. Colonial governors used market incentives to motivate early settlers in Virginia and Massachusetts. Political reforms made the grant of economic rights credible. Where pluralism took root, American industry and wealth bloomed. Where it lapsed, in southern slaveholding colonies, a long period of economic backwardness resulted. A century after the American civil war the segregated South remained poor. Extractive rules are self-reinforcing. In the Spanish New World, plunder further empowered the elite. Revolution and independence rarely provide escape from this tyranny. New leadership is tempted to retain the benefits of the old system. Inclusive economies, by contrast, encourage innovation and new blood. This destabilises existing industries, keeping economic and political power dispersed. 200

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Failure is the rule. Here, Venice provides a cautionary tale. Upward mobility drove the city-stateÿs wealth and power. Its innovative commenda, a partnership in which capital-poor sailors and rich Venetians shared the profits from voyages, allowed those of modest background to rise through the ranks. This fluidity threatened established wealth, however. From the late 13th century the ducal council began restricting political and economic rights, banning the commenda and nationalising trade. By 1500, with a stagnant economy and falling population, Veniceÿs descent from great power was well under way. Moves towards greater inclusivity are disappointingly rare. The French revolution provides an example, but also demonstrates the authorsÿ unfortunate habit of ignoring historical detail. Revolution put paid to absolutism and led, after a long and messy struggle, to the creation of an enduring republic. Institutions, in the form of a fledgling merchant class, provided momentum for reform, making the difference between the successful French revolution and failed uprisings elsewhere. But the authors give short shrift to the presence and meaning of Enlightenment ideals. It is difficult to believe this did not matter for the French transition, yet the intellectual climate is left out of the story. History is contingent, the authors apologise, but history is what they hope to explain. The story of Botswana is also unsatisfying. There, a co-operative effort by tribal leaders secured the protection of the British government against the marauding imperialism of Cecil Rhodes. Despite its considerable diamond wealth, which might have spawned a corrupt and abusive elite, Botswana became a rare success in Africa, assisted by the benevolence of its leaders and by having a tiny population. At times the authors come dangerously close to attributing success to successfulness. The intuition behind the theory is nonetheless compelling, which makes the scarcity of policy prescriptions frustrating. The book is sceptical of the Chinese model. China ÿ s growth may be rooted in the removal of highly oppressive Maoist institutions, but its communist government remains fundamentally extractive. It may engineer growth by mobilising people and resources from low-productivity activities, like subsistence agriculture, toward industry. But without political reform and the possibility of creative destruction, growth will grind to a halt. Rich countries determined to nudge along the process of institutional development should recognise their limitations, the authors reckon. The point is well taken. It is hard to ignore the role of European expansion in the creation of the 201

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underdeveloped worldÿs extractive institutions which, in self-perpetuating fashion, continue to constrain reform and development. Evidence nonetheless hints that contagious ideals, propitious leadership and external pressure matter. The promise of European Union membership encouraged institutional reform in central and eastern Europe. America eventually eradicated extractive southern institutions and placed the South on a path toward economic convergence. There is no quick fix for institutional weakness, only the possibility that steady encouragement and chance will bring about progress. ses of religion The uses

Comfort, mfo or joy and disagreement 䉘 Two philosophers disagree sagree agre Religion for Atheists: A Non-Believer

s Guide to the Uses of Religion. By Alain de

Botton. Pantheon; 320 pages; $26.95. Hamish Hamilton; £18.99 . Buy from Amazon.com, Amazon.co.uk The Face of God: The Gifford Lectures. By Roger Scruton. Continuum; 186 pages; $26.95 and £18.99. Buy from Amazon.com, Amazon.co.uk IT IS difficult to imagine Alain de Botton and Roger Scruton becoming friends if they met at a party. All too soon the two philosophers would start talking about God. For Mr de Botton there is something slightly demented about religious belief, whereas for Mr Scruton there is something deeply tragic about atheism. Mr de Botton has published bestselling books on a wide range of subjects. subjec He is an aggregator of ideas rather than an original thinker, but his skill is to write simply about complex ideas and he gives his fans the sensation of reading something profound with little effort. The premise of his new book, ĀReligion for Atheistsā, which seeks to steer a course between religious fundamentalists and atheist fundamentalists, is that there is too much of value in religion to leave it to the religious alone. It must be possible to balance Āa rejection of religious faith with a selective reverence for religious rituals,ā he says. In practice, this means emptying out such rituals of their meaning and using them for secular ends, a kind of spiritual pick þnÿ mix. Although Mr de Botton is a clever man, he often stretches a good idea beyond its 202

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elastic limit. Religions are Ā the most successful educational and intellectual movements the planet has ever witnessed,ā he states, because they tell people what to think and hammer it home. University lecturers anxious to persuade should copy the didactic tricks of a Pentecostal preacher. ĀDo you hear me?ā he hollers. ĀI say do you hear me?ā An analysis of religious imagery leads him to recommend advertising Ā forgiveness ā on billboards. Daily bouts of meditation on the immensity of the galaxies, he argues, will offer Āsolutions to our megalomania, self-pity and anxietyā. Had it been written as a direct response, Mr Scrutonÿs book, ĀThe Face of Godā could hardly be a stronger refutation of Mr de Botton ÿ s project. A philosophy professor, novelist and composer, Mr Scruton is a controversial figure, lampooned for his love of foxhunting and tweeds and uncompromisingly elitist in his opinions about classical architecture, music and aesthetics. The essays in this work of natural theology were first delivered as lectures at St Andrewÿs University, and they have a whiff of the sermon about them. Atheists do not understand sacraments and acts of worship, he says. The sacred and the transcendental are Āreal presencesā which bind communities together. The underlying problem is that scientists have cheapened meaning, he claims. Our deepest emotions are not mere Āadaptationsā, Āhard wiredā in the human cortex; if you reduce people to balls of cells, you wipe away intention, responsibility, freedom and emotion. Instead, the real meaning of existence is located in peopleÿ s relationships with each other, the earth and God. The face is his paradigm of meaning, relationship and identity. It is through contemplating the face, the outward form and image of what is inside, that humans see each other as subjects, rather than objects, he says. That Mr Scruton simply asserts the existence of God may be regarded as a fault here, and his prose is dense and often hard going. But he is at least serious and thoughtful. By contrast, Mr de Botton seems to get dafter with each turn of the page. Arguing that religion can bind people together to help guard against loneliness, he concludes that the Mass should be used as a model for his pastiche ĀAgape Restaurant ā , with its own liturgy and an annual orgy (there is even a soft-porn picture to show readers what this would be like). Mr Scruton, who frets that people have become indifferent to beauty and smut, argues that it is because they confuse agape and eros (the ancient Greek words for deep affection and erotic attraction) that they objectify each other and devalue love in a cycle of Āever-expanding heartlessnessā.

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Of the two, Mr de Botton will probably sell more books. But it is Mr Scruton who gives readers much more to think about. The history of computing

Creation story Computingÿs puting uting long and twisted past Turing s Cathedral: The Origins of the Digital Universe. By George Dyson. Pantheon; 401 pages; $29.95. Allen Lane; £25. Buy from Amazon.com, Amazon.co.uk ĀI AM thinking about something much more important than bombs,ā John von Neumann remarked in 1946. Ā I am thinking about computers. ā The Hungarian-born mathematical genius knew that weapons and computers were closely intertwined. During the second world war computers had been built to crack codes (Colossus, in Britain) and calculate artillery firing tables (ENIAC, in America). But these were dedicated machines built to perform specific tasks. Von Neumann dreamed of building a far more flexible and powerful general-purpose computer, the theoretical capabilities of which had been determined in the 1930s by Alan Turing, a British mathematician. As the cold war began, along came the perfect opportunity: the hydrogen bomb, whose construction would require detailed mathematical modelling. Von Neumann did a deal with his American military paymasters. They got their bomb, and the scientists got their computer, a key ancestor of all modern machines. The subsequent explosion of computing changed the world. As George Dyson explains in ĀTuringÿs Cathedralā, von Neumann was just as excited by the other possibilities opened up by computers, from artificial life to weather forecasting. But the hydrogen-bomb project offered him the freedom and the money to build a new type of computer: a Āstored-programā machine that could be reconfigured quickly to perform different tasks by changing its software, rather than rewiring its hardware. The project took shape in the unlikely surroundings of the Institute for Advanced Study (IAS) in Princeton, New Jersey, an academic Utopia where some of the worldÿs finest minds, including von Neumann, Albert Einstein and Mr Dysonÿs father, Freeman Dyson, were given extraordinary freedom to pursue theoretical research. Von Neumann and the band of engineers he assembled to build his 204

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computer were looked down upon by other members of the IAS faculty, who preferred to grapple with esoteric theories rather than cathode-ray tubes, thermionic valves and soldering ironsület alone thermonuclear weapons. But von Neumann got his way, and by 1953 his machine was simulating nuclear explosions by day and modelling the evolution of artificial life forms, the creations of Nils Barricelli, by night. The computer let humans play God, creating life in the digital realm while devising new ways to destroy it in the real world. That same year James Watson and Francis Crick revealed the digital nature of life itself, with the discovery of the structure of DNA. Mr Dyson, who relishes such ironies, observes that the digital ecosystem of the internet has now assumed biological complexity. Yet despite establishing the blueprint for all subsequent computers, which are known to this day as Neumann machines, the IAS machine is less well known, even among computer-history buffs, than ENIAC or Colossus. Admittedly, it was not the first stored-program machine; during its construction, von Neumann and others modified ENIAC to a stored-program design, and other stored-program machines were also built in Britain. But the IAS machineÿs design was distributed and widely copied; one of its many offspring was the IBM 701, the first commercially successful computer. Mr Dyson ÿ s book, the product of ten years in the IAS archives, is an effort to remedy this blind-spot in computing history. It seems to have arisen, in part, because the IAS was embarrassed by the practical nature of von Neumann ÿ s project, making it reluctant to highlight its role in the genesis of modern computing. This is a technical, philosophical and sometimes personal account: as a boy Mr Dyson encountered many of the protagonists of his story while visiting his father at the IAS. The chronology of ĀTuringÿs Cathedralā is confusing at times, and Mr Dyson sometimes gets sidetracked by minor details: Kurt Gödelÿs visa problems, for example, or the construction and layout of IAS buildings. But there are fascinating detours into the histories of science and mathematics, the origins of weather forecasting, the development of nuclear weapons and the earliest work on artificial life. This wide-ranging and lyrical work is an important addition to the literature of the history of computing.

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New fiction

My family and other animals Hippy parents and their offspring Various Pets Alive and Dead. By Marina Lewycka. Fig Tree; 367 pages; £20. Buy from Amazon.co.uk NOT many authors could successfully mix lentils, bra-burning and free love with city traders, quantitative analysts and the mathematical calculations that supposedly make naked short selling, CDOs and subprime mortgages infallible. But Marina Lewycka is an exception. The bestselling author or of a tors 2005 hit, ĀA Short History of Tractors in Ukrainianā, has set her fourth book in London and Doncaster and uses farce, irony and biting wit to explore serious issues.

Ā Various Pets Alive and Dead ā

features a group of sharply drawn and

sharp-tongued characters. Marcus and Doro, elderly ex-hippies from Solidarity Hall, non-b a left-wing commune, still wear their slogan T-shirts and crave the Ānon-bourgeois non-private non-nuclear non-monogamous communityā of their past. To make the present bearable, Marcus is writing a never-ending history of the left-wing movement, while Doro looks after the Downÿs syndrome child they are raising. She fulfils her longing for militant action by campaigning to save local allotments. Their daughter Clara (named after Clara Zetkin, a German proto-feminist), and son Serge (Victor Serge, a Belgian-Russian revolutionary) are somewhat different. Clara, a Doncaster schoolteacher, battles to educate children who smell of cigarette smoke, chip fat and urine, while craving order, clean bathrooms and a man ü preferably Mr Gorst, the headmaster, whose hunky presence makes her giddy with 206

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girlish desire. Her brother Serge, whose parents think he is studying for a Cambridge PhD in maths (a worthy validation of their ideals), has ditched academic life to become a City fat cat at Financial and Trading Consolidated Alliance (FATCA), in London. When he is not fixated by the figures on his computer screen he fantasises about the figure of Maroushka Malko, a haughty eastern European quant in slinky skirts and slingback shoes Āyou could stab kittens withā. This quartet takes the story from present to past and back again in a series of sparklingly humorous vignettes. The clever bit is that while whooshing the reader along on a tide of wit, the author also neatly explores the morals and values of different generations and the impact that these have on family dynamics. Never has reading about something serious been quite so much fun. Art after Fukushima

Godzillaÿs grandchildren How the nuclear disaster roused Japanÿs artists

Disorderly conduct IN JAPAN there is no kudos in going to jail for your art. Bending the rules, let alone breaking them, is largely taboo. That was one reason Toshinori Mizuno was terrified as he worked undercover at the Fukushima Dai-ichi nuclear-power plant, trying to get the shot (pictured) that shows him in front of the mangled third reactor holding up a refereeÿs red card. He was also terrified of the radiation, which registered its highest reading where he took the photograph. The only reason he did not arouse 207

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suspicion, he says, is because he was in regulation radiation kit. And in Japan people rarely challenge a man in uniform. Mr Mizuno is part of ChimPom, a six-person collective of largely unschooled artists who have spent a lot of time getting into tight spots since the disaster, and are engagingly thoughtful about the results. Twice they have used the off-limits Dai-ichi plant as a canvas for strikingly daring video art or photography. Once, they attached a painting of its smouldering wreckage to a famous Taro Okamoto anti-nuclear mural, ĀThe Myth of Tomorrowā. Vandals they are not; they say they peeled it off a day later. It is easy to dismiss ChimPomÿs work as a publicity stunt. But the artistsÿ actions speak at least as loudly as their images. There is a logic to their seven years of guerrilla art that has become clearer since the nuclear disaster of March 11th 2011. In fact, Noi Sawaragi, a prominent art critic, says they may be hinting at a new direction in Japanese contemporary art. ntemp temp Radiation and nuclear annihilation tion have ha suffused Japanÿs subculture since the film ĀGojiraā (the Japanese Godzilla) in 1954. The two themes crop up repeatedly in manga and anime cartoons. Over the past decade or so Takashi Murakami, Japanÿ s best-known artist, has explored consumerism and the fetishisation of sex in ĀSuperflatā, work that draws on the flattened forms of fine art and cartoons to highlight the mindless Utopianism of Japanese shopping culture. Mushrooms and mushroom clouds are frequent motifs and he recently travelled to Qatar to unveil a 100-metre painting inspired by Fukushima. ns, at times head-on. One ChimPom confronts Mr Murakamiÿs consumerist concerns, of their works, ĀIÿm BOKANā (2007), obliquely refers to his collaboration with Louis Vuitton, which included decorating its ubiquitous handbags with the Japanese artistÿs bright and instantly recognisable marks. ChimPom took some Louis Vuitton bags to Cambodia and blew them up using cleared landmines. The message to me. Japan was that conflict exists, however cute things might seem back home. In 2008 they used a planeÿs exhaust fumes to mark the sky over Hiroshima with the word ĀPikaā for the flash an atom bomb makes in manga. They were pilloried for what was seen as an insult to the victims of the tragedy and grovelled in apology. But they also explained that they were reminding the public of what was often forgotten in Japanÿs subculture: that the nuclear threat was real, not a figment of an otherworldly imagination.

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ChimPom says it pays homage to Mr Murakami, but its work has moved on. As Mr Sawaragi puts it, Superflat largely reflected the culture of stability during the Ābubble yearsā until the early 1990s (the bubble was not just economic; it was also one of Āimaginary realityā). ChimPom questions that stability itself. ĀTheir work is not flat. They are trying to question and discuss what was invisible in the Superflat society,ā he says. Other young artists are ploughing similar ground. Kota Takeuchi, for instance, secretly took a job at Fukushima Dai-ichi and is recorded pointing an angry finger at the camera that streams live images of the site. Later he used public news conferences to pressure Tepco, operator of the plant, about the conditions of its workers inside. His work, like ChimPomÿs, blurs the distinction between art and activism. Japanese political art is unusual and the new subversiveness could be a breath of fresh air; if only anyone noticed. The ChimPom artists have received scant coverage in the stuffy arts pages of the national newspapers; mostly they are treated as part of a delinquent fringe. The group held just one show of Mr Mizunoÿ s reactor photographs in Japan. He says: Ā The timing has not been right. The media will just want to make the work look like a crime.ā

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Obituary

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Obituary James Q. Wilson James Q. Wilson, investigator of American society, died on March 2nd, aged 80 0

LECTURING once at Harvard, where he taught government for 26 years, James Q. Wilson slipped in a slide of himself in scuba-diving gear beside a 20-foot shark. His students, accustomed to his shyness, were somewhat surprised. They should not have been. Mr Wilson had co-written with his wife Roberta a book on coral reefs, and dived down to explore them whenever he had the chance. There, swimming among the calcified branches, he asked himself questions. Why were some fish camouflaged, and not others? Why did some socialise in the mornings, but not the afternoons? Why did they like to feed on non-nutritious bits of the reef? In short, why did they do what they did? Sitting eagerly in Fenway Park to watch the Red Sox game, or strolling through the streets of New York City, he asked much the same questions about the swarming mass of human beings. What motivated them, and were their motives changing? What made them afraid? What made them happy? Why were their marriages and families failing? Could they be governed better and, if so, how? Fans of his frequent articles in Commentary and the Public Interest sometimes joked that his ĀQā was for query, as well as quirky. 210

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His doctoral thesis in 1959 inquired into the political behaviour of blacks in Chicago, finding that their subservience to white powerbrokers was a way of getting benefits for themselves. His masterwork ĀBureaucracyā (1989) looked at armies, prisons and schools as well as government agencies, discovering that policymakers rarely knew what the cliff-face workers did. From the mid-1960s he was periodically sucked in to sit on government commissions agonising over the crime rate, because no one else asked questions about it in the fresh-eyed way that he did. The approach he took was empirical and practical. Grand, simple theories never fitted neatly, though in his giddy youth he had hoped to find them. Instead he looked at human behaviour on the ground, talked to people, and built up details. None was too small. One policeman on a street corner would nod and wink at scuffling boys, while another arrested them; he concluded that there were three distinct styles of police behaviour, linked sometimes merely to mood, but often to the nature and prosperity of the neighbourhood. A patrolman on the beat did not necessarily reduce the crime rate; but the elderly woman at the bus stop, who felt safer, thought he did. Most famously, if one window was broken in a building and left unrepaired (his italics), soon all the other windows would be broken too, and criminal elements would take over. If places were visibly cared for, crime was deterred. This Ābroken windowsā theory, written up with George Kelling in the Atlantic in 1982, made Mr Wilsonÿs name, especially when it was taken up, years later, by the police departments of New York and many other cities. He was glad of that, but also modestly irritated. Among his many books, he was proudest of those that investigated the workings of government in all its flawed, shambling efforts to balance fairness, fiscal prudence, big goals and multiple clashing interests. The label Āsociologistā annoyed him. ĀPolitical scientistā, though, was fine and good. A flickering candle The word Āneoconā was also tacked on him, as an eager follower of Irving Kristol and adviser to the American Enterprise Institute. He shook it off, pointing out his broad liberal streak (his friendship with Pat Moynihan, a Democrat who also investigated the pathology of black families, and his youthful campaigning for Hubert Humphrey). ĀPolicy scepticā, he thought, defined him better. Though he came to favour stiff prison sentences for criminals and public orphanages for welfare mothers, he never set out on his quests with pre-set answers. Thus he favoured capitalism, but teased out the immorality in it; he knew America ÿ s 211

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government needed to be smaller, but marvelled that the monster worked as well as it did, keeping liberty and order, however tenuously, in balance. Much of his most elegant writing dealt with morality and virtue. He wanted to restore these ideas to public discourse, rather than the limp word Āvaluesā; for most human beings, he believed, had a moral sense and tried to live by it. This was Ānot a strong beacon lightā, rather Āa small candle flame, casting vague and multiple shadows ā . Parents inculcated it with admonitions and rewards, and perhaps even policymakers, by reforming welfare or the tax code, could help it along a little. Like Aristotle, whose shade he revered, he believed in habituation to virtuous acts. Both upbringing and instinct made him an optimist, as befitted a thinker formed in safe, sunny, small-town California. Problems remained, however. None was more thorny, for him, than quantifying the evidence. Many of the social problems he pondered seemed to boil down to culture and ways of thinking, for which the data were ungathered and ungatherable. As a scientist, political or social, he needed to count and collate things to find the answers to his questions. But nothing that was really important about human beings, he once said, could be measured in that fashion. Like the parrotfish, flicking their blue tails around him, his objects of inquiry would ultimately get away.

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