The economist november 1 2014

Mid-term upheaval in America The surprising vigour of family firms Christianity sweeps China Jihad’s internal war NOVEMBER 1ST– 7TH 2014

Economist.com

The Amazons of the dark net

The revolution is over

The new Iran and the prospects for a nuclear deal A SPECIAL REPORT

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The Economist November 1st 2014 5

Contents 7 The world this week

On the cover Changes in Iran make a nuclear deal more likely—not next month, perhaps, but eventually: leader, page 11.

After decades of messianic fervour, Iran is becoming a more mature and modern country, says our special report, after page 44 The Economist online Daily analysis and opinion from our 19 blogs, plus audio and video content, debates and a daily chart Economist.com/blogs

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Leaders 11 Iran The revolution is over 12 America’s mid-term elections The silent centre 12 Family companies Relative success 13 After Brazil’s election Diehard Dilma 14 China Xi Jinping and the rule of law Letters 16 On books, Germany, schools, UKIP, homosexuals, the Pet Shop Boys Briefing 19 Religion in China Cracks in the atheist edifice

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26 26 Volume 413 Number 8911 Published since September 1843 to take part in "a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress."

Editorial offices in London and also: Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago, Hong Kong, Johannesburg, Lima, Los Angeles, Mexico City, Moscow, New Delhi, New York, Paris, San Francisco, São Paulo, Singapore, Tokyo, Washington DC

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United States The mid-term elections What they’re all about The governors’ races Running after Walker Ballot initiatives Of pot and personhood Mitch McConnell The new master of the Senate?

Georgia’s Senate race Tycoon, tormented Explaining run-offs It ain’t over till it’s over The politics of tax cuts Brownbackonomics on the ballot Lexington Flags over the Capitol

The Americas 33 Brazil’s presidential race More of the same 34 Cannabis in Chile Easing the agony 36 Bello The dogs bark in Colombia

Asia 37 Malaysia Anwar’s trials 38 Bangladesh’s past War crimes 39 Prostitution in India Make it legal 39 Taiwan and Hong Kong Told you so 40 New Zealand’s flag Clashing with the sunset 41 Banyan American values China 43 Politics The constitution’s new role 44 Corruption and housing How officials gain 44 The law at work A citizen’s travails

US mid-terms If moderates don’t vote next week, extremists will thrive: leader, page 12. On November 4th America is set to kick the president and hand control of the Senate to the Republicans, page 23. Several Republican governors are in trouble, page 24. Americans have not given up hope that government can be fixed: Lexington, page 32

Special report: Iran The revolution is over After page 44 Middle East and Africa 45 Extremist ideology Jail, jihad and exploding kittens 46 The war against IS The Kurdish Stalingrad 47 Tunisia’s election The secularists have it 47 Libyan oil A sticky problem 48 Nuclear talks with Iran Diplomatic spin 49 Zimbabwe The Mugabe brawl 49 Ebola A glimmer of hope Europe 50 Ukraine’s election Good voters, not such good guys 51 Russia and the West Hard talk 51 Turkey and Europe Problems with neighbours 52 French public finances Budget, fudge it 52 Germany’s far left November revolution 53 Charlemagne The Environmental Union

Chinese Christians The rapid spread of Christianity is forcing an official rethink on religion, pages 19-21. China’s Communist Party has called for a “profound revolution” in the way the country is governed.

It must take its own words seriously: leader, page 14

Jihad’s internal war Today’s jihadists are too extreme even for leading ideologues of holy war, page 45

1 Contents continues overleaf

6 Contents

The Economist November 1st 2014

54 55 55 56 The dark net Business is thriving on the anonymous internet, despite the efforts of law enforcers, page 57

Family firms There are important lessons to be learnt from the resilience of family firms: leader, page 12.

Companies controlled by founding families remain surprisingly important and look set to stay so, page 59

QE Ending quantitative easing may be penny-wise, pound-foolish: Free exchange, page 73

Britain Austerity and the law Justice in a cold climate War memorials Bringing it home Sperm donors Nice to gamete you Bagehot Cameron’s European dilemma

International 57 Illicit e-commerce Amazons of the dark net 58 Happiness and income Everything converges Business 59 Family firms Business in the blood 63 French companies Room at the top 64 Ebola and African business Struggling through adversity 64 Vaccine-makers and Ebola Giving it a shot 65 Insolvency and commercial disputes Caught up in the courts 66 Post-sanctions in Iran Awaiting the gold rush 67 Schumpeter Hollywood, an unlikely role model Finance and economics 68 Deutsche Bank A weary lender 69 Buttonwood Reducing volatility 70 European banks Stress relief

71 Japanese investment in South-East Asia Outward bound 72 Institutional investors In-house revolt 73 Free exchange The rights and wrongs of QE Science and technology 74 Stem-cell research Having the stomach for it 75 Private space flight Oops...

75 Genes and behaviour Next candidate 76 Orphan technologies A phoenix rises Books and arts 77 Marilynne Robinson’s new book Amazing grace 78 American photography Hotshots 78 Nepal Between a rock and a high place 79 Capitalism A grand tour 80 The history of surgery Suffering for their art 84 Economic and financial indicators Statistics on 42 economies, plus a closer look at gender equality Obituary 86 Gough Whitlam Caesar in Canberra

Deutsche Bank Germany’s flagship bank is in trouble.

Some is of its own making, page 68

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The Economist November 1st 2014 7

The world this week Politics

Dilma Rousseff scored a narrow victory, with 51.6% of the vote, in Brazil’s presidential election run-off. As she embarked on her second term she promised to reunite the nation after a bitter political contest.

But she failed to mention her centre-right rival, Aécio Neves, by name, and the rancour showed little sign of abating.

After the poll the Central Bank raised its key interest rate to 11.25%. Inflation has been riding high for months, but the fraught election and Ms Rousseff’s approach to monetary policy meant a rise was unlikely before the run-off.

Uruguay seemed set for a further period of centre-left, socially liberal government after the candidate of the ruling Broad Front party, Tabaré Vázquez, topped the poll in the first round of a presidential ballot. Mr Vázquez benefited from the popularity of his predecessor, José Mujica, who had lived modestly, legalised marijuana and boosted women’s rights.

The Canadian authorities disclosed that Michael ZehafBibeau, who was killed after he opened fire in the parliament on October 22nd, had been trying to get a passport to travel to Syria. The funeral of a soldier killed in the attack became a day of national mourning.

America catches a fever The total number of Ebola cases passed 13,700, though the WHO said that the spread of the disease in Liberia was slowing. New Jersey and New York state came under criticism from many health experts for

unilaterally introducing a quarantine for medical workers returning from areas affected by Ebola in west Africa. A nurse who lives in Maine was held in a hospital for four days

by New Jersey after landing at Newark airport. She is talking to lawyers.

Hackers reportedly tried to access unclassified areas of the White House’s computer systems, in what is thought to be a test of how far they could breach secure networks. Russian and Chinese hackers frequently try to break into government computers.

Desert rats A three-month state of emergency was imposed by Egypt in the Sinai peninsula after a suicide-bomber killed at least 30 soldiers. The army has evicted residents from the border with Gaza and started blowing up buildings to create a buffer zone and plug crossborder tunnels.

Tunisia’s parliamentary election was won by the secularist Nidaa Tounes (“Tunisian Call”) party, a surprise defeat for Nahda, the biggest Islamist grouping. Many Tunisians thought that the Nahda-led coalition government was too slow in responding to the spread of jihadist ideology in mosques. Days before the election a gun battle with militants left one policeman and six others dead.

Yehuda Glick, an Israeli rightwing activist, was shot and seriously wounded as he left a meeting in Jerusalem that called for greater access for Jewish worshippers to the area known as Temple Mount to Jews and al-Aqsa to Muslims.

The gunman was killed in a

shoot-out with the police, who also closed the Temple Mount amid heightened tensions.

Zambia’s president died.

Michael Sata was 77 and had been in power since 2011 following a mostly peaceful election. He had been a critic of the mining companies who operate in the country. Guy Scott, born in Zambia to Scottish parents, is the interim president, and Africa’s first white head of state in 20 years, until an election is held.

Botswana’s ruling party won a parliamentary election, handing Ian Khama a second term as president. His campaign promised to tackle unemployment and poverty in the mineral-rich country.

Laying down the law China’s Communist Party wrapped up a key meeting by declaring more emphasis on the rule of law. Beyond the usual boilerplate, the party’s central committee called for less local control over the legal system and, unexpectedly, for more attention to be paid to China’s constitution, whose admirably liberal parts the authorities often disregard.

Meanwhile, the party kicked James Tien Pei-chun, the leader of a pro-Beijing party in Hong Kong, out of the Chinese People’s Political Consultative Conference, a party-controlled talking shop. Mr Tien had called for Hong Kong’s chief executive, Leung Chun-ying, to resign after he had failed to resolve a month-long stand-off with students calling for democracy.

More than 100 people were feared dead after a landslide in Badulla district in central Sri Lanka engulfed homes following heavy monsoon rains.

Budget politics Italy and France avoided a showdown with the European Commission by adding new budget cuts that bring them closer to complying with European Union rules. The commission approved the two countries’ budgets, even

though they fail to meet tough structural-deficit targets. It could still punish them for violating the limits this month.

Under mounting pressure from the anti-Europe right in Britain, David Cameron, the prime minister, said he would not pay an extra £1.7 billion ($2.7 billion) contribution to the EU budget, due by December1st. The bill reflects new European-wide economic calculations showing that Britain’s GDP was higher than previously thought. The Dutch government also faces a bill. It demanded to see the calculations and asked if it could postpone its payment.

Ukraine elected a new, proWestern parliament that returned Petro Poroshenko to power as president. Talks continued with Russia to stop it cutting off gas supplies again.

Russia wants Ukraine to settle debts and pay in advance for future deliveries.

NATO jets scrambled to intercept more than two dozen Russian military aircraft that entered European airspace over the course of two days.

The Russian aircraft included fighters as well as six longrange nuclear bombers. The level of activity was unusual.

NATO has intercepted three times as many Russian planes this year as in all of 2013.

Tens of thousands of demonstrators took to the streets in Hungary to protest against the government’s planned internet tax. The uproar led Viktor Orban, the prime minister, to cap the tax. But the European Commission still called it a “terrible idea” that could set a precedent for other 1 countries.

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The Economist November 1st 2014

10 The world this week

Business Concluding its long-standing process of “tapering”, America’s Federal Reserve announced its final monthly purchase of bonds, bringing an end to its third round of quantitative easing. The central bank introduced its policy of asset buying in November 2008. Supporters of QE point to falling unemployment in America and a strengthened economy, but critics say it has merely provided cheap money to investors and inflated asset prices. Whatever the verdict, the Fed now views QE as a vital tool and is not ruling out another future round.

Feeling a bit deflated Sweden’s central bank cut its main interest rate to zero.

Inflation has been below the Riksbank’s target rate of 2% for almost three years and the bank intends to keep interest rates low until it “has clearly picked up”. However, Sweden’s economy is growing much faster than that of the euro zone, which is also battling deflation.

The latest “stress tests” of European banks found 25 with inadequate capital to cope with a severe economic shock as of the end of 2013, nine of them in Italy. Since then 12 of the 25 have made up the shortfall, leaving13 with a combined €9.5 billion ($12 billion) to raise.

Germany’s biggest bank recorded a loss for the third quarter. Deutsche Bank set aside almost €900m ($1.1 billion) in the period towards the legal fees it expects to incur from investigations into the LIBOR scandal and other regulatory issues.

In other banking news, UBS, Switzerland’s biggest bank, booked a hefty SFr1.8 billion ($1.9 billion) charge for legal costs in its earnings. It is discussing a settlement in a wideranging probe into rigged foreign-currency markets.

Barclays set aside £500m ($800m) also for any possible

litigation that might arise from the forex probe, which took the shine off a solid quarterlyearnings report. And Standard Chartered saw its share price swoon, as the slowdown in its core emerging markets ate into quarterly profit.

Deutsche Börse appointed Carsten Kengeter to take over as chief executive when Reto Francioni steps down next spring. Mr Kengeter used to work for Goldman Sachs and UBS and has extensive experience of capital markets in Asia, a region into which the German exchange is expanding. It plans to open a clearing house in Singapore.

The Russian rouble continued to fall to new lows against the dollar. Economic sanctions against Russia over the conflict in Ukraine are hurting. Markets were spooked by reports that Rosneft, the state oil giant, has requested more emergency aid from the government.

A joint offer from Joseph Safra, a Brazilian banking tycoon, and Cutrale, a Brazilian orange-juice producer, won the bidding war for Chiquita, a banana distributor that has its roots in the old United Fruit Company. Chiquita’s board had favoured a merger with

Fyffes, which is based in Dublin and would have allowed Chiquita to benefit from Ireland’s lower corporate tax.

In a bid to stamp out offshore tax evasion, 51 countries signed an agreement to start exchanging tax information systematically from 2017. Another 30 pledged to join later.

The deal is a step forward but contains loopholes, critics complained.

Fiat Chrysler Automobiles decided to spin off Ferrari. It will float 10% of its shares in an IPO next year and distribute the remainder to Fiat shareholders. The company is hoping to reduce its debt and at the same time finance a big rollout of new cars. Luca Cordero di Montezemolo recently stepped down as chairman of Ferrari after repeatedly clashing over strategy with Sergio Marchionne, Fiat’s boss.

Sanofi removed Christopher Viehbacher as its chief executive, reportedly because of an aloof management style that led to a fractious relationship with the French drug company’s board. Mr Viehbacher, a dual German-Canadian citizen, had moved his office to Boston from Paris during the summer.

Facebook reported a big surge in quarterly revenue and profit as sales rose from mobile advertising. The number of people who use the social network on a monthly basis expanded to 1.35 billion. Still, investors were unnerved by Facebook’s rising costs from investing in businesses such as virtual-reality headsets.

The Twitter jitters Twitter’s shares fell below the price at which it closed on its stockmarket debut a year ago.

Its third-quarter earnings showed that although the number of people who use it monthly had risen to 284m, the rate at which it was growing had slowed again. Revenue doubled in the quarter to $361m, though the company reported another net loss and has yet to turn a profit.

Other economic data and news can be found on pages 84-85

The Economist November 1st 2014 11

Leaders

The revolution is over Changes in Iran make a nuclear deal more likely—not this month, perhaps, but eventually

T

ALKS to curb Iran’s nuclear programme have less than a month to run. Even now, after 12 years of sporadic argument, Iran insists that it wants civilian nuclear power and not a bomb. But nobody really believes that. If the talks break down, atomic weapons could proliferate in the Middle East; or, in a bid to stop Iran, America or Israel could launch a military attack on its infrastructure. Either outcome would be a disaster.

Plenty still separates Iran and, on the other side, the permanent members of the UN Security Council plus Germany (known as the P5+1). Much of the focus is on the mechanics of a deal (see page 48). The two sides cannot agree on how many centrifuges Iran should be able to use to enrich uranium, how long an agreement should last, or how fast to lift sanctions.

The gap would be easier to close if Iran and America trusted each other. One reason why the relationship is so poisonous is that popular Western views of Iran are out of date to the point of caricature. A better understanding of the country would help the talks reach a comprehensive settlement—or, at least, avoid a catastrophic collapse.

Prelude and centrifuge Much that Iran does is wrong. It finances terrorists and militias in Lebanon and the Palestinian territories and backs the murderous regime of Bashar Assad in Syria. Its politicians routinely deny Israel’s right to exist. They treat opponents at home with cruelty and injustice. On Sunday a woman was hanged for killing the man she accused of molesting her, shortly before a UN envoy condemned a surge in executions and the treatment of Iran’s women. His colleague at the UN’s nuclear agency recently complained that Iran is failing to come clean about its nuclear research—part of a litany of evasion and deceit.

Bad as that is, however, Western denunciation casts Iran in an almost uniquely grim light. It is an implacable enemy. It was part of George W. Bush’s Axis of Evil. It is a dictatorship bent on exporting revolution and prey to a dangerous, millenarian Islam that might just be irrational enough to welcome a nuclear apocalypse. Barack Obama, America’s president, has been condemned for even talking to such a pariah.

Thirty-five years have passed since a senior American official last visited Iran. It has changed. Our special report in this issue describes a country whose revolutionary fire has been extinguished. As people have moved from their villages to the cities they have got richer and acquired a taste for consumer goods and Western technology. Over half of Iranians go to university, up from a third five years ago. The disastrous presidency of Mahmoud Ahmadinejad, the failed Green revolution— which sought to topple him in 2009—and the chaotic Arab spring have for the moment discredited radical politics and boosted pragmatic centrists. The traditional religious society that the mullahs dreamt of has receded. With the passing of time, the mosques have started to empty. The muezzins’ call to prayer is heard less often, because people complain about the

noise. In Qom, the religious capital, seminaries are dwarfed by a vast shopping mall. As a caliphate takes root in Iraq and Syria, here is one Islamic state where religion is in retreat.

Iran is not a straightforward dictatorship. The supreme leader, Ayatollah Ali Khamenei, has the last word. But his role is to adjudicate between the claims of an elite made up of thousands of politicians, clerics, generals, academics and business people. They form a confusing and ever-shifting pattern of competing factions and coalitions. Although this hardly amounts to democracy, it is a political marketplace and, as Mr Ahmadinejad discovered, policies that tack away from the consensus do not last. That is why last year Iran elected a president, Hassan Rohani, who wants to open up to the world and who has reined in the hardline Islamic Revolutionary Guard Corps. Mr Rohani belongs to the establishment, naturally, but it says a lot about today’s Iran that his cabinet contains more doctorates from American universities than Barack Obama’s.

No Qompromise What does this mean for a nuclear deal? For a start, that on balance Iran will act pragmatically, in what it sees as its own interests, rather than out of a messianic desire to pull down the world order, and is therefore worth talking to. Secondly, that power in Iran moves between factions, just as in America, so any deal must be future-proofed against the day when a hardliner returns to the presidency. And thirdly—and most important—that the world has time on its side.

The further the 1979 revolution recedes, the more normal Iran will tend to become. Dogma will be further eclipsed by everyday worries, like making money and doing business.

Iran will not suddenly abandon its nuclear programme, which ordinary Iranians would see as humiliation; it is not about to become friendly to America, nor to stop meddling in its region.

But if the regime comes to feel that it can escape the fate of Libya’s Muammar Qaddafi, who gave up on nuclear weapons only to be toppled, a curb will seem less of a gamble.

Time also helps because a deal is increasingly in Iran’s interests. Mr Rohani needs relief from sanctions. After growing by over 5% a year for a decade, the economy shrank by 5.8% in 2012. Oil pays the government’s bills; its recent 25% fall in price is squeezing the economy further. Iran’s region is dangerous, too. Islamic State threatens its Shia allies in Iraq, and both Mr Assad and Hizbullah, its ally in Lebanon, are engulfed by war in Syria. Iran hints that America should give ground in the nuclear talks so as to secure Iranian help in the Middle East. In fact, Shia Iran is the one who stands to gain: America would risk a backlash from its Sunni allies in Saudi Arabia and from the Sunnis it is trying to win over in Iraq and Syria.

Despite this month’s deadline, the P5+1 should be patient.

The interim agreement that paved the way for talks, under which no new centrifuges are being installed, creates a pause in the nuclear programme. The world should neither break the talks with impossible demands, nor give way to Iran for fear that there will never be a better opportunity. Instead, the P5+1 should hold out for the right deal. It would be good if they got one next month, but if they don’t it will not be a disaster. 7

The Economist November 1st 2014

12 Leaders America’s mid-term elections

The silent centre If moderates don’t vote next week, extremists will thrive

A

LL political campaigns involve a certain amount of looking voters straight in the eye and lying to them. But America’s mid-term election campaign has involved more flim-flam than most. The Republicans, if you believe Democratic attack ads, oppose equal pay for women, want to ban contraception and just love it when big corporations ship American jobs overseas. The Democrats, according to Republicans, have stood idly by as Islamic State terrorists—possibly carrying Ebola—prepare to cross the southern border. And they, too, are delighted to see American jobs shipped overseas.

Only a blinkered partisan would believe any of these charges. Alas, partisans are far more likely than anyone else to vote, especially in elections like this one, where the presidency is not up for grabs.

A survey by the Pew Research Centre finds that 73% of “consistently conservative” Americans are likely to cast a ballot on November 4th, along with 58% of consistent liberals. Among those with “mixed” views, however, only 25% are likely to bother. That, in a nutshell, is why both parties are pandering to the extremes. Their strategy relies less on wooing swing voters than on firing up their own side to get out and vote. Often, this involves telling them scare stories about the other lot. The same Pew poll finds that dislike of the other party is one of the strongest incentives to vote. Republicans with a “very unfavourable” view of Democrats are far more likely to turn out, as are Democrats who loathe Republicans. With Barack Obama in the White House Republicans are angrier than Democrats, and that is one reason why they are expected to win (see page 23). Most polls say they will capture the Senate and hold onto the House of Representatives.

America’s cycle of polarisation and alienation is self-reinforcing. As the debate grows shriller, moderates tune out. Politicians come to rely more and more on the votes of die-hard partisans, so they say and do more extreme things, alienating yet more moderates. Most members of Congress are more frightened of being tossed out by their own party’s primary voters—typically for the heresy of compromise—than they are of losing an election to the other party.

America’s electoral system needs reform. It is too late to change the rules before this election, however, so it is up to moderates to walk to a polling booth and be counted. To those who grumble that there is no point voting because they don’t like any of the candidates, we offer two counter-arguments.

Speak now, or be ignored First, these elections matter. Control of the United States Congress—the body that writes the laws and holds the purse strings of the most important nation on Earth—is at stake. (So are 36 out of 50 state governorships and thousands of local offices—see page 24.) Individually, it may be rational not to vote: one ballot is unlikely to affect the outcome. But when whole groups stay at home—centrists, young people and non-whites spring to mind—their interests will be ignored.

Second, politicians are more sophisticated than they appear on the stump. Many are secretly embarrassed by the flame-grilled drivel they have to serve up to partisan audiences. Plenty hanker for the days when divided government meant that the centrists in both parties hammered out reforms together and ignored the frothing fringes. But all of them can count votes—very accurately, these days. And all tend to reward their supporters: to “dance with the ones that brung them”, as the saying goes. So if moderate Americans want to influence how their government taxes, spends, regulates and wages war, they should tick a box next week. 7

Family companies

Relative success There are important lessons to be learnt from the surprising resilience of family firms

T

ODAY real power is rarely inherited. Monarchs spend their lives cutting ribbons and attending funerals. Landed aristocrats have to climb the greasy pole if they want to wield serious influence. Even in the United States great dynasties such as the Clintons and Bushes have to go to the trouble of getting themselves elected. The one exception to this lies at the heart of the capitalist system: the family firm.

Leading students of capitalism have been pronouncing the death rites of family companies for decades, arguing that fam-

ily firms would be marginalised by the arrival of industrial capitalism. They also insisted that the Dallas-style downsides of family ownership would become more destructive: family quarrels would tear these companies apart and the law of regression to the mean would condemn them to lousy management. Most countries have a variation of the phrase “clogs to clogs in three generations”. For a long time, they appeared to be right: in both America and Europe, family firms were in retreat for much of the 20th century.

Yet that decline now seems to have been reversed. The proportion of Fortune 500 companies that can be described as family companies increased from 15% in 2005 to 19% today.

That is largely because of the rise of emerging economies, in 1

The Economist November 1st 2014 2 which family firms are more common. But even in the rich

world family companies are these days holding their own. Of the American firms in the Fortune Global 500, 15% are family firms—only slightly less than a decade ago. In Europe, families control 40% of big listed companies.

You can happily go through a day consuming nothing but the products of family concerns: reading the New York Times (or the Daily Mail), driving a BMW (or a Ford or a Fiat), making calls on your Samsung Galaxy, munching on Mars Bars and watching Fox on your Comcast cable. And the growth is likely to continue. McKinsey predicts that in 2025, family companies from the emerging world will account for 37% of all companies with annual revenues of more than $1 billion, up from 16% in 2010 (see page 59).

Pass the silver spoon, Dad Why have family companies defied their obituarists? Many of them continue to suffer from serious problems: witness the recent debacle at Portugal’s Espírito Santo. But, particularly in the West, family firms have far fewer defects than in the past, largely because they have got better at addressing their obvious weaknesses.

These days it is rare for a family boss to hand his job on to an obvious dud. Most family companies train future leaders by sending them to business schools and putting them through their paces in a succession of lower level jobs. A growing number (particularly in Germany) have become masters at moving family members from executive jobs to supervisory roles in the boardroom. An entire consulting industry exists to help families deal with the peculiar dynamics of their companies, such as managing personal conflicts and sidelining thick relations without hurting their feelings.

Family firms’ strengths, meanwhile, are just as important today as they were in the early days of capitalism. They solve the “agency problem” that Adam Smith put his finger on in “The Wealth of Nations” when he argued that hired managers would never have the same “anxious vigilance” in running

Leaders 13

companies as the owners. Family managers are often parsimonious: companies such as Walmart, Koch Industries and Mars & Co are famous for running a tight ship with humble headquarters, lean management and an obsession with operational efficiency. They are good at thinking in terms of generations rather than quarterly results: Roche makes long-term bets on developing pharmaceuticals; the Murdochs and Newhouses have stuck with print media in difficult times.

But the emerging world is currently witnessing a battle for the soul of the family firm. Old-model family companies are sprawling conglomerates that rely on political connections to protect them from global competition and complex crossownership structures designed to give families maximum control for minimum cash. New-model family firms are professionally managed, transparent outfits whose owners maintain long-term vision and quality but eschew the sort of wheeling and dealing that made them rich in the first place.

The best way to ensure that the right side wins is to increase competition: India’s great liberalisation of the late 1990s persuaded Tata and Mahindra & Mahindra to transform themselves. Emerging-world governments should also outlaw cross-ownership and strengthen the rights of non-family shareholders, as America did in the 1930s and other countries have done more recently.

The other great problem with family companies, which plagues the West as well as the emerging world, is that the weaker members of the breed have failed to learn from the stronger members. Too many fail to make even the most basic plans for the future: PricewaterhouseCoopers discovered that only 16% of the family firms it surveyed had put a formal succession plan in place. Too many lack the ambition to think that they can compete with the best in the world: convinced that they are a bit of an anachronism they tend to keep themselves to themselves. The remarkable record of the best family firms should remind millions of business owners that, in the corporate world at least, you do not have to surrender family control in order to prosper. 7

After Brazil’s election

Diehard Dilma After her narrow victory in a divided country, the president must heed opponents as well as supporters

I

T WAS hardly a ringing endorsement. After a dirty and divisive campaign, Dilma Rousseff won a second term in Brazil’s presidential election on October 26th by just three percentage points against her centre-right opponent, Aécio Neves (see page 33). That is by far the narrowest margin in Brazil’s modern electoral history.

If her second term is not to be an even bigger disappointment than her first, Ms Rousseff needs to take heed not just of her supporters but also of those who did not vote for her. They include much of the middle-class, who in 2013 took to the streets in mass protests to demand better public services and less corruption. Mr Neves won easily in much of Brazil’s southeast and south, the country’s economic powerhouse.

Ms Rousseff’s victory is not what this newspaper hoped for—we backed Mr Neves—yet it is no great surprise. Brazil remains a country of searing inequality, and poorer voters are grateful to the ruling Workers’ Party (PT) for the improvement in living standards and opportunities they have enjoyed in its 12 years in office (eight under Luiz Inácio Lula da Silva). The advantages of incumbency, the PT’s formidable machine and its money (some, it seems, stolen from Petrobras, the state-run oil company), and Lula’s rapport with o povo (the people) combined to tip the campaign in Ms Rousseff’s favour.

Nobody but herself to blame Her performance during her first term, however, did not justify her victory. The legacy she has left herself is a troubled one, which includes recession, inflation above the Central Bank’s target, opaque public accounts, rising public debt and a looming downgrade in Brazil’s credit rating, as well as a current-ac- 1

The Economist November 1st 2014

14 Leaders 2 count deficit that, at 3.7% of GDP, is the widest since 2002 and is

financed partly by “hot money” (whose ardour is likely to be cooled by her victory).

Her main job is to sort the economy out. She needs to appoint a competent finance minister, who must be allowed to do the job without interference from the presidential palace, to redouble her timid efforts to attract private investment into infrastructure, and to attempt a tax reform. That she has promised to reform Brazil’s political system is encouraging, but she is not proposing the changes that are really needed: smaller constituencies to make politicians more accountable, and a higher threshold for entry to Congress so as to prevent the endless proliferation of parties (the new Congress will have 28).

Without these, her preferred solution ofpublic funding for parties risks bringing democracy into further disrepute.

Damaging though the Petrobras scandal is for the PT, it should be properly investigated. Ms Rousseff might benefit from such a move. When, at the start of her first term, she sacked several ministers accused of corruption she was re-

warded with widespread popular approval.

There is a risk that Ms Rousseff chooses a darker road. Some in the PT favour partisan policies, such as curbs on the mass media. Previously a stout defender of freedom of expression, Ms Rousseff wavered on this during the campaign, and her grip on the Brazilian state is tightening. By next year she will have named a majority of supreme-court judges. The danger is that Brazil turns into a micromanaged society in which the state dishes out favours to its clients and allies.

A glance at Venezuela ought to dissuade Ms Rousseff from pursuing such a course. It would not just be a disaster for Brazil; it would also, very likely, weaken her own position. Her allies have only a narrow majority in Congress. A partisan approach would make it harder for her to control it.

That such a bitter election took place peacefully is credit to Brazil. But 16 years of rule by one party is bad for the health of any democracy. Though widely regarded as obstinate, Ms Rousseff insists that she has learned to listen and to change.

Let’s hope she means it. 7

Rule of law in China

China with legal characteristics Xi Jinping is invoking the “rule of law”. That’s risky for him and good for China

D

RAFTERS of Communist Party documents in China are masters of linguistic sleights; Deng Xiaoping invented the term “socialist market economy” to satisfy hardline ideologues while he steered the country towards capitalism.

Now the party is trumpeting a new slogan: “Socialist rule of law with Chinese characteristics”. At an annual plenum that ended on October 23rd, the Central Committee promised that it would be implemented by 2020 (see page 43) and would lead to “extensive and profound” changes. If they are anything like as significant as those that Deng’s catchphrase heralded, then this is a welcome development.

This new enthusiasm for the rule of law springs from the campaign against corruption. Xi Jinping, the party leader, aims to restrain officials and prevent their rampant corruption from causing public anger to boil over. The Central Committee has decided to make local courts more impartial and to penalise officials for telling judges what to decide. And, lest everyday laws continue to fail to have the desired effect, Mr Xi is invoking the highest law of all: the constitution.

Officials will now have to swear loyalty to China’s constitution. There is to be a new “National Constitution Day”. Schools are to teach its importance. The idea is to make it clear to errant officials that, no matter what they may think of ordinary laws and regulations, there is a big one they cannot ignore. The constitution, for example, enshrines property rights. Of the many thousands of “mass incidents” of unrest each year in rural China, 65% relate to disputes over the (often illegal) seizure of land by officials. Mr Xi wants to make it clear that their behaviour is not just illegal but also unconstitutional. That sounds scarier.

Mr Xi’s initiative is good news in two ways. First, it has encouraging implications for his anti-corruption campaign. Xi-

watchers are uncertain whether the campaign is a sincere effort to clean up the country or an excuse for a purge of officials the president has taken against. That he is emphasising the rule of law, rather than just continuing to pick off his enemies, suggests that the target really is corruption.

Using China’s constitution is a risk for Mr Xi—which is the second reason why this development is good news. The constitution is festooned with language relating to political rights.

It guarantees freedom of speech, of the press, of assembly, of association and of religious belief. Thanks to an amendment in 2004, it even guarantees “human rights”. Campaigners invoke the constitution in their cause. Last year journalists at Southern Weekend, a newspaper based in Guangzhou, went on strike after propaganda officials changed a leading article that called for guaranteed constitutional rights.

Rights? Wrong The party says Chinese interpretations of such notions as human rights are different from those in the West, and continues to persecute dissidents, Christians (see pages 19-21) and other trouble-makers. Many Chinese, however, believe that terms such as “human rights” mean exactly the same in China as they do elsewhere. By invoking the constitution so strongly, Mr Xi is likely to reignite calls among the country’s beleaguered liberals for it to protect citizens more broadly than he intends.

Mr Xi has been presiding over the most sweeping crackdown on dissent that China has seen in years. He has clearly felt no compunction about using the law to do so, and it seems highly unlikely that he intends to use the constitution to check the power of the party itself. Yet he is clearly a brave leader who is prepared to take risks. If he really wants to clean up the system and defuse public anger, he should give Chinese citizens the rights enshrined in the constitution. It is the only way to bring about the “extensive and profound” change he has promised them. 7

16

Letters Scholars like books SIR – Your essay on the future of the book was timely and wise (October11th). However, while the scroll did overlap with the bound codex, it began to go out of fashion around the time of Julius Caesar, and with good reason. The codex is a far more convenient form of book. It can be flipped through quickly and put down on a table alongside other books for comparison. When using digital texts we are faced once again with having to scroll through texts, one at a time, relying on our memories to keep in mind references to other lines or words. The inconvenience is not often remarked on in discussions of the digital universe.

No one denies the marvel of digital texts, but libraries are forgetting the usefulness of, and the need for, bound books in codex form. This is leading to the wholesale diminution around the world of libraries that care for bound books and make them available for readers, an extraordinarily shortsighted policy.

In fundamental scholarship (which is what most learning and secondary research is based on), the library is the scholar’s laboratory.

Research libraries must be maintained for their original purposes, as the creators of the libraries at Alexandria and Florence knew. The codex is the essential form of book for efficient research, besides being pleasant to handle and to look at without strain.

C.M. PYLE Co-chair, Columbia University Seminar in the Renaissance New York The need for speed SIR – Any new spending on Germany’s infrastructure should also include building an adequate broadband network (“Build some bridges and roads, Mrs Merkel”, October 18th). A report by Ericsson found that doubling a country’s broadband speed generally leads to a 0.3% increase in GDP growth. When it comes to Germany, a study by Raul Katz

The Economist November 1st 2014 of Columbia Business School and others found that the impact of significant investment in ultra-fast broadband on GDP would be equivalent to 0.6% of annual growth over a ten-year period. In addition around half a million building jobs would be created.

It is not just Germany that would benefit. Such investments would create a shortterm boost in construction and electronic employment throughout Europe and help redirect investment to knowledge-based industries.

KARIN AHL President Fibre to the Home Council Europe Brussels SIR – You argued that the German government could increase infrastructure spending because “the rules of the debt-brake are excessively rigid”. But a week earlier the Charlemagne column (October11th) took the French government to task for its “fiscal laxity”, blaming the FrancoGerman breach in 2003 of the rule limiting deficits to 3% of GDP for causing the euro zone’s “later troubles”.

If the Germans, in their wisdom—virtually alone among euro-zone governments—refuse to borrow-andspend, why press them to do so, when it has brought the rest of the continent nothing but economic grief?

SANJIV MEHTA Montreal Britain’s schools SIR – We reject the assertion that teachers’ unions represent nothing more than “vested interests” in British education (“The new school rules”, October11th). For every outstanding school academy one can easily find a state-maintained school that equals it. A study by Henry Stewart, which went unchallenged by the Department for Education in a recent court case, showed that when schools with similar results in previous years are compared, state primary schools perform better than sponsored primary academies. Sponsored second-

ary-school academies do no better and sometimes do worse than state secondaries.

You say that schools free from local-government control but which run a profit could “turbocharge” reform and help “overcome regulatory and bureaucratic obstacles”. Yet the abject failure of the free-school experiment in Sweden is never mentioned by pro-market cheerleaders.

You also suggest there is a crisis in British state education by citing PISA data. This is simply not the case. Britain’s performance is similar to that of Denmark, France, Iceland, New Zealand and Norway.

Finland is consistently placed top or close to top of the PISA rankings. This in a country that has largely rejected market reforms in education.

CHRISTINE BLOWER General secretary National Union of Teachers London

SIR – I had a chuckle at your comment that the north-east of England has seen little immigration (“Keep open the gates”, October 25th). I am a doctor and my surgeries in unfashionable Gateshead are full of Poles, Romanians and people from the Baltics. The latter two groups are newly arrived and mostly in unskilled jobs, but the Poles have been here longer and have worked their way up to become managers. They came here with nothing and are climbing the ladder. Their kids are filling the good primary schools. They are ambitious and hard working.

At the prize-giving at my children’s comprehensive school more than half the last-names are east European or African, but they are growing up thoroughly British.

Their energy and talent give me hope for the future.

PETER WARD Newcastle upon Tyne

UKIP on the rise SIR – I was disappointed to see you label the UK Independence Party’s core vote as “poorly skilled” and “down-atheel” (“Farage against the machine”, October18th).

Insults are counter-productive and weaken your argument.

UKIP simply understands the difference between immigration and mass immigration.

The former is beneficial; the latter causes social damage on both sides of the equation. The cleaner at my apartment block is Bulgarian. She used to work as a special-needs teacher. Do you think the children she once cared for, and who desperately need help, have benefited from her decision to emigrate? She doesn’t think so.

THOMAS HODSON London SIR – Do not underestimate the wide appeal of UKIP at lots of levels. Europe is creating an increasingly uncompetitive business environment for small businesses. I and many other business owners believe we would be more competitive without it.

DAVID SOUTHWORTH York

Sounding dated SIR – Please clarify: what is a “rampant homosexual” (“A toxic monarch”, October 25th)?

What makes him rampant, and do rampant heterosexuals exist as well?

DIRK EVENSON Berlin Left to our own devices SIR – How can you expect to be taken seriously? I refer to your very introspective behaviour in using disco songs by the Pet Shop Boys for mini headlines in an article (“Tainting love”, October11th). Yes, please desist as this will actually confuse your bilingual readers; would it be so hard to release copy in an alternative and less flamboyant format?

(Note: this letter contains 14 Pet Shop Boys titles.)

PAUL GRODEN St Helier, Jersey 7 Letters are welcome and should be addressed to the Editor at The Economist, 25 St James’s Street, London sw1A 1hg E-mail: letters@economist.com More letters are available at: Economist.com/letters

Executive Focus

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We are looking for an individual with broad experience, especially in an IT service provision environment.

For further information, and to apply for these positions, please visit our website at:

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The Economist November 1st 2014

17

18

Executive Focus

The Economist November 1st 2014

Briefing Religion in China

Cracks in the atheist edifice WENZHOU

The rapid spread of Christianity is forcing an official rethink on religion

T

HE coastal city of Wenzhou is sometimes called China’s Jerusalem. Ringed by mountains and far from the capital, Beijing, it has long been a haven for a religion that China’s Communist leaders view with deep unease: Christianity. Most cities of its size, with about 9m people, have no more than a dozen or so visibly Christian buildings. Until recently, in Wenzhou, hundreds of crosses decorated church roofs.

This year, however, more than 230 have been classed as “illegal structures” and removed. Videos posted on the internet show crowds of parishioners trying to form a human shield around their churches. Dozens have been injured. Other films show weeping believers defiantly singing hymns as huge red crosses are hoisted off the buildings. In April one of Wenzhou’s largest churches was completely demolished. Officials are untroubled by the clash between the city’s famously freewheeling capitalism and the Communist Party’s ideology, yet still see religion and its symbols as affronts to the party’s atheism.

Christians in China have long suffered persecutiont. Under Mao Zedong, freedom of belief was enshrined in the new Communist constitution (largely to accommodate Muslims and Tibetan Buddhists in the west of the country). Yet perhaps as many as half a million Christians were harried to

death, and tens of thousands more were sent to labour camps. Since the death of Mao in 1976, the party has slowly allowed more religious freedom. Most of the churches in Wenzhou are so-called “Three Self” churches, of which there are about 57,000 round the country. These, in the official jargon, are self-supporting, self-governed and self-propagating (therefore closed to foreign influence). They profess loyalty to China, and are registered with the government. But many of those in Wenzhou had obviously incurred official displeasure all the same; and most of the Christians who survived Maoist persecution, along with many new believers, refuse to join such churches anyway, continuing to meet in unregistered “house churches”, which the party for a long time tried to suppress.

Christianity is hard to control in China, and getting harder all the time. It is spreading rapidly, and infiltrating the party’s own ranks. The line is blurring between house churches and official ones, and Christians are starting to emerge from hiding to play a more active part in society. The Communist Party has to find a new way to deal with all this. There is even talk that the party, the world’s largest explicitly atheist organisation, might follow its sister parties in Vietnam and Cuba and allow members

The Economist November 1st 2014 19

to embrace a dogma other than—even higher than—that of Marx.

Any shift in official thinking on religion could have big ramifications for the way China handles a host of domestic challenges, from separatist unrest among Tibetan Buddhists and Muslim Uighurs in the country’s west to the growth of NGOs and “civil society”—grassroots organisations, often with a religious colouring, which the party treats with suspicion, but which are also spreading fast.

Safety in numbers The upsurge in religion in China, especially among the ethnic Han who make up more than 90% of the population, is a general one. From the bullet trains that sweep across the Chinese countryside, passengers can see new churches and temples springing up everywhere. Buddhism, much longer established in China than Christianity, is surging too, as is folk religion; many more Han are making pilgrimages to Buddhist shrines in search of spiritual comfort. All this worries many officials, for whom religion is not only Marx’s “opium of the people” but also, they believe, a dangerous perverter of loyalty away from the party and the state.

Christianity, in particular, is associated with 19th-century Western imperial encroachment; and thus the party’s treatment of Christians offers a sharp insight into the way its attitudes are changing.

It is hard even to guess at the number of Christians in China. Official surveys seek to play down the figures, ignoring the large number who worship in house churches.

By contrast, overseas Christian groups often inflate them. There were perhaps 3m 1

20 Briefing Religion in China 2 Catholics and 1m Protestants when the

party came to power in 1949. Officials now say there are between 23m and 40m, all told. In 2010 the Pew Research Centre, an American polling organisation, estimated there were 58m Protestants and 9m Catholics. Many experts, foreign and Chinese, now accept that there are probably more Christians than there are members of the 87m-strong Communist Party. Most are evangelical Protestants.

Predicting Christianity’s growth is even harder. Yang Fenggang of Purdue University, in Indiana, says the Christian church in China has grown by an average of 10% a year since 1980. He reckons that on current trends there will be 250m Christians by around 2030, making China’s Christian population the largest in the world. Mr Yang says this speed of growth is similar to that seen in fourth-century Rome just before the conversion of Constantine, which paved the way for Christianity to become the religion of his empire.

In the 1980s the faith grew most quickly in the countryside, stimulated by the collapse of local health care and a belief that Christianity could heal instead. In recent years it has been burgeoning in cities. A new breed of educated, urban Christians has emerged. Gerda Wielander of the University of Westminster, in her book “Christian Values in Communist China”, says that many Chinese are attracted to Christianity because, now that belief in Marxism is declining, it offers a complete moral system with a transcendental source. People find such certainties appealing, she adds, in an age of convulsive change.

Some Chinese also discern in Christianity the roots of Western strength. They see it as the force behind the development of social justice, civil society and rule of law, all things they hope to see in China.

Many new NGOs are run by Christians or Buddhists. There are growing numbers of Christian doctors and academics. More than 2,000 Christian schools are also dotted around China, many of them small and all, as yet, illegal.

One civil-rights activist says that, of the 50 most-senior civil-rights lawyers in China, probably half are Christians. Some of them have set up the Association of Human Rights Attorneys for Chinese Christians. Groups of well-paid urban Christian lawyers join together to defend Christians—and others—in court. Missionaries have begun to go out from China to the developing world.

Unexpected benefits The authorities have responded to this in different ways. In places like Wenzhou, they have cracked down. Implementation of religious policy is often left to local officials. Some see toughness as a way of displaying loyalty to the central leadership.

Mr Yang of Purdue University says there

The Economist November 1st 2014 1

Miraculous numbers Christians in China, m 120 100 80 60 40 20

*

0 1900

50

80

Source: Yang Fenggang, Purdue University

90 97 2003† 11† 20‡ *Government estimate †Estimate ‡Forecast

are rumours in Wenzhou that the crackdown there is partly the result of a local leader’s efforts to win favour with President Xi Jinping.

China Aid, an American church group, says that last year more than 7,400 Christians suffered persecution in China. And there is still plenty of less visible discrimination. But 7,400 people are less than 0.01% of all Chinese Christians. Even if the figure is higher, in this century “persecution is clearly no longer the norm”, says Brent Fulton of ChinaSource, a Christian group in Hong Kong.

That is largely because many officials see advantages in Christianity’s growth.

Some wealthy business folk in Wenzhou have become believers—they are dubbed “boss Christians”—and have built large churches in the city. One holds evening meetings at which businessmen and women explain “biblical” approaches to making money. Others form groups encouraging each other to do business honestly, pay taxes and help the poor. Rare is the official anywhere in China who would want to scare away investors from his area.

In other regions local leaders lend sup-

Room for 5,000

port, or turn a blind eye, because they find that Christians are good citizens. Their commitment to community welfare helps to reinforce precious stability. In some large cities the government itself is sponsoring the construction of new Three Self churches: Chongyi church, in Hangzhou, can seat 5,000 people. Three Self pastors are starting to talk to house-church leaders; conversely, house-church leaders (often correctly) no longer consider official churches to be full of party stooges.

In recent years the party’s concerns have shifted from people beliefs to the maintenance of stability and the party’s monopoly of power. If working with churches helps achieve these aims, it will do so, even though it still frets about encouraging an alternative source of authority. In 2000 Jiang Zemin, then party chief, and himself a painter of calligraphy for his local Buddhist temples, said in an official speech that religion would probably still be around when concepts of class and state had vanished.

Increasingly, the party needs the help of religious believers. It is struggling to supply social services efficiently; Christian and Buddhist groups are willing, and able, to help. Since about 2003, religious groups in Hong Kong have received requests from mainland government officials to help set up NGOs and charities. In an age of hedonism and corruption, selfless activism has helped the churches’ reputation; not least, it has persuaded the regime that Christians are not out to overthrow it. For the Catholic church, though, the situation is trickier: allegiance to Rome is still seen by some officials as a sign of treachery.

Ms Wielander says she does not believe the flock will go on growing by 10% year in, year out. But she admits that the party is now paying more attention to the increasing religiosity of ordinary Chinese. So, in some areas, it is modifying its attitude and official rhetoric (while keeping intense pressure on Buddhist Tibetans and Muslim Uighurs, whose religious beliefs are seen to threaten the integrity of the state). In May last year the head of the Russian Orthodox church was welcomed by Mr Xi in Beijing, the first such foreign church leader to meet China’s party chief.

Now is the time for all good men...

When the Communist Party allowed entrepreneurs to join in 2001, some voices suggested that it should also allow religious believers to do so. Pan Yue, a reformist official, wrote a newspaper article to that effect entitled, “The religious views of the Communist Party must keep up with the times”. One influence was the decision ofthe Communist Party ofVietnam in 1990 to allow its members to be religious believers. The move went smoothly, and may even have helped to stabilise Vietnam after its turbulent recent past. In China, 1

The Economist November 1st 2014 2 however, Mr Pan’s idea was ignored.

One Chinese article in 2004 claimed that 3m-4m party members had become Christians. Despite that, the party still has doubts about officially admitting them. Recent pro-democracy protests in Hong Kong are likely to reinforce those fears: some of the organisers were Christians. It worries the regime that the growth of house churches may also provide more room for the growth of quasi-Christian cults, which may then—like the banned Falun Gong movement—become politicised, and turn anti-Communist. The party’s fear of such cults is rooted in history. The Taiping rebellion in the mid-19th century, led by a man calling himself the brother of Jesus, resulted in more than 20m deaths.

But some officials are becoming more discerning in their crackdowns. This has been evident in Beijing where, around 2005, two large house churches began renting office space for their Sunday services. The largest, Shouwang church, was led by Jin Tianming, a graduate of Beijing’s elite Tsinghua University. It drew an intellectual crowd from the university district.

On some Sundays up to 1,000 people attended services. Parishioners could download sermons from the church’s website.

Mr Jin was known to be quietly arguing for more religious freedom. He tried to register Shouwang as a legal but independent congregation, not under the control of the official church, but was turned down. In 2009, just before a visit by America’s president, Barack Obama, the government forced the landlord of the building to terminate the church’s lease. Mr Jin took his congregation into a nearby park, where they worshipped in the snow. He and the church elders were placed under house arrest and many parishioners were detained. They had crossed a political red line.

It is a different story on the other side of Beijing. In an office building just off the third ring road another unregistered congregation, known as Zion church, meets in a similar venue; its pastor, Jin Mingri, is a graduate of Peking University. Like Shouwang, Zion covers an entire floor and includes a bookshop and a café offering loyalty cards to coffee-drinkers. The main hall holds 400 people. It looks and feels like a church in suburban America. Zion’s pastors preach equally uncompromising evangelical sermons, yet the church remains open because it is more cautious in how it engages with sensitive issues.

The pastors of both churches (and the leader of Shanghai’s largest house church, before it was closed, like Shouwang, in 2010) are members of China’s 2.3m-strong ethnic Korean minority, who see the Christianisation of South Korea as a model for China to follow. Both pastors came of age during—and took part in the Tiananmen protests of 1989, the crushing of which led to their disillusionment with the party and

Briefing Religion in China 21 the spiritual search that led to their conversion. Yet officials in Beijing, so far, feel they can cohabit with one of them at least.

At the Chinese Academy of Social Sciences one man, Liu Peng, is trying to assist the process. Mr Liu recommended a moderate line to defuse the standoff with Shouwang. A certificate in his office confirms that China’s then president, Hu Jintao, acted on his advice; by the standards of crackdowns on dissent, the one on Shouwang church was mild.

Mr Liu, a Christian himself, is now, on his own initiative, drafting a document that he hopes will become the country’s first law on religion. At present religion is governed only by administrative regulations; such a law might make it more difficult for officials to crack down arbitrarily.

Mr Liu says the party should allow its members to be believers, since an age of toleration would benefit the party as well as the churches. There should be a “religious free market”. But he admits that this, like a law, is a long way off.

Getting bolder Meanwhile, acts of defiance are increasing.

A mid-ranking official in a big city was recently told that her Christian faith, which was well known in the office, was not compatible with her party membership and she would have to give it up. She politely told her superiors that she would not be able to do that, and that her freedom of belief was protected by the Chinese constitution. She was not fired, but sent on a remedial course at a party school. She is now back at her job, and says her colleagues often come to her asking for prayer.

Christians are becoming more socially (and sometimes politically) engaged, too.

Wang Yi is a former law professor and prolific blogger who became a Christian in 2005. The next year he was one of three house-church Christians who met Presi-

Not the Little Red Book, but the Good Book

dent George W. Bush at the White House.

Mr Wang is now pastor of Early Rain, a house church in the south-western city of Chengdu. On June 1st this year, International Children’s Day, he and members of his congregation were detained for distributing leaflets opposing China’s one-child policy and the forced abortions it leads to.

In 2013 a group of Chinese intellectuals convened a conference in Oxford which brought together, for the first time, thinkers from the New Left, whose members want to retain some of the egalitarian parts of Maoism; the New Confucians, who want to promote more of China’s traditional philosophical thinking; and the New Liberals, classic economic and political liberals.

For the first time Christian intellectuals were included as well. The gathering produced a document, called the Oxford Consensus, emphasising that the centre of the Chinese nation is the people, not the state; that culture should be pluralistic; and that China must always behave peacefully towards others. This was not overtly Christian, but it was significant that Christian intellectuals had been included. A summary of the meeting was published in an influential Chinese newspaper, Southern People, and most participants continue to live freely, if cautiously, in China.

The paradox, as they all know, is that religious freedom, if it ever takes hold, might harm the Christian church in two ways.

The church might become institutionalised, wealthy and hence corrupt, as happened in Rome in the high Middle Ages, and is already happening a little in the businessmen’s churches of Wenzhou. Alternatively the church, long strengthened by repression, may become a feebler part of society in a climate of toleration. As one Beijing house-church elder declared, with a nod to the erosion of Christian faith in western Europe: “If we get full religious freedom, then the church is finished.” 7

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United States

Also in this section 24 Vulnerable Republican governors 25 Ballots on pot and personhood 25 Meet mighty Mitch McConnell 26 Nunn v. tycoon in Georgia 26 It may not end on November 4th 29 The politics of tax cuts 32 Lexington: Flags over the Capitol

For daily analysis and debate on America, visit Economist.com/unitedstates Economist.com/blogs/democracyinamerica

The mid-term elections

What they’re all about NASHUA, NEW HAMPSHIRE

On November 4th America is set to kick the president and hand control of the Senate to the Republicans

E

LECTION time in this New England town of houses painted in polite shades, disused brick smokestacks and trees with incandescent leaves is an antidote to pessimism about Washington.

When the mid-terms are over, $4 billion will have been spent on the congressional races alone, according to the Centre for Responsive Politics, a watchdog. Much of this has gone on attack advertisements, some in gloriously bad taste, often paid for by donors whose identities are unknown.

In the bar of the American Legion in Nashua, festooned with cobwebs, skulls, pumpkins and Bud Lite bunting, all that seems far away. Standing before a crowd of fewer than 50 ex-soldiers are two senators—John McCain of Arizona and Kelly Ayotte of New Hampshire—and one exsenator who would like to be one again, Scott Brown. “None of us like what is happening in Washington,” says Senator Ayotte. Yet Washington is in a sense the expression ofthe wishes, often contradictory, of those who turn up to vote.

The mid-terms will decide which party controls the Senate, as well as picking every member of the House of Representatives, 36 state governors (see next article) and 45 statehouses. They also offer an opportunity for some political phrenology: a chance to infer something about the country’s mood. Several issues have threatened to dominate only to fade a little: Obamacare, a surge of child migrants into Texas,

scandals at the Department ofVeterans’ Affairs, the racially-charged riots in Ferguson, Missouri, the beheadings of Americans by jihadists and lately the first cases of Ebola on American soil have all played this role.

As the closeness of the race in New Hampshire suggests, the only real constant in 2014 has been frustration, largely directed at the man at the top. Barack Obama won New Hampshire easily in 2012. Yet his party is suffering, in the Granite State and nationwide, because two-thirds of Americans think the country is on the wrong track. When the White House does not lead, Senator McCain told Nashua’s veterans, bad things happen. He was talking

US Senate 2014 Close races, mid-term elections Polls as of October 29th WA

OR

MT ID

CA N V

ND

WY

UT

AZ

CO NM

HI

SD

VT

MN WI

ME

NY

MI IA NE IL IN OH PA MO KS WV VA KY NC TX OK AR TN SC GA AL MS LA FL

NH MA RI CT NJ DE MD

AK

Source: The Economist

Democrat held Republican held

Interactive: Explore our map and guide to the senate races at Economist.com/midterms14

about foreign policy, but this view fairly describes how many voters have diagnosed the country’s domestic troubles.

Mid-terms are always tough for the president’s party. Bill Clinton is the only president since 1945 to avoid losing Senate seats during his second term, an achievement that would be more impressive had he not lost so many during his first. Mr Clinton once said that the economy trumps everything. In this election it simmers in the background. Modest growth has returned, unemployment has fallen and consumer confidence has reached a seven-year high. But none of this helps the Democrats, because the typical household still feels pinched and insecure.

The electoral calendar makes Mr Obama’s party’s task still harder. A third of Senate seats are up for election: specifically, the ones that were last contested in 2008. That year the country fell in love with Mr Obama and handed his party seats in several states that normally lean Republican. This year, Democrats must defend those seats. It will not be easy.

To gain a majority, Republicans need a net gain of six seats. Montana, West Virginia and South Dakota are in the bag, leaving the party needing three more (see map).

Several states look promising: North Carolina, Arkansas, Louisiana and Alaska all voted for Mitt Romney in 2012. Democrats may hold North Carolina and perhaps even Alaska, but the Republicans look good in Iowa, where a victory would probably hand them a majority, and may well take Colorado or New Hampshire too.

There are ways for the Democrats to keep their majority: an upset in Georgia (see page 26), an independent victory in Kansas, a run-offin Louisiana (also on page 26). But for that to happen everything would have to go right for their candidates, and most signs suggest everything won’t. 1

The Economist November 1st 2014

24 United States 2

Turnout is expected to be low, which helps to explain the narrow, repetitive nature of the campaign pitches: Republicans attack Democrats as Barack Obama’s playmates; Democrats warn darkly about Republican extremists in the pockets of billionaires. Low turnout hurts Democrats.

Polling suggests that conservatives are more excited about voting than liberals.

If the campaigns all sound the same, the dynamics of each race differ. In Republican Kansas the contest was upended by Greg Orman, a political novice standing as an independent. In Iowa, which Mr Obama won by six points in 2012, his party picked a dull, gaffe-prone candidate (Bruce Braley) and the Republicans picked a folksy, punchy one (Joni Ernst). In a recent ad Ms Ernst stands in a pigsty and says: “It’s a mess: dirty, noisy and it stinks...I’m talk-

ing about...Washington.”

That Americans will cast many protest votes seems certain, but what will they be voting for? If the Republicans win, their likely leader, Mitch McConnell of Kentucky, a man few Americans would recognise if he sat next to them on a bus, will be one of the most powerful people in the world (see page 25). But incoming Republican senators will still have to work with a Democratic president. “Send a message to Washington that you’re tired of the gridlock,” Scott Brown told Nashua’s voters.

But whatever happens on November 4th, there will still be divided government.

Another certainty is that on November 5th attention in Washington will switch to the next election, in 2016, when the bars of New Hampshire will once again throng with visiting senators. 7

The governors’ races

Running after Walker OSHKOSH

Several Republican governors are vulnerable

S

COTT WALKER, Wisconsin’s Republican governor, makes even a painful accident look like a political ploy. Walking into the factory of Blended Waxes Inc, a small firm in Oshkosh, a town best known for making armoured cars, he shakes the hands of workers with his thumb wrapped in plaster. “I was out hunting,” he explains, “and my gun, as I shot, the recoil caught me.” Lest anyone think this indicates a dodgy grasp of firearms, he is quick to add that he hit the pheasant he was aiming at. This segues into a point about how his Democrat opponent, Mary Burke, could not shoot a gun if she tried.

Mr Walker has built a reputation as a Republican who can win in a blue state without sacrificing his conservative principles.

Most notably, he has curbed the power of public-sector unions, which he sees as an obstacle to good, cost-effective govern-

ment. A law he signed bars state employees from bargaining collectively over matters other than pay. Wisconsin no longer deducts union dues directly from its workers’ wages. And public-sector unions must be re-certified by their members every year. Organised labour—and the Democratic Party, which relies on donations from unions—were so outraged that they collected a million signatures to force a special “recall” election in 2012.

Mr Walker won it, prompting chatter among conservatives that he should run for the White House in 2016. But he may now be in trouble. Ms Burke, a previously unknown local businesswoman, has squeezed his lead in the polls, though he is still ahead. With big hair, a raffish smile and a history of running part of a bicycle company, she is proving a plausible centrist candidate. If Mr Walker loses, it will

cheer up Democrats in what is otherwise set to be a miserable year.

Indeed, several Republican governors may be sacked next week. In Kansas taxslashing Sam Brownback is trailing narrowly (see page 29). In Florida Rick Scott, the Republican incumbent, may lose to Charlie Crist, an ex-Republican governor who is now a Democrat. Sitting Republicans are also weaker than they should be in Alaska, Michigan, Georgia and Maine.

One reason why Republicans may do poorly in governors’ races this year even as they (probably) capture the Senate is that governors mostly serve four-year terms, whereas senators serve six years. So the senators up for re-election this year were elected in 2008, a Democratic high-water mark; the governors were elected in 2010, a year of Republican triumph. In each case, the party that advanced last time is now fighting battles on tougher terrain.

Still, each race has its own peculiarities.

For political obsessives, the exciting thing about Mr Walker is that he gives a hint as to how far conservative governance can be pushed. For voters, however, jobs matter more. Mr Walker likes to show up at factories to pitch his entrepreneurial ideas, but under his tenure Wisconsin has struggled. Unemployment is lower than the national rate, but has not fallen as fast. Ms Burke has run ads arguing that under Mr Walker Wisconsin has been “dead last” in job-creation out of the ten Midwestern states. (Republicans cite other data which put Wisconsin around the middle.)

Mr Walker is having money troubles. In his recall election he outspent Tom Barrett, the Democrat mayor of Milwaukee, by two to one. In this election, he has been roughly evenly matched. He claims that “Washington special interests” are out to get him, which is true but only half the story: plenty of outside money is backing him, too.

Relatively few voters are undecided, so turnout will be decisive. Republicans win when blacks and liberals in Milwaukee, the state’s biggest city, and Madison, its capital, stay at home. In 2012 people in Milwaukee voted for Barack Obama over Mitt Romney by a ratio of two to one. But in mid-term elections that lead shrinks, while the conservative vote in Milwaukee’s outer suburbs and in places like Oshkosh holds up better.

This time, Democrats are doing everything they can to get their voters out. On October 28th Mr Obama appeared with Ms Burke at a school in a poor, mostlyblack district of Milwaukee where, in 2012, 99% of those who went to polls voted for him. Several thousand people, mostly black, cheered the president’s every word as he repeated his hope-and-change message ofthe past. “Don’t let anybody tell you your vote doesn’t matter,” he implored.

“The folks on the other side, they’re counting on you being cynical.” 7

The Economist November 1st 2014

United States 25

Ballot initiatives

Of pot and personhood WASHINGTON, DC

So many choices

A

MERICANS are not just picking politicians to represent them on November 4th. Voters in various states must also approve or reject146 ballot initiatives, according to the Initiative and Referendum Institute, a think-tank that is part of the University of South California. That may sound a lot but is 17% fewer than in 2012, and more than a third down since 1998.

Voters in Colorado and Oregon will ponder whether to require labels on foods with genetically modified ingredients. The Food and Drug Administration deems this unnecessary; the food industry warns that it will be costly. Organic farmers hope it will scare shoppers and boost their profits.

California will mull reducing prison sentences for some non-violent crimes.

Alaska and Oregon will vote on legalising marijuana. Washington state will decide whether to introduce background checks for all gun sales. The National Rifle Association thinks this would lead to “universal handgun registration”, making it easier for the state to grab your guns.

In Colorado, evangelicals are supporting a “personhood amendment” which would enshrine in the state constitution the idea that life begins at conception. That would ban all abortions and—in theory— some contraceptives. It has no chance of passing and would be struck down by the Supreme Court if it did. But it could affect the election in Colorado, since it gives prochoice voters a reason to turn out, and they will probably vote for Democrats.

Politicians often see ballot initiatives as a clever way to boost their own chances.

This year, Democrats hope that proposals to raise the minimum wage will boost their candidates in Alaska, Arkansas and Illinois. A decade ago Republicans used proposals to ban gay marriage to entice conservative voters to the polls, though that campaign has fizzled.

Only 35 of this year’s initiatives were put there via citizens’ petitions (the rest were put there by legislatures). This number is down from 50 in 2012 and the lowest in any election year since 1974. One reason why there are fewer initiatives is that getting onto the ballot is harder. It requires masses of signatures, which may not be collected online. That means hiring people to knock on doors or wait in car parks with clipboards. Winning is even harder: it means paying for advertisements to convince voters to care. Many ballot initiatives are sponsored by wealthy individuals. 7

Kentucky’s Senate race

The new master of the Senate?

LOUISVILLE

Mitch McConnell may soon be one of the most powerful people in America

“I

’M NOT Barack Obama,” says Alison Lundergan Grimes, clutching a shotgun. “I disagree with him on guns, coal and the EPA [Environmental Protection Agency],” the advertisement continues. As a Democrat running for the Senate in Kentucky, a conservative, coal-mining state that Mr Obama lost by 23 points in 2012, Ms Grimes must work hard to distance herself from the president. Bizarrely, she refuses to say whether she has ever voted for him, citing her constitutional right to privacy.

In her race against Mitch McConnell (pictured, with bloodhounds), who will lead the Senate if the Republicans capture it on November 4th, Ms Grimes faces a difficult balancing act. She must convince voters that she is not a bit like the president they dislike, and persuade them to send her to Washington to join his allies there.

When Mr Obama said that Democratic candidates “are all folks who vote with me [and] have supported my agenda in Congress”, it did not help Ms Grimes’s cause.

Beating Mr McConnell was always a tall order. He was first elected to the Senate in 1984, when Ms Grimes was six years old.

He is a formidable fund-raiser, strategist and backroom operator. He is unafraid of being disliked (he once referred to himself as Darth Vader, although he more closely resembles a retired librarian). He is four points up in the polls.

If he becomes Senate Majority Leader, as seems likely, he has promised to use the Senate’s budgetary powers to curb Mr Obama’s regulation of financial services

and the environment. In practice, that would be difficult. But he would certainly act as a check on Mr Obama during his last two years in office.

Ms Grimes, who is Kentucky’s secretary ofstate (a job that involves overseeing elections, among other things), has attacked Mr McConnell from the right. One ad slaps him for “giving amnesty and taxpayerfunded benefits to three million illegal aliens”. (This refers to a vote in the 1980s.)

Ms Grimes proclaims that she has never supported amnesty and “never will”.

She attacks him from the left, too, chiding him for opposing an increase in the minimum wage and joining the Democratic chorus that Republicans are chauvinists engaged in a “war on women”. Republicans gleefully retort that a restaurant owned by Ms Grimes’s family, and for which she did legal work, pays some staff only $2.13 an hour. It is also called “Hugh Jass Burgers”, sells dishes with names like “Charlotte’s Rack” and offers souvenir aprons that say “Check out my buns”.

Neither candidate is much loved by voters. Mr McConnell, who has been described as having “the natural charisma of an oyster”, is seen as a Machiavellian operator without firm beliefs—a common problem for those whose job is to hammer out messy compromises in Congress. Ms Grimes mocks his personal awkwardness.

In her “I am not Barack Obama” advertisement, she shows a picture of him holding an antique rifle above his head and chuckles: “Mitch, that’s not how you hold a gun.”1

The Economist November 1st 2014

26 United States 2

John Yarmuth, a Democratic congressman from Kentucky, predicts that most undecided voters will choose Ms Grimes, and that she will win. Not so, says Hunter Bates, a former chief of staff to Mr McConnell. It will be nearly impossible for Mr Obama’s candidate to win in the state, he says, and few undecided voters will overcome their aversion of the president.

Maybe so. On a crisp blue, glorious day in Louisville two homeless Kentuckians are discussing the candidates. Annie says she will vote for Mitch, “because he stood up for a rape victim and did a fund-raiser for her” and she herselfwas a victim of sexual violence. Her beef with Ms Grimes is that she is Mr Obama’s choice “and we don’t like him here”. Annie’s companion, who goes by the name of C.J., says he can’t vote because he is a convicted felon. 7

Georgia’s Senate race

Nunn v. tycoon ATLANTA

The Democrats’ best hope of a pick-up is in the Peach State

G

EORGIA’S Senate seat may be the only one that Democrats snaffle from the Republicans next week. Since any upset could be enough to prevent a Republican takeover of the Senate, money and endorsements are gushing into the Peach State. The race pits Michelle Nunn, the daughter of Sam, a Democratic ex-senator, against David Perdue, a successful businessman running on the Republican ticket.

Georgia is a conservative state, so Mr Perdue ought to win easily, but the polls are dead level.

Ms Nunn (pictured) is a more sure-footed campaigner. She stresses that she can work with both parties: she used to run George H.W. Bush’s “Points of Light” charity. She suggests that there is not much difference between her attitude and Mr Perdue’s when it comes to cutting corporate taxes and supporting small businesses.

At the same time, she attacks his record as a corporate titan. Mr Perdue was the boss of Reebok, a sportswear brand, and of Dollar General, a chain of convenience stores. He was once hired to turn around Pillowtex, a struggling fabric firm that eventually failed. Ms Nunn bashes him for cutting jobs: her advertisements show white women lamenting that Mr Perdue made millions while they were laid off.

Democrats were delighted when someone dug up a nine-year-old deposition in which Mr Perdue said that he had “spent most of [his] career” outsourcing. Ms Nunn also chides him for the fact that 2,000 women sued Dollar General for sex dis-

crimination while he was in charge.

Mr Perdue flounders to defend himself.

He said he was “proud” of outsourcing—a comment that goes down poorly in a polling booth. He protests that he saved and created thousands of jobs, too; and that those 2,000 women were only a fraction of Dollar General’s workforce of 70,000.

But voters are not fond of big bosses this year. Ms Nunn drew applause when she said: “Two thousand women? That actually seems like quite a lot to me.”

For his part, Mr Perdue is trying to make the race about national politics, rather than personalities. He accuses Ms Nunn having been “hand-picked” by Barack Obama and of planning to be a rubber stamp for his agenda, and that of Harry Reid, the current Senate Majority Leader.

One ad shows her saying “I defer to the president’s judgment.” Ms Nunn retorts that she has spent “maybe 45 minutes” with Mr Obama in her life, far less than the seven years she spent at Mr Bush’s charity.

She ducks the question of whether she would vote to keep Mr Reid in charge of the Senate, and quotes a joke she says a farmer told her: “If David Perdue wants to run against Harry Reid so much, why doesn’t he just move to Nevada?”

Georgia is a big agricultural state, so both candidates say they want to sit on the Senate’s agriculture committee. Both regale listeners with folksy tales of childhoods spent on farms. Mr Perdue recalls “pickin’ watermelons” with his cousin Sonny Perdue (a former governor). Ms Nunn reminisces about nurturing “everything from pecans to peppers to pigs”.

Mr Perdue hopes to ride an anti-Obama wave to victory. More eloquent figures have rushed to his aid: Texan Senator Ted Cruz, a Tea Party pin-up, delighted a Republican crowd with quips like: “Where I

Nunn having fun

come from, gun control means hittin’ what ya aim at” and (of red-state Democrats), “Every single one of them is lying to you.”

Democrats have launched a huge drive in Georgia to sign up unregistered voters, who tend to be young, non-white and to lean left: at least 200,000 since March.

However, if no candidate wins an outright majority—quite likely, since a Libertarian candidate is polling at around 4%—the race could go to a run-off on January 6th (see next article). Then Georgia will be on everyone’s mind. 7

Explaining run-offs

Not over yet WASHINGTON, DC

The election might not end next week

A

MERICANS wearied by mid-term elections may suppose that November 4th, polling day, will bring blessed relief. Not so fast. With a Republican takeover of the Senate likely but not in the bag, one grisly scenario is that America will have to wait for a December 6th run-off election in Louisiana. Or, even worse, a run-off in Georgia on January 6th, after the new Congress is due to convene.

Run-offs—extra elections triggered when no candidate scoops more than 50% of the vote—spread across the South after the Civil War, to stop blacks and Republicans from benefiting from squabbles between different white factions, and to unite votes behind a single, white Democratic candidate.

Today several southern states still use them for party primaries. Georgia uses them for general elections, too. Polls suggest that a Libertarian may grab enough Georgia voters to deny an outright majority to either Michelle Nunn, the Democrats’ Senate candidate, or David Perdue, the Republican. In Louisiana, unless one candidate wins a majority on general-election day, the top two candidates meet for a run-off.

Republicans triumphed in the most recent Georgia Senate run-offs, in 1992 and 2008, as their older, whiter, more affluent voters proved likelier to turn out for a second round of voting. In Louisiana, Senator Mary Landrieu, the Democratic incumbent, has survived run-offs before. This time would be harder. Conservatives are currently split between Bill Cassidy, a Republican, and an alligator-wrestling Tea Party candidate; many would rally behind Mr Cassidy.

If overall control of the Senate rests on a run-off, the national political circus will decamp to Georgia, Louisiana or both, followed by rivers of TV ad money.

Locals may wish to unplug their sets.

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The Economist November 1st 2014

United States 29

The politics of tax cuts

Brownbackonomics on the ballot KANSAS CITY

Voters in Kansas will pass judgment on a bold experiment in tax cutting

Q

UINDARO BLUFFS, a mostly black and solidly Democratic neighbourhood on the edge of Kansas City, would not seem a promising stop for a conservative Republican seeking re-election.

Yet here was Governor Sam Brownback, gladhanding local leaders and unveiling a proposal to lure new residents with fiveyear income-tax holidays and help paying off student loans. Mr Brownback talks a lot about opportunity, growth and Jack Kemp, his mentor and a Republican icon who combined fervour for tax cuts with heartfelt concern for the urban poor. “I want all of Kansas to be the best place in the nation to raise a family and grow a small business,” Mr Brownback declares.

He has been extolling the wonders of low taxes and high growth since taking office in 2011. His 2012 tax cut was the most ambitious by any state. So his re-election battle next week will be a referendum on Brownbackonomics—and closely watched by a whole lot of Americans with strong views on tax policy.

Mr Brownback should be strolling to a second term; Kansas is so red it hasn’t voted for a Democratic presidential candidate since 1964. Instead, polls show him tied with Paul Davis, the Democratic minority leader in the state House, largely because of the fallout from his tax plan.

Mr Brownback set out to revitalise a state in relative decline, losing people and jobs to Texas. His original plan was sound: to cut marginal rates (which discourage work and investment) and close loopholes. The top rate has dropped from 6.45% to 4.9% and will eventually fall to 3.9%.

But the execution was fumbled. The legislature cut rates without, at first, closing many loopholes. The plan didn’t touch the corporate tax rate, since many big firms avoid taxes by wringing incentives from the state. Instead, it eliminated taxes on “pass through” business entities such as sole proprietorships. The self-employed and corporations can slash their tax bills merely by changing how they report their income. Revenue took a huge and unexpected hit: $338m, or 6% below plan in the last fiscal year. Mr Brownback blamed changes to federal tax laws, but credit-raters saw long-term harm and dinged the state’s rating. Standard & Poor’s called its budget “structurally unbalanced”.

Mr Brownback’s boldness has inspired tax-cutters elsewhere (see table). Last year Ohio cut rates across the board by10% to be

The Brownback switchback Employment, December 2012=100 California United States Oklahoma* Iowa Illinois Nebraska*

Missouri* Kansas 104 103 102 101 100 99

2012

13

Source: Bureau of Labour Statistics

14 *States neighbouring Kansas

phased in by 2015, at a cost of more than $1 billion a year. Indiana will lower its top rate from 3.4% to 3.23% by 2017; Oklahoma’s will fall from 5.25% to 5% in 2015, and to 4.85% if revenues permit. In all three, though, Republican legislators refused to cut as deeply or as quickly as their governors wanted. The governors of Louisiana and Nebraska were largely stymied. Next door to Kansas, Missouri’s Democratic governor vetoed a tax cut passed by the Republican legislature last year. He did so again this year, pointing to Kansas’s experience, but the legislature overrode the veto with a more modest drop that takes effect in 2017.

Kansas’s hoped-for economic boom remains elusive, however. Since the cuts took effect at the start of 2013, unemployment has fallen slightly more than in nextdoor Missouri, which competes for jobs with Kansas, but payrolls have risen less, and indeed have lagged all nearby states save Nebraska (see chart). More people left Kansas than moved there in 2013. New business openings rose 2% in 2013 but that was still fewer than were opened in 2011, reckons Dane Stangler of the Kauffman Foundation, a think-tank.

This says little about the tax cuts’ merits; larger forces drive state economies. California and Illinois have raised taxes sharply in recent years; job growth has boomed in California but stagnated in Illinois. Kansas’s aerospace industry has seen big plant closures and layoffs. Mr Brownback pleads for patience: “Tax policy takes time.” But voters may not be patient.

Kansas has three factions: Democrats, moderate Republicans, and conservative

Republicans. Moderate Republicans often vote with Democrats; many opposed the tax cuts. So in 2012 Mr Brownback and his allies engineered the replacement of several moderates with conservatives. Many moderates now back Mr Davis.

Tax cuts are also widely blamed for the failure to restore education funds cut during the recession. Excluding pension and capital costs, Kansas spent $100m less on schools this year than in 2009, says the Kansas City Star. In April lawmakers voted to restore some education funds to comply with a state Supreme Court order, but at the same time weakened teachers’ job security and gave tax breaks for private schools. That angered teachers, who have become Mr Brownback’s most vocal adversaries. In a district south of Kansas City where two small schools closed, Christy Levings, a former teacher, took on a 22-year incumbent Republican because “I just couldn’t sit and let him run unopposed.”

The affluent residents of Mission Hills, an elegant Kansas City suburb, are big beneficiaries of the tax cut. But Barbara Bollier, the district’s moderate Republican representative, opposed it, saying most of her constituents worry more about schools.

Out canvassing for votes, she encounters a couple who voted for Mr Brownback in 2010 but are backing Mr Davis now. “At the time, I didn’t think he’d be as radical as he’s become,” says Thomas Simmons, a retired doctor. His wife, Wanda, frets that new families are avoiding the public schools because their quality has slipped.

Still, across the street Ms Bollier gets a reminder of Kansas’s conservatism from a couple backing Mr Brownback for his opposition to abortion and for his tax cuts.

“Government is taking too big a role in everything and the only way to get them out is to not give them anything to spend,” says Mack Colt, a banker. For all their unhappiness, it is not clear that Kansans want their taxes to go back up. Mr Davis has promised to block scheduled tax rate reductions, but hasn’t said whether those already in place would be rolled back. 7

The slashers and the grabbers Notable changes to state income taxes (Fiscal years ending June 30th)

State

Notes

Ohio

Cut taxes for individuals (2012, 2014) and small businesses (2014)

Maine

Cut income tax (2014)

California Increased income tax for the rich, let temporary tax hikes expire (2012) Maryland Increased income tax for the rich (2013) Kansas

Cut income tax (2013, 2014) and eliminated taxes for “pass-through” business entities (2013)

Idaho

Cut income tax and corporate tax (2013)

Illinois

Increased income and corporate tax (2012)

Source: National Conference of State Legislatures

The Economist November 1st 2014

32 United States

Lexington Flags over the Capitol Americans have not given up hope that government can be fixed

H

IGH above Washington, hidden in the western lee of the Capitol’s dome, stands a clutch of mini-flagpoles. As an ugly, unhappy election grinds to a close, those flagstaffs suggest that Americans have not lost all faith in their democracy. The poles are used to supply members of the House of Representatives and the Senate with flags certified to have flown above the Capitol, whenever constituents request them. Some recipients may assume that their flag snapped in the breeze all day. The truth is more prosaic: each Stars and Stripes flies for a few seconds before being folded and boxed: at the busiest times, staff must fly thousands of flags in a single day.

The workload of the Capitol Flag Office is worth pondering.

With the odd bump and dip, public confidence in Congress has slipped remorselessly downwards since the mid-1980s, hitting record lows this year. If opinion polls are to be believed, even the scoundrels who write and edit newspapers inspire more confidence. In television advertisements, incumbent congressmen denounce the capital (“I wouldn’t wish Washington on a dawg,” says one), while challengers make Congress sound like a feverswamp of corruption, promising, if elected, to keep their families safely back home, and to limit their own exposure to a few years.

Yet over the same period requests for Capitol flags have risen steadily, averaging more than 100,000 a year. Members from both parties cherish the scheme as a way to please constituents, says Alan Hantman, who as Architect, or chief administrator, of the Capitol from 1997-2007 signed over a million flag certificates. Patriotism causes big spikes. July 4th is always busy, as are anniversaries of the September 11th attacks. As veterans of 20th-century wars reach old age, members report a stream of requests for coffin-flags. The Capitol and its dome represent national strength, suggests Mr Hantman: they are “anchors in difficult times”.

Still more Americans tour Congress in person. Visitors used to be treated shoddily, queuing in the snow and rain for unexciting tours. Then, after the 2001terror attacks, that great enabler of public spending—security concerns—emboldened Congress to turn a modest plan into a vast Capitol Visitors’ Centre of sandstone, bronze and marble. It opened in 2008, complete with underground cinemas and a hangar-sized statue gallery. Some gasped at the costs, but visits to Congress doubled, to about 3m a year.

Representative George Miller of California is one of two remaining Democrats from the “Watergate class” of 1974, elected after Richard Nixon’s toppling. He recalls constituents arriving in Washington in those dark days, many bringing their children.

Stunned by the resignation of a president and disasters in Vietnam, they talked of assuring themselves and their families that the Republic still stood. Later, he saw voters in a mood of “great, great anxiety” after the September11th attacks. The election of Barack Obama, the first black president, sparked a period of “absolute exuberance” among visitors to his congressional offices. As he heads into retirement Mr Miller finds constituents “in a place of deep concern”, doubting large institutions that once enjoyed their trust. Some are so angry that they can hardly speak. But whether Democrats or Tea Party Republicans, they still feel that Congress belongs to them, he reports.

That matters. The 2014 elections offer ample reasons for gloom about American democracy. Voters are bitterly disappointed with a Congress and president locked in confrontation, even as crises ring the horizon. Old hands such as Mr Miller are sure that voters feel alienated by an electoral system awash in money, wondering how their voices count in an age of $25m Senate races and multi-billion dollar presidential contests. Even the old chestnut about voters loathing Congress, but liking their own representative, is showing its age: a growing number call their own member part of the problem too, notes Representative John Campbell, a California Republican also retiring this year.

But disappointment is better than despair or disabling cynicism. If Americans really thought Congress irredeemably corrupt, they would not give flags flown over it to Scout-troop leaders or veterans’ widows, as they do now. If they truly believed that Congress were a den of criminal oligarchs, sneering at those who elected them, they would not take children there for civics field-trips. Both Mr Miller and Mr Campbell, on opposite sides of the aisle, are sure that voters are mostly fed up with Congress for not doing its job. Both also think that such dysfunction must end, because Americans—eventually—will not stand for anything else. A straw poll on Capitol Hill backs them up. On a cloudless autumnal day, just ahead of the November 4th election, Americans of all political stripes can be found bringing friends, greyhaired parents and children to Congress.

Keeping faith with the Founding Fathers The premise of American democracy is a great one; it has “just lost its way”, says Jerry Dempsey, one of a group from Omaha, Nebraska. The solution lies in time-consuming, boring compromise, he suspects. But “it’s still the best system in the world.”

Sandra Long, from Tennessee, wants to show her teenage daughters the “ideal of what our government is supposed to be”.

Congress is dysfunctional, “but we’re optimistic”, adds her mother, Linda Lang. A father from Michigan thinks Congress “fixable” with an influx of new blood. “The government is us,” says Joel Pitcher, an ex-soldier from Maine: if there’s a “desperate feeling” in the country, “We have to act on that.”

Such optimism is not grounds for complacency. These have been unimpressive elections, steeped in appeals to partisan mistrust. Nonetheless Washington, DC, a much-criticised capital, should not miss some small signs of hope. Many millions of Americans still have faith in the idea of Congress, even if present realities dismay them. Such voters want their government to work. Politicians cannot keep ignoring them for ever. 7

The Economist November 1st 2014 33

The Americas

Also in this section 34 Cannabis in Chile 36 Bello: The dogs bark in Colombia

For daily analysis and debate on the Americas, visit Economist.com/americas

Brazil’s presidential race

By a whisker, more of the same SÃO PAULO

An incumbent scrapes home despite the desire, and need, for change

B

RAZILIANS seemed to be clamouring for change. Since nationwide protests erupted in June last year over shoddy public services, the rising cost of living and venal politicians unable to do anything about either, two in three have been telling pollsters they wanted their next government to do things differently. Yet on October 26th, 51.6% of them opted for continuity. The president, Dilma Rousseff, was re-elected to a second four-year term and her left-wing Workers’ Party (PT) handed its fourth consecutive victory. The centreright challenger, Aécio Neves, trailed by 3.5m votes. It was the slimmest margin in Brazil’s modern psephological history, but a clear defeat nonetheless.

Perhaps this was inevitable. Only two Latin American presidents have lost reelection bids in the past three decades.

Odds are stacked in favour of incumbents, with all the machinery of power and patronage at their disposal. Ms Rousseff could also point to record-low unemployment, rising wages and falling inequality on the PT’s watch. But Mr Neves argued, with good reason, that progress has stalled since Ms Rousseff took office in 2011. Fully 51m Brazilians believed him. Ms Rousseff’s 54.5m votes, out of an eligible population of 143m, are certainly no ringing endorsement. “The message from the ballot box is this…change and reform,” she conceded in a television interview on October 27th.

She will lead a country rent asunder.

She strolled to victory across swathes of the poor north and north-east, helped by less fortunate Brazilians’ gratitude for the PT’s social programmes, but also by her baseless insistence that Mr Neves would end them. In Maranhão, the poorest state, she notched up 79%; in six others her rival failed to carry a single municipality.

Much of Brazil’s richer centre and south plumped convincingly for the marketfriendly Mr Neves. As a measure of how capital voted, if each Brazilian state had an electoral weight determined by GDP rather than population, Mr Neves would have beaten Ms Rousseff by 53% to 47%.

In São Paulo, home to one-fifth of Brazil’s population and a third of its economy, he led by 7m votes; around the state capital there were some fireworks and a march celebrating the PT’s victory but the local response was deafening silence. Mr Neves lost only in Rio de Janeiro (by less than predicted) and Minas Gerais, Brazil’s second most populous state where he served two successful terms as governor in 2003-10—a strange defeat that probably cost him the presidency. Social media are abuzz with quixotic calls for southern independence.

In her acceptance speech Ms Rousseff denied that Brazil was divided, before promising “dialogue” and “consensus”. Efforts at healing wounds after the tetchiest campaign in living memory got off to a poor

start, however, when she failed so much as to mention Mr Neves, who had been gracious enough to congratulate her.

The scars run deep. Ms Rousseff’s ally and predecessor Luiz Inácio Lula da Silva went so far as to liken the PSDB to the Nazis because of their supposed intolerance of the disadvantaged. The PSDB, for its part, accused the PT of being mired in sleaze, citing a rumbling probe into a kickback scheme at Petrobras, the state-controlled oil giant, that allegedly benefited Ms Rousseff’s party and some coalition allies.

Three days before the run-off Veja, Brazil’s biggest weekly which is fiercely anti-PT, published unsubstantiated claims that she and Lula had known all about the alleged graft, something both strenuously deny.

Given all the acrimony, the prospect of bipartisanship looks remote. Indeed, PSDB bigwigs have already hinted that they lost in part because their opposition has been too docile. They want a congressional inquiry into the Petrobras affair. The bad blood will be an obstacle to Ms Rousseff’s stated aim of overhauling the political system to make the country more governable.

An attempt at political reform prompted by last year’s protests was stymied by congressmen who like the current set-up. Such obstruction is only likely to deepen. From January Congress will contain 28 political parties, up from an already unwieldy 22. Ms Rousseff’s weak mandate—the flimsiest of any government since democracy was restored in 1985—will make it hard to bang heads together. In her victory address she vowed to consult Brazilians on political reform in a plebiscite, before there is congressional deliberation.

Eduardo Cunha, congressional leader of the Party of the Brazilian Democratic Movement (PMDB), the PT’s biggest coalition ally has said it will reject such a 1

34 The Americas

The Economist November 1st 2014 Cannabis in Chile

Brazilian 2014 presidential election

% of vote for leading candidate

Second-round results by state

Dilma Aécio Rousseff Neves

National result, %: Neves

48.4

RORAIMA

Rousseff

>60: AMAPç

50-60: RIO GRANDE DO NORTE

51.6 A M A Z O N A S

MARANHÌO

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CEARç PARAêBA PERNAMBUCO

PIAUê

ACRE TOCANTINS

RONDïNIA

SERGIPE BAHIA

MATO GROSSO

ALAGOAS

Probability of candidates winning, % 1ST ROUND BALLOT

2ND ROUND BALLOT Rousseff 80 Neves

DISTRITO FEDERAL

GOIçS

100

60 40 20

MATO GROSSO DO SUL

MINAS GERAIS

SÌO PAULO

RIO DE JANEIRO

PARANç

RIO GRANDE DO SUL

ESPêRITO SANTO

SANTA CATARINA

0 6

13

October

20

26

2 hasty vote—though it would accept a refer-

endum held after proper legislative preparation. In many areas, he warns, support for the government “will not be automatic”. To ensure that Ms Rousseff got the message, on October 28th the PMDB helped quash a controversial executive decree, issued in May, which would require the federal government to consult grassroots social movements when formulating policy.

This mood of rancour may hamper Ms Rousseff’s immediate taskofreviving nearzero growth and curbing inflation, running at 6.7% a year. (In a move that was both unexpected and overdue, on October 29th the central bank raised its benchmark interest rate, from 11% to 11.25%.) A bigger obstacle is the refusal to admit that there is a problem. Jobs are plentiful and wages are rising, Ms Rousseff boasted in the television interview. Judging by her acceptance speech, the economy is a distant third on her priority list, behind political reform and curbing corruption. The result of the race “shows that the people approve of our economic policy,” her outgoing finance minister, Guido Mantega, crowed on October 27th. She delayed naming his replacement, keeping markets on edge. Those hoping for concrete pro-business proposals got only some platitudes about snappier growth and the need to harness “entrepreneurial energy”.

At the hustings Ms Rousseff blamed high unemployment, prohibitive interest rates and stagnant wages during the PSDB’s tenure in 1995-2002 on the party’s orthodox policy prescriptions (less government

Easing the agony

Sources: Valor; Pollingdata.com.br

meddling in the private sector or central bank policy, more fiscal rectitude). In fact, far from wreaking havoc, those methods helped stabilise an economy plagued by hyperinflation and poor competitiveness, paving the way for Lula’s social policies.

Even if Ms Rousseff can understand this, she had made it harder to embrace Mr Neves’s ideas, because of her campaign’s leftwing tone.

Lula may prompt his protégée to be a bit more business-friendly and pragmatic, as he was while in office in 2003-10, a period many Brazilian bosses recall with nostalgia. Markets, too, may force some adjustment. Following Ms Rousseff’s re-election Brazil’s currency, the real, reached a nineyear low against the dollar. The main stockmarket index plunged by 6%. Both have rebounded, but—in the view of Tony Volpon of Nomura, a bank—that probably reflects the fact that her victory was priced in, more than any faith in a policy rethink.

The odds are that Ms Rousseff will tinker at the edges, just enough to stave off a painful credit-rating downgrade. The deficit is running at a five-year high of 4% of GDP. After the election Standard & Poor’s and Fitch, two ratings agencies, intimated that more budgetary restraint and structural reform would be needed in order to preserve Brazil’s prized investment grade, secured by Lula in 2008. Without such policies, the chances are that the country will keep drifting, putting jobs and incomes, and even the PT’s social programmes, at risk. After a wild election campaign, Ms Rousseff is in for a bumpy ride. 7

Santiago

The state relaxes its stance on the use of the drug as a painkiller

C

ECILIA HEYDER has breast cancer. She also has systemic lupus, a disease of the immune system. She’s had a mastectomy, radiotherapy and chemotherapy. She has taken many painkillers, often with side effects as bad as her symptoms. Last year, in desperation, she asked a doctor what else she could take to relieve her agony. He took out a pen and drew her a cannabis leaf. “It was as if he didn’t dare speak the drug’s name,” Ms Heyder recalls.

A 48-year-old mother of two, Ms Heyder had only dabbled with cannabis as a teenager. But she got hold of some leaves and used them to make tea. The result was startling. It was far more effective than any conventional painkiller she had used.

Inspired by her illicit experiment, Ms Heyder looked for Sativex, a cannabinoid medicine, but it was unavailable in Chile.

She persuaded the government to let her import it; the drugs arrived from Europe in September. The Chilean authorities say it’s the first time a cannabis-based treatment has been legally brought to Latin America.

But Sativex is pricey. It costs Ms Heyder $2,000 a month. When her stash runs out she will have to buy more cannabis on the streets. “I don’t want to go back to the fear of being arrested,” she says.

In view of the cost of cannabinoid medicines, campaigners in Chile are arguing for the right to make cheaper alternatives.

In September they won a ground-breaking victory. The Daya Foundation, a local notfor-profit outfit, was allowed to grow cannabis on land in La Florida, a district of Santiago. It will be used to make a painkill- 1

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36 The Americas 2 er for 200 cancer sufferers. The seeds were

sown on October 29th. Blessed by the state, it is the first such project in Latin America. Uruguay made waves by legalising recreational marijuana use; now Chile is blazing a trail for the medicinal kind.

Nicolás Dormal, Daya’s co-founder, says teaming up with the University of Valparaíso and a respected cancer clinic helped secure approval. The project includes a clinical study of cannabis as a painkiller. La Florida’s mayor, Rodolfo Carter, is on board. “I’ve had a few jokes about the mayor growing his own pot but in general the reaction of local people has been

The Economist November 1st 2014 awesome,” he says. “They realise this is not about personal use of marijuana...[but] providing people with a natural, healthier and cheaper treatment for their pain.”

The project may soon expand to help with other ailments. Many Chileans grow marijuana illegally and use it to combat epilepsy. A group of mothers produce the stuff for their epileptic offspring.

Not everyone approves of marijuana as a medicine. Doctors and psychiatrists warn that it is habit-forming. The World Health Organisation says it impairs learning and can worsen schizophrenia. The WHO accepts that cannabinoids can have

positive therapeutic effects but says more research is needed into their benefits.

But people like Cecilia Heyder cannot wait; she has only months to live. Having seen how cannabis works, she will use it whether it’s legal or not. Fear of arrest is only a slight deterrent when you’re dying.

Faced with such realities, there is little point in prosecuting people who use cannabis to reduce pain. Canada and at least eight European countries allow the marketing of cannabis-based medicine; now the trend may be starting in the southern hemisphere. For people with little else to celebrate, that is good news. 7

Bello The dogs bark in Colombia Despite the intransigence of the FARC and the opposition, the peace process is still alive

I

T IS two years since President Juan Manuel Santos’s government began peace negotiations with the FARC guerrillas in Havana, and the going has been slow. The two sides have reached provisional agreements only on the easiest three of the six points on the agenda—on rural development, participation in politics and how to fight drug trafficking. The FARC’s leaders seem to be in no hurry to abandon a 50year habit of war for the uncertainties of peace. Now, as Mr Santos sets off on a tour of Europe seeking political support and money to implement the hoped-for peace deal, the talks are facing ever-shriller opposition at home.

That opposition is led by Álvaro Uribe, Colombia’s president in 2002-10, whom Mr Santos served as defence minister for three years. Mr Uribe, now a senator, unleashes a daily blast of vituperation against his former colleague. To follow Mr Uribe’s Twitter account, as more than 3m Colombians do, is to be told that Mr Santos, an urbane pillar of his country’s establishment, has become a sympathiser of “Castro-Chavismo”. In up to 30 tweets a day, Mr Uribe makes outlandish claims: for example, that Mr Santos favours “the political leadership of the kidnappers and the handing over of the country to the FARC”. Mr Uribe’s party last month issued a document called the “52 capitulations of Santos in Havana”. No sooner had the government answered these charges one by one, than the uribistas added an extra 16.

There are legitimate disagreements to be had about the peace talks. Many Colombians dislike the idea that leaders of the FARC, a murderous Stalinist outfit that has financed itself by drug-trafficking and kidnapping, might end up, through the democratic process, in political control of chunks of countryside or escape punish-

ment for heinous crimes. But when president, Mr Uribe himself put out feelers to those he calls “terrorists”. His charges are “outright lies”, Mr Santos told Bello. The government has “red lines that we won’t cross”, including the defence of the armed forces, private property and the idea of a market economy.

Mr Uribe has ignored an offer from the president to discuss his concerns. Some prominent Colombians worry that without a united front in Bogotá, peace in Havana will be impossible. The FARC are every bit as intransigent as Mr Uribe. When Mr Santos said in August that the discussions had reached the final stage, Iván Márquez, the FARC’s chief negotiator, flatly contradicted him.

Yet it would be wrong to conclude that the talks are doomed. Rather, they have entered a make-or-break period. The negotiators have abandoned their sequential approach and are now simultaneously talking about the remaining issues. These include transitional justice (ie, what punishment the FARC will face and how many of them will face it) and the reparation of victims; as well as disarmament, demobil-

isation and the reintegration of the guerrilla rank-and-file into civilian life. Drawing the line between justice and peace is “the most difficult point in ending any conflict,” Mr Santos says. And getting a guerrilla to lay down his gun is never easy.

The government negotiators have been reinforced by senior army officers.

And almost all of the FARC’s most important—and notorious—commanders have joined the talks. Mr Uribe denounces this as the government facilitating a FARC “Congress of terrorism” in Havana. That sounds like nonsense: the FARC is faced with momentous decisions; ending its war needs a united front of its own.

The biggest problem now is time. Mr Santos has erred in the past by announcing a timetable that the FARC ignored. But the talks will lose credibility if they drag on. In the coming months, the government must confront the FARC’s leaders with a choice: either they accept a deal that is not victory and under which at least some of them will have to go to prison, or the state will resume a military offensive in which the guerrilla chiefs will sooner or later be wiped out.

As for Mr Uribe, he fails to admit that the talks offer the best chance of ending a conflict that has burdened Colombia with death, destruction and the displacement of millions of people. The irony is that it was his security build-up that forced the FARC to negotiate. What explains his campaign? In Bogotá it is variously attributed to envy, irrational obsession and anger that prosecutors have pursued officials from his government for corruption. Mr Santos conjectures that “maybe he thinks his political capital would disappear if there was peace.” As a saying widely attributed to Don Quixote put it, “let the dogs bark, Sancho, it’s a sign that we’re advancing.”

The Economist November 1st 2014 37

Asia

Also in this section 38 Politics and the past in Bangladesh 39 Prostitution in India 39 Taiwan and Hong Kong 40 New Zealand’s identity 41 Banyan: The city on the hill

For daily analysis and debate on Asia, visit Economist.com/asia Economist.com/blogs/banyan

Malaysia

A lousy sequel KUALA LUMPUR

Jail for Malaysia’s opposition leader would not necessarily clobber his coalition

F

OR 16 years Anwar Ibrahim, leader of Malaysia’s opposition, has battled dodgy charges of sodomy and corruption designed to keep him from power. One way or another, a court hearing which began on October 28th looks like the end of the road. As The Economist went to press Mr Anwar (pictured above, with his wife) was reaching the conclusion of his final appeal against a five-year prison sentence, imposed in March, for allegedly having sex with a male aide (sodomy is illegal in Malaysia). It leaves Pakatan Rakyat, his threeparty coalition, on shaky ground.

Mr Anwar has been here before. He was once the rising star of the United Malays National Organisation (UMNO), which has governed Malaysia since independence in 1957. But a bust-up with Mahathir Mohamad—the prime minister for over two decades—saw him dumped from the party in 1998 and convicted of sodomy soon after. That conviction (though not another for corruption) was quashed in 2004, after Mr Anwar had spent more than five years in jail. He has since fashioned the first serious challenge to UMNO rule.

The latest case looks just as fishy as the first and began in 2008. The charges were dismissed in 2012, but in March an appeal court overturned Mr Anwar’s acquittal.

That came just weeks before a by-election that would probably have enabled Mr Anwar to become chief minister of Selangor, Malaysia’s richest state and a prime spot

from which to challenge Najib Razak, the prime minister, at general elections in 2018.

In the months leading up to his appeal, prosecutors have hounded opposition politicians with charges of sedition and defamation. One of Mr Anwar’s lawyers is among eight opposition politicians charged so far. So cynically political have sedition charges against Pakatan politicians appeared that Malaysia’s usually docile lawyers took to the streets in protest.

Mr Anwar’s conviction bars him from holding a political post for five years after his sentence is served. Going back to jail would thus probably end the political career of the 67-year-old, who as leader of Pakatan has enjoyed unprecedented success.

Since 2008 the coalition has taken huge bites out of the dominance enjoyed by Barisan Nasional, the ruling alliance headed

by UMNO. At the general election in 2013 Pakatan won just over half the popular vote. But under Malaysia’s first-past-thepost—and heavily gerrymandered—electoral system, it got less than a majority of the seats in Parliament.

For all its achievements, Pakatan is a fractious alliance. It groups Mr Anwar’s People’s Justice Party (PKR) with the PanMalaysian Islamic Party (PAS), a devout Muslim outfit, and the Democratic Action Party (DAP), a secular, ethnic-Chinese one.

Until now Mr Anwar’s charisma—and his legal travails—have kept these parties together despite their differences. But the di-

visions have widened.

For much of this year the coalition squabbled in unseemly fashion over who should fill the plum post in Selangor, earmarked for Mr Anwar before his conviction rendered him ineligible. PAS leaders torpedoed a plan to install Mr Anwar’s wife, Wan Azizah, PKR’s president and a respected politician in her own right. The imperious way in which PKR had proposed this dynasticism raised hackles throughout Pakatan, although some say the Islamists’ main worry was the prospect that a woman—and a relatively liberal one to boot—might one day run the coalition.

After a six-month stand-off and the intervention of the local sultan, the job of chief minister has gone to Azmin Ali, Ms Azizah’s deputy. But the “childish infighting” has dented Pakatan’s image among voters, says Bridget Welsh, an academic.

PAS, the smallest party in the opposition coalition, is also its weakest link. It is distracted by a struggle between progressive Muslims who predominate in its upper ranks and conservatives in its grass roots. The party is growing more illiberal, notably in a renewed push to toughen sharia law in the northern state of Kelantan, its heartland. Widespread criticism of the party’s spoiling role in the Selangor crisis has pushed PAS’s leader, Abdul Hadi Awang, closer to the conservatives, reckons Wan Saiful of IDEAS Malaysia, a thinktank. Government barons would love to lure PAS to their side.

Were he to remain free, Mr Anwar would continue to be the best person to ward off these threats. But he is no longer quite as crucial to the opposition as he once was. Though his coalition has made impressive gains, Mr Anwar has twice failed to lead it to outright victory. He can still raise a crowd. On October 27th Malaysia’s oldest university appeared to cut the 1

The Economist November 1st 2014

38 Asia 2 electricity to parts of its campus in order to

discourage students from attending a rally in his defence. But his story is less compelling to young Malaysians than it was to those who heeded his first calls for change in 1998. Another jail sentence would make a martyr of him; it would also give his party’s younger leaders a chance to shine.

In the PKR Mr Azmin is the most promising of them. He cut his teeth as Mr Anwar’s private secretary during his years in government and has proven a loyal deputy. But the capable 50-year-old can readily move out from his mentor’s shadow. Mr Azmin has greater experience than either Nurul Izzah Anwar, Mr Anwar’s impressive daughter, or Rafizi Ramli, a party strategist somewhat tarnished by the Selangor debacle. Healing the wounds in that state would help convince voters that Mr Azmin could run the country competently.

As for the prime minister, his people like to push the line that he is a moderniser doing away with his party’s thuggish ways. Certainly, it is hard to see how Mr Anwar’s case will benefit Mr Najib even if he thinks him deserving of punishment.

He will want to see the back of a case that is damaging the country’s reputation abroad.

But it all underscores how weak Mr Najib’s position has become.

With a general election still four years away, the prime minister faces a threat from within his own party, notably from conservative factions close to Dr Mahathir, who still pulls strings from the wings.

Whispers abound that an effort to unseat Mr Najib is imminent. As always, the prime minister touts policies intended to get Malaysia’s economy motoring. He has never looked less capable of carrying them out. 7

Politics and the past in Bangladesh

Dialling down

A series of trials for war crimes still matter politically, but less than before

I

T IS rare to be sentenced to death twice over. On October 29th Bangladesh’s selfstyled International Crimes Tribunal told Motiur Rahman Nizami (above), leader of the country’s main Islamic party, Jamaat-eIslami, that he would hang. The tribunal convicted the 71-year-old of murder, rape and looting as a pro-Pakistani militia leader during the country’s war of secession from Pakistan in 1971. Mr Nizami’s sentence came on top of a separate one from a criminal court in January, ordering his execution after he was convicted over a big haul of arms, destined for insurgents in India’s north-east, that was discovered in

2004, when he was in government.

The tribunal was set up in 2009 by Sheikh Hasina’s Awami League, but Mr Nizami’s was the first war-crimes verdict since Sheikh Hasina’s re-election as prime minister in January. The verdict came a week after the death in custody of 91-yearold Ghulam Azam, another high-profile defendant at the tribunal. He had preceded Mr Nizami as leader of Jamaat, which promotes a Saudi Arabian strand of Islam in nominally secular Bangladesh. He also ran Jamaat back in 1971. Mr Azam’s funeral in Dhaka, the capital, on October 25th drew tens of thousands of followers. His last

wish had been for either Mr Nizami or a third war-crimes convict, Delwar Hossain Sayedee, to conduct final prayers. It went unfulfilled.

The Awami League strives to keep the public memory of the war of independence alive. Pakistani soldiers were the main perpetrators of an appallingly bloody campaign against Bangladeshis seeking independence as well as others, notably Hindus. Pakistani perpetrators have been always beyond the reach of the courts. So their Bangladeshi collaborators, including Mr Azam and Mr Nizami, have been prosecuted in their stead.

Both had opposed independence and assisted Pakistan’s army. Jamaat’s student wing supplied members to pro-army militias that committed atrocities, abducting and killing academics and journalists. The war-crimes court accused Mr Nizami of “Gestapo-like attacks”. His lawyers said the verdict was “not based on evidence” and vowed to appeal, a process that could take two years.

Before their trials, the men had enjoyed extraordinary immunity. After spells in Pakistan and England, Mr Azam was protected by two successive dictators who ruled until 1990 and welcomed his religious brand of politics. Even after democracy returned, Khaleda Zia—the widow of one of those dictators, Ziaur Rahman, and heiress to the Bangladesh Nationalist Party (BNP)—struck an electoral alliance with Jamaat. It was in a BNP government that Mr Nizami served as minister.

Mrs Zia’s bitter rival, Sheikh Hasina, has relished having the upper hand. The Awami League had promised war-crimes trials before its landslide election in 2008.

By the time of this year’s election, many leading suspects from the war had been sentenced and jailed, and one executed, despite deep flaws in the way the tribunal was run, with concerns about its independence. The Supreme Court is now weighing various appeals.

But now the trials’ political usefulness for the League is diminishing—and they may even become a factor in political instability. As it is, more than 100 people have died in violence related to the trials. Sheikh Hasina might now prefer to advance her credentials as a wise, legitimate and moderate leader by leaving a flawed tribunal to grind forward only very slowly. After all, she wants Bangladesh to bolster its international reputation. This month it won a seat at the UN Human Rights Council. Accusations of a sham democracy, which were lively when Mrs Zia was boycotting the last election, have fallen quiet.

As it is, some of the older prisoners before the tribunal may not live long enough to be executed, given a lengthy appeals process. Three have now died in custody.

Mr Sayedee, whose death sentence was commuted in September, will presumably 1

The Economist November 1st 2014 2 never leave prison. And the timing of ver-

dicts and sentencing appears to be alive to political sensitivities. High-profile ones do not seem to fall due when foreign dignitaries happen to be paying a visit to Bangladesh. More commutations may now be favoured.

Sheikh Hasina, in the United Arab Emirates this week, also judges how the war-crimes trials are seen in the Gulf. Most important is Saudi Arabia, the biggest destination for Bangladesh’s millions of migrant workers and a source of subsidised oil. Its rulers do not want Mr Nizami or other accused too obviously ill-treated. It thus suits Sheikh Hasina to keep up the notion that the legal process is beyond political interference. For the time being it may, in other words, be convenient to observe a less active war-crimes process. 7

Prostitution in India

Make it legal DELHI

A proper debate is needed on legalising sex work

S

INCE her husband walked out on her a year ago, Sumana has commuted from a rented slum house in south-eastern Delhi to sit by a busy road in the city centre.

Dressed in a floral-print salwar kameez and with kohl around her eyes, she picks up two or three customers a day for sex. Mostly they are car chauffeurs, who pay as little as 300 rupees ($4.80) a time. Some, she says, are generous or gentle, but there is also violence.

Sumana sticks to daylight hours. Her family thinks she has an office job, which is what she would prefer. But she has no education, and she will carry on until her teen-

Another day in G.B. Road

Asia 39 age son finishes school. She knows soliciting is illegal—though the law is vague on prostitution itself. She understands the benefits of condoms, yet her customers rarely wear one.

Sumana has no pimp; nor was she trafficked. The same goes for Bina, a younger woman nearby who arranges to meet higher-paying men by phone: guards, drivers and cooks who pass around her number. She complains of long hours.

Officials say India has over 3m sex workers. It is unclear how many, like Sumana and Bina, opt for the business because they need the money, and how many are forced by others. Bharati Dey, president of the All India Network of Sex Workers, argues that prostitution is a matter of choice, and that sex workers should have rights like anyone else. The industry has grown as women, notably ill-educated rural migrants, enter India’s labour market in larger numbers. Most find low-paid or casual work; for a minority, selling sex is a relatively well-paid option.

Ms Dey’s and other groups want the sex trade brought out of the shadows. In April the UN’s special rapporteur on violence against women said ending India’s de facto criminalisation of sex workers would make them less vulnerable. Five years ago the Supreme Court said prostitution should be legalised. So, now, does the National Commission for Women, a federal body, changing its previous stance. Its head, Lalitha Kumaramangalam, argues that a regulated industry could better stop forcible trafficking, including of children, improve hygiene among workers and clients and limit the spread of HIV and other diseases. On November 8th she will make the case before a special panel of the Supreme Court looking at amending the law.

Openness and regulation bring benefits. Mayank Austen Soofi, who has written in depth about the brothels of G.B. Road, a sprawling red-light district in Delhi

dating back to the Mughal era, says that every sex worker he knows wants to be legal.

Prostitutes today hesitate to approach doctors. They dread police harassment. And they fear their landlords will expel them.

A priority should be ending forced prostitution, especially of children. Apne Aap, an anti-trafficking group, says brokers pay as little as 4,000 rupees to the families of village girls who are then raped by customers. Raids of brothels by NGOs and police to rescue victims often fail because families later return the children to the same brokers. In other cases girls and young women are tricked with promises of marriage. Apne Aap claims that over a third of all sex workers are under18.

The organisation opposes legalisation, arguing that more demand for sex would lead to more trafficking. Instead, Apne Aap’s campaign, “Cool Men Don’t Buy Sex”, is intended to reduce demand. If that looks unlikely to have much success, the prospects of legalisation appear slender, too. No politician is ready to champion the idea. The conservative Bharatiya Janata Party is unlikely to support it. Those selling sex will continue to live in the shadows. 7

Taiwan and Hong Kong

Told you so TAIPEI

The protests in Hong Kong fuel Taiwan’s distrust of China

“O

NE country, two systems”, the formula supposed to guarantee Hong Kong’s autonomy under Chinese sovereignty, was first devised for Taiwan. But it has never held much appeal there, and China’s refusal to cede to the demands of pro-democracy protesters in Hong Kong comes as no surprise. But the confrontation makes it harder to enthuse Taiwan about unification with the mainland.

Taiwan’s president, Ma Ying-jeou, elected in 2008, has conjoined Taiwan’s economy ever closer with China’s. The hope in China is that this will pave the way for political unification. But even Mr Ma insists the fiercely democratic island has a right to its own sovereignty. Born in Hong Kong, he has backed the democracy movement there. Speaking on Taiwan’s National Day on October 10th, as honour guards twirled rifles and dancing girls imitated butterflies, he argued that Chinese leaders should make Hong Kong a democratic region separate from the mainland, experimenting with political reform as China did with capitalism when it set up special economic zones in the 1980s.

Taiwan’s opposition Democratic Progressive Party (DPP) has also backed the 1

The Economist November 1st 2014

40 Asia New Zealand’s identity

Clashing with the sunset WELLINGTON

John Key pushes for a national rebranding

T

More practical than a sunflower 2 Hong Kong protests. The DPP has long

wanted a formal declaration of independence for Taiwan from China. These days it is less headstrong, anxious to show voters it can manage relations with the mainland.

But its supporters would naturally sympathise with the Hong Kong protesters.

Taiwan’s students in particular are worried about Chinese encroachment. They fear Mr Ma’s business agreements come with political strings, and that ultimately Taiwan will become just another Hong Kong. For this reason, students, in a “sunflower” movement in March, occupied the island’s parliament to protest against a services-trade pact with China. On October 1st around 5,000 people, including highschool students, forsook sunflowers for umbrellas, the symbol of the Hong Kong protests, to wave them at a rally in Taipei.

Among ordinary Taiwanese, however, the protests have had little impact. This may be because they already live in a democracy, and some view China as a foreign country. “It’s fortunate that you don’t see a lot of Taiwanese fighting for Hong Kong, as it shows Taiwanese do not feel close to China,” says Ketty Chen, an aide to the DPP’s leader, Tsai Ing-wen.

Coverage of the protests in Taiwan’s press may also have been a factor. Three papers gave them ample space, but the China Times, owned by Tsai Eng-meng, a proChina billionaire, played them down.

When Hong Kong’s police used tear-gas, Taiwan’s Apple Daily screamed: “Hong Kong is Crying.” Mr Tsai’s China Times ran a front-page story on baseball.

Moreover, the great majority of Taiwanese get their news from television, which at first paid the protests scant attention. One reason for this may be the parochialism that afflicts much of Taiwan’s media. But

HE country’s prime minister, recently re-elected to a third term, is a cast-iron monarchist. Even so, John Key is bent on coming up with a new flag for New Zealand, one in which Britain’s Union Jack will no longer feature. Instead, he says, the flag will “scream New Zealandness”.

The current flag, Mr Key told students at the University of Victoria in Wellington a few months ago, “remains dominated by the Union Jack in a way that we ourselves are no longer dominated by the United Kingdom”. To The Economist Mr Key explained that changing the flag is “about our place in the world and how we see ourselves…confident, outwardlooking, multicultural.”

Other New Zealanders seem to care more about the fact that their flag looks uncomfortably close to Australia’s—both share the Union Jack and the constellation of the Southern Cross. Either way, on October 29th Mr Key announced that the country will get to vote in two related referendums on a new flag. The whole process will be over by early 2016. A panel of “respected New Zealanders” is to survey potential new designs.

Besides the prominence of the Union Jack, many criticise their flag for making no nod to indigenous Maoris. It was not always so: New Zealand’s first flag, in 1834, was chosen by an assembly of Maori chiefs. Other flags competed with it, and the current flag was adopted in 1902 after arguments over which one should go with New Zealand troops into the Boer war. Since then, many have died for that flag, one reason plenty of New Zealanders will be against a new one.

Those keen for a new flag will in the months ahead emphasise values that

New Zealanders have a right to be smug about: being the first country to give women the vote, championing human rights, supporting the UN and multilateralism, paying reparations to Maoris for past wrongs and being open to Asian immigration.

Yet self-confidence has not yet led to an unstoppable groundswell of support for a change. Many see Mr Key’s initiative as a diversion from more pressing tasks.

He himself says that “in the context of the economy, health, law and order and the environment, it’s not the big issue.”

And then comes the question of what the new flag should look like. Mr Key favours the quasi-national emblem, the silver fern, on a black background. But that risks looking variously like a logo for the All Blacks national rugby team, an advertisement for marijuana or even the battle-standard for the antipodean branch of Islamic State.

critics also accuse Taiwan’s television stations of being soft on China, as their owners either have business interests there or wish they did. This accusation has been directed even at a popular DPP-leaning cablenews station owned by Sanlih Entertainment Television, which makes soap operas popular on the mainland. After an angry reaction on social media, the television channels gradually stepped up their coverage of the protests. Even then, says Kuang Chung-hsiang, a media analyst at the National Chung Cheng University, reporting tended to be sensationalist and rarely related the protests back to Taiwan.

Mr Ma’s ruling Nationalist party, the Kuomintang, is expected to do poorly in municipal elections at the end of the year,

which will set the stage for a presidential vote in 2016. But this has to do with poor governance, not Hong Kong. Mr Ma, one of the most unpopular elected leaders Taiwan has had, is currently battling the fourth food scandal in three years.

China’s Taiwan policies are also unlikely to change much. China’s president, Xi Jinping, has said the Taiwan problem should not be left to future generations. But George Tsai, of the Taiwan Foundation for Democracy, who is close to Chinese policymakers, says Mr Xi does not want to add Taiwan to a daunting foreign-policy agenda. “If you bring in Hong Kong, the South China Sea, the East China Sea: China has no extra energy for Taiwan,” he says.

Mr Xi may have to wait after all. 7

The Economist November 1st 2014

Banyan

Asia 41

The city on the hill

Democracy, human rights and all that take a back seat in America’s Asia policy

W

HEN Barack Obama ducked out of two summits in Indonesia and Brunei a year ago, the credibility of the “pivot to Asia” he had proclaimed, giving the region greater importance in American foreign policy, tooka big knock. This month he is due to show up at back-to-back gatherings in Beijing, Naypyidaw, the capital of Myanmar, and Brisbane in Australia, giving him a chance to hammer out the dent. It will be a struggle. The centrepiece of the economic aspect of the pivot, a regional free-trade agreement called the Trans-Pacific Partnership (TPP), is still not a done deal. Some Asians remain unsure about whether the strategic, military pivot really amounts to much. And there is yet another difficulty: the perception in Asia that America’s faith in the universality of its ideals of freedom and democracy has weakened.

American leaders used to raise the issues of human rights and democracy in Asia at almost every opportunity, especially where China was concerned, but also in Indonesia, Myanmar, Vietnam and elsewhere. That they no longer hector so loudly is welcome to many governments. But it seems to jar with American professions of continued leadership.

The reticence reflects two trends. One is that the world seems to be in flames elsewhere. The rise of Islamic State (IS), the spread of Ebola and the forced partition of Ukraine: all have hijacked America’s attention. When American leaders have microphones thrust in their faces, questions about Asia are not the first they have to answer, and when they lookat Asia it is through the prism of other global problems.

The other is that America’s strategic and economic ambitions in Asia have a higher priority than promoting American political values. Take America’s muted reaction to a number of recent political developments around Asia. In Hong Kong, where studentled protesters this week marked a month of sit-ins on big thoroughfares, American officials have voiced support for their main demand ofgenuine universal suffrage in the election for the territory’s chief executive in 2017, rather than the sham version offered by China.Yet Mr Obama has held his tongue on the protests.

To speak out might encourage the paranoid tendency in China that sees the unrest as part of an American-led plot to weaken and ultimately topple Communist Party rule. To stay silent, however, suggests that Mr Obama does not see Hong Kong as impor-

tant enough to risk adding yet another complication to a fraught relationship with China.

America’s president will also have to think hard what to say about Myanmar when he goes to the East Asia Summit held there. Liberalising reforms since 2011 have been held out as the great success of his “unclenched-fist” policy towards the country, with the strategic benefit of forging a partnership with a place that had been stuck in China’s orbit. But the mood has soured.

Hopes have faded of amending a constitution that guarantees the army a blocking minority in parliament and bars the opposition leader, Aung San Suu Kyi, from the presidency. Some now doubt that the general election due next year will even take place. To emphasise the many positive changes in Myanmar may look starry-eyed; to harp on about the setbacks would blur a rare foreign-policy bright spot.

Even in Thailand, where the army staged its latest coup in May, America’s position has not been entirely clear. It has condemned the putsch, called for the restoration of democracy and suspended a modest amount of military aid to its old ally. But it has stepped back from a threat to move the annual “Cobra Gold” joint Thai-American military exercises out of the country next year. America’s links with Thailand have withstood countless changes of government. It would not want to jeopardise them entirely, and push Thailand deeper into China’s embrace.

Similarly, American policy toward Malaysia has been coloured by realpolitik. Opposition politicians and others identify a worrying repressive tendency in the government, with an archaic sedition law used to hound its opponents. And this week saw the culmination of a ludicrous trial on charges of sodomy of the opposition leader, Anwar Ibrahim (whose coalition won the popular vote, though not a majority of seats, in last year’s general election). America, however, has been largely silent about all this, and, in Malaysia in April, Mr Obama did not even find time to meet Mr Anwar. Najib Razak, the prime minister, is an important regional ally—an elected, moderate Muslim ready to speak out against IS, and to take on domestic lobbies to bring Malaysia into the TPP. Moreover, Mr Obama and he are said to get on.

A more natural partner might be another moderate Muslim democrat, Joko Widodo, known as Jokowi, the new president of Indonesia, whose ascension to power as an outsider buoyed by grassroots support recalls Mr Obama’s own. America’s secretary of state, John Kerry, did attend the inauguration last month, and held a 30-minute meeting. But it seems he concentrated on America’s agenda—climate change, IS and Ebola—rather than Jokowi’s, or on how America might assist his shaky new administration.

Softly, softly Playing down contentious issues of domestic politics in favour of international co-operation seems to make sense at a time of shifting global power and heightened tension. But it has a cost: it squanders part of America’s “soft power”, a great asset. Many in Asia believe that China is the waxing power and America the waning one. But America remains the place that far more young people want to visit and hope their own country can emulate. For all its flaws and mis-steps, it represents not just economic and military might, but an ideal to aspire to, in a way that China does not.

And when American leaders appear to give less weight to that ideal, they not only diminish America’s attractions, they also lend more credence to the idea of its relative economic and military decline. 7

42

Property

The Economist November 1st 2014

China

The Economist November 1st 2014 43 Also in this section 44 Housing-market corruption 44 The law at work

For daily analysis and debate on China, visit Economist.com/china Economist.com/blogs/analects

Politics

Rules of the party BEIJING

Three articles look at the Communist Party’s new call for “rule of law”. First, reviving the constitution; next, the ordeals of justice; lastly, gaming the system

I

N A lengthy document published on October 28th the Communist Party called for no less than an “extensive and profound revolution” in the way China is governed. This would involve establishing “rule of law” by 2020 and giving new emphasis to a long-neglected constitution which, among other things, enshrines freedom of speech and of the press. However, the party means far less by all this talk than might be imagined. President Xi Jinping is embroiled in a campaign to instil discipline in his corruption-riddled party. He hopes a blast of fresh rhetoric and some legal reforms will help curb official abuses of power and the anger they fuel. It is not his plan to reduce the party’s importance.

The nearly 17,000-character “resolution” was endorsed by the party’s 370member Central Committee at an annual plenum five days earlier (pictured, above).

Such documents are normally kept secret for a few days to allow lower-ranking party officials to digest them. The document, and the plenum itself, were striking.

It was the first Central Committee meeting in the party’s history to focus on building “rule of law”, and it was the first time that the committee had given such a place of honour to the constitution. In the past the party has often preferred to keep quiet about it because of its liberal-sounding clauses, including the stirring declaration that “the state respects and preserves human rights”.

The resolution declared that December 4th would henceforth be National Constitution Day, that officials would have to swear an oath of allegiance to the constitution, and that it would be promoted “throughout society”. Everyone, including party members and the armed forces, “must regard the constitution as the fundamental guideline of their activities”, the document says. Mr Xi had talked up the constitution for a while after he took over as China’s leader late in 2012, but had appeared less eager after liberal intellectuals began speaking of the constitution as a way of checking the party’s power. Now he appears enthused again. The plenum ruled that all regulations which violate the constitution must be revised.

Mr Xi’s aim, however, is not to encourage the liberals. A decade ago the constitution was amended to include explicit protections for human rights and private property. Citizens with grievances briefly took heart and attempted to use these clauses to challenge official abuses of power. They were ignored, roughed up or arrested. Under Mr Xi, Chinese academics and journalists have been banned from expressing support for “constitutionalism”: a term that the party sees as a codeword for Western democratic values.

The Central Committee made clear the party had not changed its stance on this.

“We absolutely cannot indiscriminately copy foreign rule-of-law concepts and

models,” it said. Yang Xiaojun of China National School of Administration told People’s Daily Online, a party mouthpiece, that the party needed to “strengthen internal propaganda and education” to prevent any misunderstanding that the constitution was like a Western one.

Some legal scholars believe there might be a change in the offing: the Supreme People’s Court, the country’s highest judicial body, could begin using the constitution to review lower-court rulings. But if so the aim would not be to protect civil liberties, but to give the central authorities more control over the legal system. People who independently challenge the party will continue to be punished harshly. Mr Xi, indeed, has presided over a sweeping crackdown on dissent since he came to power.

Mr Xi’s aim appears to be to use the constitution to rein in local officials whose routine flouting of the law causes public anger and many thousands of protests every year. By making them swear to uphold the constitution, he is trying to make clear that they are not above the law when it comes to such matters as property rights. He does not expect them to ignore restrictions on demonstrating; the party has never acknowledged a contradiction between such laws and the constitution’s guarantees.

The Central Committee said new types of courts would be set up that will cross several administrative regions; their judges, in theory, will not be so easily beholden to local officials. In addition, the party will now assess whether officials have interfered in legal cases when deciding on their prospects for promotion.

Judges are to bear “lifelong responsibility” for their decisions in cases.

Official English translations refer to the importance of “rule of law”. But Mr Xi’s tactics appear better suited to a different translation of the Chinese term, yifa zhi- 1

The Economist November 1st 2014

44 China 2 guo: “rule by law”. His aim is to strengthen

law to make the party more powerful, not to constrain it. Randy Peerenboom of La Trobe University in Melbourne says Mr Xi’s measures seem intended to make China’s courts work better and more consistently, “more like [in] Singapore”—a country that Chinese officials sometimes hold up as a model of benign authoritarianism.

But the fate of its own elite is to remain in the hands of the party. On October 28th Xinhua, an official news agency, said a former general, Xu Caihou, had confessed to bribe-taking and that legal proceedings against him had begun. This was only made possible by a decision in June to expel him from the party; members cannot stand trial. The plenum produced no news about the most high-profile target of Mr Xi’s anti-corruption campaign, Zhou Yongkang, a former chief of domestic security.

Prosecutors will have to wait until the party issues its verdict. 7

Corruption in the housing market

To those that have

The bureaucrat’s house-price discount

O

FTEN the trickiest part of being a corrupt bureaucrat is not how to find new ways to extort money or accept bribes, but how to hide the ill-gotten gains.

No one wants to end up like “Uncle House”, as a district official in the southern province of Guangdong was dubbed by internet users. He was outed two years ago by online anti-corruption activists after acquiring 22 properties that on his salary he clearly could not afford.

However, research by Hanming Fang of the University of Pennsylvania, and Li-An Zhou and Quanlin Gu of the Guanghua School of Management at Peking University suggests that the housing market is a source of illicit riches, as well as a place to park them. The authors find that Chinese bureaucrats consistently pay less when buying houses, receiving on average a 1% discount.

The most likely explanation is that this is a form of bribe by property developers.

Supporting this theory is the authors’ finding that officials who regulate property, and senior public servants, enjoy the biggest discounts. Those from provincial governments, for example, received a 4% reduction, roughly equivalent to two-thirds of their yearly salary.

The authors examined over 1m mortgage contracts, which contain detailed statistics on the applicant, such as his income and employer, and the house in question.

The law at work

No more rooms BEIJING

Against a network of officials and thugs, the law is no shield

F

OR most of the past 70 years Qiao Shuzhi’s family supported the Communist Party, and the party took good care of the family. Mr Qiao’s father, an underground member during the war against Japan in the 1930s and 1940s, helped store and move military supplies.

He was rewarded with a building in the Haidian district of north-western Beijing.

In 1953 he turned it into the Tianyi Guesthouse, offering budget lodgings to travellers. Permission for the business was granted, in writing, by China’s police chief at the time.

In the 1960s, Mr Qiao says, Zhou Enlai, who was then prime minister, protected the guesthouse, allowing it to operate as the only private business in Beijing throughout the mayhem of Mao’s Cultural Revolution. When pro-market reforms began in the late 1970s the guesthouse was widely praised as a model familyrun operation.

Now Mr Qiao, 64, has lost it all. He does not understand why the party, whose Central Committee has just met to extol the “rule of law”, cannot protect him from the developers and officials he accuses of grossly violating it. Wielding a sheaf of official papers that acknowledge his ownership of the building, Mr Qiao says he was abducted and held for13 hours last December as the building was demolished by what he describes as a network of corrupt officials and developers. All of its contents were lost.

Mr Qiao’s story is far from unique.

Since the mid-1990s, tens of millions of Chinese have lost their land. In many cases, only minimal compensation has been offered. Researchers believe that, of thousands of “mass incidents” of rural

They then compared the average price paid by bureaucrats with that paid by those in the private sector. These estimates probably underestimate the corruption as they do not cover houses purchased by the spouses or children of bureaucrats.

Until recently the property market seemed a one-way bet for corrupt and honest citizens alike. At their peak, house prices in some big cities were growing by 20% a year. But in recent years the market has been cooled by rules such as limits on the number of properties each citizen can buy and on the mortgage subsidies the state supplies. Prices are reported to have declined by1.3% in September, marking the fifth consecutive monthly fall, suggesting that the restrictions may have worked too

unrest occurring each year, the majority are about land. In one of the worst recent cases, nine people were killed in midOctober in Yunnan province in the southwest in a dispute over evictions.

In their campaign for redress, Mr Qiao and his son have been stymied at every turn. Local police did not respond when thugs broke the Qiaos’ windows. The electricity bureau did nothing when power to his building was cut. Planning officials scoffed at his request for adequate compensation for the loss of his business. The Qiaos informally approached a local court to assess their chances of suing the government successfully. They were given a brush-off.

Mr Qiao and his son dare not go back to their old street. They are paying a high rent in order to live near Zhongnanhai, the compound housing China’s leaders.

They feel that at least they’ll be safer in a well-guarded neighbourhood.

Mr Qiao’s last stand well. Keen to avoid a collapse, the government has begun to unwind some of the restrictions in second-tier cities.

For as yet unexposed “Uncle House” types, this may be a good time to clean up their portfolios. The furore over corrupt officials has prompted the government to introduce a property register. The hope is that will succeed in uncovering the full extent of illicit holdings and corruption.

However, the register is to be implemented completely only by 2020, affording shady bureaucrats plenty of time to move their wealth into the shadows. China’s property market may indeed one day become transparent, but not so soon as to give officials moonlighting as speculators an immediate reason to panic. 7

SPECIAL REPORT IRAN November 1st 2014

The revolution is over

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SP EC IA L R E P O R T IRA N

The revolution is over After decades of messianic fervour, Iran is becoming a more mature and modern country, says Oliver August

ACK NOW LE D G M E N T S The author would like to thank the following (as well as many others who prefer to remain nameless) for sharing their knowledge and insights with him: Parviz Aghili, Ali Alfoneh, Reza Bundy, Patrick Clawson, Tony Cordesman, Richard Dalton, Coco Ferguson, Haleh Isfandiari, Foad Izadi, Colin Kahl, Mehdi Khalaji, Hooman Majd, Suzanne Maloney, Mohammad Marandi, Afshin Molavi, Alireza Nader, Vali Nasr, Amir Nayeri, Kelly Niknejad, Emanuele Ottolenghi, Trita Parsi, Rouzbeh Pirouz, Kenneth Pollack, Ramin Rabil, Hossein Rassam, Dennis Ross, Karim Sadjadpour and Robert Satloff.

The Economist November 1st 2014

FROM THE MOUNTAINS of the Caucasus to the waters of the Indian Ocean, Iranians are watching intently as their government haggles with foreign powers over trade sanctions imposed to restrain its nuclear programme. Pointing to a corner of his office, the owner of a struggling cannery says: “See that television set? I watch it hour by hour, hoping for news that sanctions will be lifted.”

Iran says its nuclear programme is for peaceful purposes only. The West, not unreasonably, fears that Iran is building a bomb. In the hope of preventing a nuclear arms race in the Middle East, America and its allies have made it very difficult for Iran to engage in international commerce.

The country’s oil exports have dwindled to half their former level. The Iranian government, for its part, has broken a habit of a lifetime and publicly held detailed discussions with countries it regards as hostile, including America. As this special report will explain, its motives are internal as much as external. All sides are keen to find a solution to this long-running stand-off. A deadline of November 24th has been set. An agreement to shackle the nuclear programme would have wide-ranging geopolitical consequences and could push Iran further towards modernity.

For now, Iran is disliked and mistrusted across much of the democratic world. Terrible things have been done in the name of its revolution.

Some of its leaders have denied the Holocaust. They have locked up and tortured citizens who dared to challenge them openly. The country really could be set on having a bomb. But while the world has been cut off from Iran, it has failed to notice how much Iranians have changed. No longer is the country seething with hatred and bent on destruction. Instead, the revolution has sunk into the disillusion and distractions of middle age.

This is not always a nice place, perhaps, but not a Satanic one, either.

To be sure, Iran is hard to fathom. It often makes visitors feel unwelcome. Journalists who have been able to obtain a precious visa still leave with a sense of uncertainty as few Iranians feel free to speak their mind.

For years the government even refused to share information with the 1

CO N T EN T S 5 Religion Take it or leave it 7 Domestic politics Rush to the centre 8 The hardliners Goon squad 10 The economy Melons for everyone 12 Sanctions Shackled 13 The neighbours Moving targets 15 Prospects We shall overcome, maybe

A list of sources is at Economist.com/specialreports An audio interview with the author is at Economist.com/audiovideo/ specialreports

3

S P EC I A L R E PO R T IR AN

forms last longer than radical change.”

The appetite for revolution has TURKEY TURKMENISTAN waned on all sides. Reformists are tired Caspian Tabriz Sea Ashgabat after their failed attempt in 2009 to push Zanjan Ramsar aside a government they considered illeBonab CYPRUS Mashhad gitimate because the vote was rigged.

Qazvin Tehran SYRIA Mediterranean LEBANON Fordow Protests were put down bloodily, remindParchin Damascus Beirut Sea IRAQ Arak Qom ing many of the unhappy years after the ISRAEL Natanz revolution. Since then, reformists have reBaghdad Amman AFGHANISTAN Saghand Isfahan Yazd coiled at political bloodshed in neighEGYPT JORDAN bouring countries. Conservatives, for I R A N Cairo their part, have come to see revolution as Shiraz KUWAIT a threat to their interests abroad; regimes PAKISTAN S A U D I Bushehr they fostered in Iraq and Syria are fighting A R A B I A e Gchine Gu Strait of rebellions not unlike Iran’s home-grown l f BAHRAIN Hormuz Iranian nuclear facilities: one in 1979. “The Arab spring fallout has QATAR Military Civilian scared everyone,” says a Western dipto OMAN Riyadh Uranium mines lomat in Tehran. “Iran is now a bastion of 500 km INDIAN OCEAN OMAN U.A.E. stability. The question of the validity of Taliban removed Saddam removed Hamas takes Arab US troops the regime has been settled.” from Afghanistan from Iraq power in Gaza spring leave Iraq Yet although revolutionary fervour 2000 02 04 06 08 10 12 14 has waned, Iran’s 1979 revolution itself reKhatami Ahmadinejad Ahmadinejad Rohani mains a source of legitimacy for the regime. Many Iranians, or at least the ethnic Iran branded part Nuclear negotiations Sanctions Sanctions Currency Nuclear of “axis of evil” with Iran fail tightened tightened collapses talks Persian majority among them, continue further begin to associate it with national liberation from foreign oppression. Not being Arab, Turkic or South Asian, they feel friendless 2 World Bank. John Limbert, an American diplomat held hostage among their neighbours. This is vital to understanding Iranian in Tehran in 1979 who served his country until 2010, points out foreign policy and helps explain why the nuclear programme enthat “almost nobody in Washington has been to Iran in decades.” joys widespread popular support despite the pain that the sancYet the country has unmistakably changed. The regime tions have inflicted. Many regard it as a symbol of national may remain suspicious of the West, and drone on about seeding strength at a time of perplexing social changes. This special rerevolutions in oppressor countries, but the revolutionary ferport will examine the effect of those changes on Iran’s politics, its vour and drab conformism have gone.

Iran is desperate to trade with whomever will buy its oil. Globalisation trumps puri- Many regard the nuclear programme as a symbol of tanism even here. national strength at a time of perplexing social changes Revolution as a political lodestar has a limited shelf life. Adam Michnik, a historian who helped to overthrow the Soviets in Poland, once said: economy and its place in the world.

“Revolutions have two phases: first comes a struggle for freedom, Hardliners have long railed against “Westoxification” (the then a struggle for power. The first makes the human spirit soar title of a book by Jalal Al-e Ahmad, published in 1962), yet in their and brings out the best in people. The second unleashes the daily lives they are now surrounded by Western consumer worst: envy, intrigue, greed, suspicion and the urge for revenge.” goods, computer games, beauty ideals, gender roles and many Iran followed this pattern. First came courageous street protests other influences. Iranian culture has not disappeared, but the traduring the 1979 revolution, then the infighting started. Thouditional society envisaged by the fathers of the revolution is resands were executed, properties were seized, bread was short. ceding ever further.

The most visible shift is in public infrastructure. Tehran, the Colour me mellow capital, is a tangle of new tunnels, bridges, overpasses, elevated Arguably, there is a third phase to a revolution: the struggle roads and pedestrian walkways. Shiny towers rise in large numfor acceptance. Once power is secure, revolutionaries often seek bers, despite the sanctions. Screens at bus stops display schedrecognition by strong outsiders. In a globalised world, that ules in real time. Jack Straw, a former British foreign minister and means engaging with the great trading countries. Children of Iraa regular visitor, says that “Tehran looks and feels these days nian revolutionaries have long followed this path. Privilege for more like Madrid and Athens than Mumbai or Cairo.” them equals access to Western education and Asian consumer Smaller Iranian cities have changed even more. Tabriz, Shimarkets. Even hardliners allow their children to jet around the raz and Isfahan are working on underground railways. Half the world. The offspring of Ayatollah Ruhollah Khomeini, who led traditional bathhouses in Qazvin, an industrial town west of the revolution, have flocked to Instagram and embrace Western Tehran, have closed in recent years. In a basement with a domed mores. Seven of his 15 grandchildren have openly criticised the ceiling built 350 years ago, the forlorn manager sweeps around regime. Many of the students who took American diplomats two kittens and bemoans the loss of a 700-year-old competitor, hostage 35 years ago have become reformists and wish to see musing that “people now have bathrooms with hot running wacloser ties with the West. Ebrahim Asgharzadeh, who was one of ter.” In Yalayesh, a remote village near the Caspian sea, entertaintheir spokesmen and then served on Tehran’s city council, now ment remains old-fashioned: a Kurdish strongman, Ismail the says: “I no longer take radical actions and I believe gradual reHero, shows off a lion in a cage on the back of his blue truck. Still, 1 Ankara

ARMENIA

AZERBAIJAN

Baku

UZBEKISTAN

Th

4

The Economist November 1st 2014

SP EC IA L R E P O R T IRA N

2 two years ago the government finished piping natural gas into

every house, making winters with temperatures of -20oC “tolerable for the first time”, says a spectator.

During the eight-year presidency of Mahmoud Ahmadinejad, which ended in 2013, prosperity spread rapidly. Loans, handouts and social-housing programmes, however corrupt and ineptly run, showered billions of oil dollars on the poor. Many found white-collar jobs in government agencies. The middle class ballooned. Villagers streamed into Tehran to buy property as GDP per person rose from $4,400 in 1993 to $13,200 last year (at purchasing-power parity). Despite the sanctions, Iran does not look like beleaguered Cuba; people drive new sedans made locally, not 1950s Chevrolets. Life became harder when sanctions

were tightened in 2011, but even now Iranians live much better than most of their neighbours.

Prosperity has inspired an obsession with technology that restrictions on internet access cannot dampen. Facebook is the primary medium for half the country’s youth and Twitter is used by officials to put out statements—never mind that both are banned. Freedom House, an American human-rights lobby, ranks Iran last in the world in terms of internet freedom, but in reality access is cheap and fast. (The fastest speeds are achieved near seminaries, since clerics preach online and get priority on fibre-optic cables.)

Although the media are controlled by the state, uncensored news is easily available. Foreign websites like Tehran Bureau, 1

Take it or leave it Ordinary Iranians are losing interest in the mosque

BY LAW, ALL public buildings in Iran must have prayer rooms. But travelling around the country you will find few shoes at prayer time outside these rooms in bus stations, office buildings and shopping centres. “We nap in ours after lunch,” says an office manager.

Calls to prayer have become rare, too. Officials have silenced muezzins to appease citizens angered by the noise. The state broadcaster used to interrupt football matches with live sermons at prayer time; now only a small prayer symbol appears in a corner of the screen.

Iran is the modern world’s first and only constitutional theocracy. It is also one of the least religious countries in the Middle East. Islam plays a smaller role in public life today than it did a decade ago. The daughter of a high cleric contends that “religious belief is mostly gone. Faith has been replaced by disgust.” Whereas secular Arab leaders suppressed Islam for decades and thus created a rallying point for political grievances, in Iran the opposite happened.

The transformation of Shia Islam into an ideology undermined both the state and the mosque. The great irony of the Islamic revolution is that inadvertently it did more to secularise the country than the tyrannical shah, who ruled Iran after a coup in 1953 and persecuted clerics. By forcing religion on people it poisoned worship for many. They are sick of being preached at and have stopped listening.

Some have found salvation in materialism. Ever more shops and malls have sprung up. In the words of Saeed Laylaz, a noted economist, “You can’t shower a trillion dollars in oil money on a society in a decade and expect it to stay pious and revolutionary.

People get comfortable.” This is not unique to Iran. “The country is Islamic in much the same way that Italy is Catholic,” says a The Economist November 1st 2014

southern European diplomat. “Everyone professes to believe, but in private we cheat on our taxes and our wives.”

The clerics’ power has waned and is mostly indirect. Many of them have withdrawn to seminaries and retain little say in the day-to-day management of the economy and foreign affairs, though they are still consulted on matters of principle. Western negotiators in the nuclear talks report that their Iranian counterparts often shift positions after trips to Qom, the cradle of the Islamic revolution. The clergy also has vast financial resources and thus economic influence. And Iranians remain a spiritual people who see Islam as part of their identity.

What many have moved away from is institutionalised religion—as far as they can.

Women still have to cover their hair in public.

They are banned from sports stadiums, and buses are segregated, with women sitting in the back behind a barrier. Yet female Arab visitors say they feel freer in Iran than at home, where misogyny is “less organised but more ingrained”, as one puts it. Female students outnumber men by 2:1 at many Iranian universities, leading to calls for male quotas. A recent survey of young adults by Iran’s parliament suggests that 80% of unmarried women have boyfriends.

Nowhere is change more apparent than in Qom, the religious capital. Pilgrims throng the shrines and listen to anti-Western sermons given by turbaned ayatollahs. But this is mostly a veneer. Government offices and seminaries on Martyr Street, which the locals call Time To Have Fun Street, are dwarfed by the multi-storey Pearl shopping mall, where the female mannequins wear tight jeans. In the past 15 years Qom’s population has risen tenfold, to 1.5m. Tidy suburbs line new ring roads and an elevated monorail.

The city has grown rich on the pilgrims,

Signal fading as have the clerics. Restricted in their choice of robes and obliged to spend many hours studying every day, they splash out on expensive glasses, says the owner of an eyewear shop. Some sport bright yellow slippers, a sign of virility, according to an obscure religious text. “Relations between the unmarried are tumultuous,” ventures a former seminary student. “Private lives are full of vice. We have the highest rate of alcohol consumption in the country.”

Men and women mix openly in cafés that once closed early but now stay open into the night. Face veils used to be common among women but were banned after three men wearing them entered a local school and groped the girls.

5

S P E C I A L R E PO R T IR AN

2 based in London, fill the gaps. Iranians access them using virtual

private networks (VPN). Almost everybody has one. Sitting under a tree in the Alborz mountains, a group of farmers nod cautiously when asked about internet access. One of them explains later that most download “sexy films”, hence the shy response.

Pornography, although strictly banned, blazes a trail for freedom.

“The government tries to put up controls, but people are well versed in evading them,” says one of Iran’s first bloggers. A lot of effort has gone into trying to mimic China’s strategy of nurturing local websites that can be controlled, such as salam.ir, a search engine. But most of these have failed spectacularly because access to superior foreign competitors is easy. So-called VPNtrepreneurs sell the software and access codes to bypass controls. A 21-year-old wearing cordless headphones says he charges a dollar a month or $10 a year and has 80,000 clients. His day job at an IT company is a cover. Occasionally he pays the cyber-police a few hundred dollars in bribes.

The hunger for free information is fuelled by rising education levels, which are now comparable to those in Western countries. In 2009, 34% of Iranians in the relevant age group went to university. Three years later the number had gone up to 55% and is said to have climbed further since then, mostly thanks to the huge expansion of Azad University, which now has over 100 campuses and 1.5m students. Iran’s cabinet has more members with PhDs from American universities than that of America itself; the president, Hassan Rohani, got his in Scotland. According to SCImago, a Spanish firm that monitors academic journals, Iran’s scientific output has increased by 575% in the past decade.

The country also publishes three times more books than all Arab nations combined.

The vastly expanded education system, which makes particular efforts to reach poor and rural families, has acted as a catalyst for independent thinking. The art world has opened up. Film scripts still require approval, but religious themes have faded.

Culture is no longer a mere propaganda tool.

One of the knock-on effects of these social changes has been a demographic shift. Iran is fast becoming a middle-aged country (see chart 1). After the revolution the birth rate soared, but as Iranians became more prosperous and educated it started falling and eventually dropped below pre-revolution levels. The size of the population has doubled since the 1980s but the number of births has halved. There are no reliable figures, but experts put it at 1.6-1.9 children per woman, broadly in line with Euro-

Middle-aged spread Population, by five-year age group, m Iran

Iraq 4

100+

Turkey MEN WOMEN 2 – 0 + 2

100+

4 100+

90-94

90-94

90-94

80-84

80-84

80-84

70-74

70-74

70-74

60-64

60-64

60-64

50-54

50-54

50-54

40-44

40-44

40-44

30-34

30-34

30-34

20-24

20-24

20-24

10-14

10-14

10-14

0-4

0-4

0-4

Source: UN

6

MEN WOMEN 2 – 0 + 2 4

2

A nation of scholars Enrolment in tertiary education Iran, m

Per 100 people 6

5 Turkey 4

Iran

5 4

3

Egypt 3

2

Saudi Arabia

2

1

1 0

0 2002

04

06

08

10

12

2002 04

06

08

10

12

Source: UNESCO

pean rates. In neighbouring Iraq it is 3.5. The calming impact on politics is unmistakable. The largest age bracket now is 25- to 29year-olds. Soon most of them will be married and lose interest in street protests.

Nor are they much interested in religion (see box, previous page). The majority of Iranians are Shia Muslims; they generally put less emphasis on public worship than Sunnis, but that alone cannot explain the many empty mosques. Friday prayers at Tehran University—often the place for ideological pontificating by clerical leaders—are well attended, but in the provinces it is different. Few believers turn up in the main mosque in Zanjan, a soaring concrete structure with double-glazed windows and powerful air-conditioning near the Azeri border.

All these social changes have had a palpable effect on Iranian politics. In the presidential election last year most of the debate was focused on which candidate was the better manager, even among conservatives. Few tried to bring in religion, which was seen as a vote-loser. Nasser Hadian, an academic and government adviser, says that “ideology has been losing its potency in domestic politics.” Ten-storey-high murals showing martyred fighters still stare down from the façades of prominent buildings, but Iranians are generally fed up with mass mobilisation and indoctrination, and most of them prize individualism above public duty. The death-loving idealism of the past has become a minority interest.

The winner of last year’s election, Mr Rohani, is pursuing a moderate agen1 da. His government is staffed by pragmatic technocrats rather than messianic nationalists. It has allowed Iran’s people more freedom, though many restrictions MEN WOMEN remain. As one local journalist puts it, 2 – 0 + 2 4 “We can now print things that were offlimits last year, but of course not everything.” Headscarves have crept backwards, yet women who discard them altogether may still be detained by the “morality police”.

Mr Rohani seems to recognise that past belligerence has hurt Iran. In an article in the Washington Post last year he wrote: “We must work together to end the unhealthy rivalries and interferences that fuel violence and drive us apart.” But does he mean it, and if so, will the rest of the political establishment support him? 7 The Economist November 1st 2014

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Domestic politics

Rush to the centre Iran’s political elite maintains a delicate balance

bia University and doyen of America’s Iran-watchers.

Who might succeed the 75-year-old Mr Khamenei is the subject of endless speculation. No heir apparent has emerged, and some observers worry that when he dies a destructive power struggle could ensue. But the Islamic Republic’s system of governance, or nezam in Farsi, has a strong collective identity and seems quite capable of coming up with a successor. Even though members compete fiercely with one another, they acknowledge that without a supreme leader who is acceptable to all sides the nezam cannot survive.

Still, competition can get out of hand. In the late 1990s, after Mohammad Khatami, the first true reformist, was elected president, tensions rose to the point where competing power centres were in open revolt. Conservatives more or less declared war on their own government. The supreme leader feared the system might crash unless he curbed reformist ambitions. In 2005 Mr Ahmadinejad, a conservative provincial politician thought to be a loyal standard-bearer, succeeded to the presidency.

But the new president turned out to be very much his own man. He had no interest in unifying the system and instead built a separate power base for himself. He took on vested interests in much the same way his predecessor had done but offended reformists as well as conservatives. He won re-election in 2009 by rigging the vote. The supreme leader and other conservatives supported him in this, given that the likely winner was another reformist. The subsequent revolt by millions on the street, though quickly put down, again threatened the system’s survival. The plan to achieve greater coherence had failed.

AYATOLLAH KHOMEINI, THE founder of the Islamic Republic, was essentially an anarchist. Having been persecuted by the shah’s secret police, he despised state structures. Yet after grabbing power he quickly realised that the gains of the revolution could be cemented only with the help of permanent institutions. So he set out to build them, lots of them, sometimes with the explicit intention that they should keep an eye on each other: the army held in check by the revolutionary guard, justice dispensed by clerics as well as by civilian judges in separate courts, militias performing some of the same functions as the police, an elected president facing an appointed supreme leader.

Khomeini mimicked America’s Founding Fathers, creating checks and balances and occasional gridlock.

Three and a half decades later, Iran’s political system is neither a free-flowing democracy nor a monolithic dictatorship. As one dissident says, “We have freedom ofexpression, just not freedom after expression.” Public debates are fierce, but often amount to little more than shadow-boxing by an elite that makes A semi-democratic legitimacy decisions behind closed doors. What is remarkable is the size of this elite. Thousands of politicians, clerics, generals, judges, jourSo for last year’s presidential election the system reverted to nalists, academics, businessmen and others participate in deciits old ways. Four conservatives and two moderate candidates, sion-making in one way or another, shaping government policy all carefully vetted, were given a more or less equal chance to in endless and overlapping private meetings, conversations and win power. Before the vote the supreme leader said publicly that conclaves, listening to and lobbying each other. he was not supporting any one candidate, and that “all votes will Often described as a constitutional theocracy, Iran also rebe counted.” sembles a democratic oligarchy. No one man or group within the That Mr Rohani won the election was part accident and semi-representative elite holds anything more than a sliver of part fallout from the previous election. In the complicated taxon- 1 power. A coalition of naysayers can usually stop the executive from moving too far ahead. Big decisions require if not consensus then at least sizeable majorities. Assembling them takes time and stand-offs are common. But once made, decisions have a good chance of holding.

All this is achieved in the near-absence of political parties. Groupings and factions form for a time, but few have formal hierarchies and most fail to impose discipline. Compromise for the sake of a common agenda is rare.

This anarchic system just about works because at its centre sits a supreme leader (always a high cleric) who draws his authority from the revolution. Ali Khamenei, who was appointed for life in 1989, is only the second person to hold the job.

His way of operating is to wait for consensus to form in debates and step in only when he has to in order to break a deadlock. He sees himselfless as a decider than a referee. “He listens to his advisers and opponents, constantly weaving and tacking to stay in the mainstream,” says Gary Sick, an academic at New York’s Colum- Rohani, the face of moderation The Economist November 1st 2014

7

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2 omy of Iranian politics he might best be described as a centrist.

During the campaign the reformist camp stood squarely behind one of their own, Mohammad Reza Aref, a former vice-president under Mr Khatami. But shortly before the vote Mr Aref’s supporters persuaded him to stand aside in favour of Mr Rohani, believing that only he had a chance of defeating the conservative candidates. Mr Rohani would probably have won in any case, but he also benefited from the conservatives’ failure to agree on a unity candidate.

Given the reformists’ previous intransigence, it was an extraordinary decision for them to unite behind Mr Rohani. One of the senior people involved in making it explains: “We went through a lengthy and painful process, but ultimately it led to a sort of success.” From wanting to challenge the system, the reformists moved towards working within it. Before the election their leaders had hotly debated whether to take part in it at all.

Pragmatists led by Mr Khatami won. According to the senior reformist, “The hot-headed young learnt to play politics during the Ahmadinejad years. They saw that fielding candidates who are diehard reformists does not get results. They had to be more moderate, less ambitious. That’s the lesson from the many defeats of the past.”

Pick your battles Many reformists had been broken by the protests in 2009.

Given the size of the demonstrations, the number of people killed was not huge, perhaps a few hundred. But thousands endured periods of detention and abuse, saw their friends suffer and were harassed once released.

This seemed to work well for the regime. Many former protesters withdrew to protective cocoons from which they have still not emerged. They avoid the streets and take hashish at home.

Others have left the country or thrown themselves into non-political careers. Those who remain active in the public sphere have become more pragmatic and cautious, picking battles carefully and advocating patience. As Mr Hadian, the academic and government adviser, puts it: “As a reformist I now know the limits of power. We know the other side much better and we know how to deal with them.”

Attitudes in the conservative camp have changed, too, although less conspicuously. The crackdown in 2009 was risky.

Faced with a possible loss of power, the generals and clerics did what they thought was necessary to retain it. But many realised afterwards that they could not go backto the status quo. In a highly educated and well-informed society, only so much can be imposed from above. Quite a few conservatives supported Mr Rohani, seen as the candidate best placed to win popular support.

After the election the supreme leader made it clear that he stood behind the new president. His backing is not indefinite or unconditional, but it created enough breathing space for Mr Rohani to launch controversial initiatives such as engaging the West in nuclear talks. The hardliners are showing some restraint.

Both sides unenthusiastically support a “central solution” (which generally means a political compromise) to relieve economic pressure and improve Iran’s international position. Kevan Harris, an academic at Princeton, reckons that “radicals on both sides are exhausted. They have run out of ideas. Neither ambitious reforms under Khatami nor hardline isolation under Ahmadinejad proved successful.”

This does not quite amount to a new equilibrium in Iranian politics. In the past year conservatives have impeached one of Mr Rohani’s ministers, dragged an adviser into court, tried to keep the president himself off state television and frustrated his attempts to free up the internet. And the conservatives retain plenty of power through the revolutionary guards. 7 8

The hardliners

Goon squad Will the conservative camp sink a nuclear deal?

AT THE CENTRE of Iran’s establishment sits a shadowy organisation responsible for defending the ideals of the revolution. The Islamic Revolutionary Guard Corps (IRGC) is a paramilitary force rolled into an intelligence agency wrapped in a giant business conglomerate with security-related interests. It is directly controlled by the country’s supreme leader, Mr Khamenei, who is chosen by regime insiders for life and outranks the elected president.

Many guard commanders eventually end up in senior government posts, but they exert political influence long before then. Their baseej militia, made up of tens of thousands of youth volunteers, helps to keep domestic order. Baton-wielding militiamen dispersed protesters in 2009. In social clubs across the country they are moulded into conservative storm troopers. Their national snooping hotline is advertised on billboards: call 114.

The guards are dedicated to a strong Iran, both at home and abroad. The means by which they pursue their goals are often unconventional, including the funding of terror groups and the exploitation of sectarian tensions, all in the name of revolutionary change for the benefit of the downtrodden. The real aim, though, is to ensure stability at home and win greater influence vis-à-vis America and its allies abroad. The Quds Force, a specialoperations unit, fights on Iran’s behalf outside the country. Aiding the government of Syria, a long-time client, it is taking part in a civil war that has so far killed 200,000 people. The guards also sponsor Hamas and Hizbullah, the missile-toting tormentors of Israel. A decade ago the Quds Force supplied weapons to Iraqi insurgents bent on killing American soldiers. More recently it has allegedly nurtured rebels in Bahrain and Yemen.

Last but not least the guards oversee the nuclear-weapons programme. Iran has officially denied trying to build a bomb, but almost all Western analysts believe that to be its aim.

Money talks The guards preside over a vast business empire that generates a substantial income. They own mobile-phone networks, oil firms, carmakers and construction companies, mostly acquired in a $120-billion privatisation bonanza over the past decade.

Many of the firms they own refuse to pay tax or open their books to government inspectors. The guards also control smuggling networks set up to bypass sanctions.

Mr Rohani, the president, is not close to the guards and has reduced their influence in government. His relationship with them has always been difficult. Hashemi Rafsanjani, a former president, writes in his memoirs that during the Iran-Iraq war, when Mr Rohani was a presidential aide, guard commanders constantly complained about him. Under Mr Ahmadinejad about half the cabinet posts went to senior guards officers. That number has now dropped to four out of18, of whom only the defence minister is an important figure. The share of provincial governors supplied by the guards has dropped from half to a tenth.

Yet Mr Rohani is still surrounded by security folk. Five of his cabinet ministers come from the ministry ofinternal security, the successor to the shah’s secret police. The police can still be heavyhanded and wilful, and many dissidents remain in prison. Crit- 1 The Economist November 1st 2014

SP EC IA L R E P O R T IRA N

2 ics can question the competence or honesty of officials but are

never allowed to challenge the legitimacy of the Islamic Republic itself. When the justification for many policies amounts to “because we are an Islamic Republic”, political freedom is bound to remain circumscribed.

Since Mr Rohani’s election the power structure has remained unchanged and he has given few jobs to reformists. Conservative judges still hand out harsh sentences for trivial offences. Liberals who voted for Mr Rohani seem disappointed.

They describe him as a pragmatic insider who lacks ideals. A joke making the rounds in Tehran this summer draws a parallel between the reign of his underwhelming predecessor but one, the moderate Mr Khatami, and the succession by the hardline Mr Ahmadinejad, who in turn has now been succeeded by the more centrist Mr Rohani: An old man seeks out a mullah to complain about his life. “I have only one room and no food,” he says. “My women and children are crying.

What can I do?” The mullah tells him to buy a goat. The next day he comes back and says things are even worse now. “The women and children are crying and the goat is defecating everywhere. What can I do?” The mullah tells him to sell the goat. The man returns the following day, embraces the mullah and thanks him profusely. “Everything is so wonderful now that the goat is gone,” he says.

Moderates like Mr Rohani are allowed to tinker at the margins, but the hardliners will not let them stray far from traditional policies. Many still view the West with contempt and blame America for the wrongs of the world. Sermons authorised by the supreme leader are regularly filled with bitter accusations, such as that America created the extremist groups terrorising Iraq and Syria. Israel is openly despised, and Mr Ahmadinejad is not alone in questioning the Holocaust.

Arguably the regime needs external enemies to justify its repressive stance. Modern-day America is depicted as the latest

iteration of the colonial powers with which Iran has grappled for centuries, thus justifying “internal vigilance”. But suspicion of all things Western is real enough. Repeated clashes with America, not least in Iraq, have shaped the views of many. The push to acquire nuclear weapons is mostly defensive: they would be an insurance policy. Some mention North Korea and Pakistan, whose security seems to have benefited from building a bomb.

Some Western observers fear that Iran is following a strategy which Mao Zedong called “fight-fight, talk-talk” during the Chinese civil war in the late 1940s: negotiate with your adversary to weaken his resolve and put off outside intervention by holding out the prospect ofa compromise solution, but fight to win. In essence, they say, Iran is negotiating in bad faith, hiding materials and technicians at secret facilities to produce a nuclear arsenal even as the talks are in progress. Besides, they continue, dragging out negotiations and hence keeping sanctions in place serves the guards’ economic interests, since they control smuggling networks earning billions of dollars.

This argument suffers from several problems. First, cheating will be difficult. If the West signs a deal, it will insist on intrusive inspections. If Iran tries to drag out the talks, Congress is likely to impose more sanctions. And though some guard commanders may benefit from smuggling, the colonels and majors involved have no political influence. Senior generals, on the other hand, are linked to large companies whose business has been hit by sanctions like everyone else’s. An opening of trade would allow them to woo foreign investors and expand abroad.

The guards’ business interests are important, but they do not dominate the economy. A Western-educated banker in Tehran estimates that they cover just 5-10% of GDP, mostly in telecoms, energy and transport. He points out that “building a pipeline to Pakistan has national-security implications, so one of their firms gets the contract.” But the guards do not preside over a military-industrial monolith. Many enterprises are remarkably 1

Many still view the West with contempt and blame America for the wrongs of the world

The Economist November 1st 2014

9

S P E C I A L R E PO R T IR AN

2 inefficient, often relying on personal favours from former offi-

cers, of whom there are many. During the Iran-Iraq war an estimated 2m Iranians served in the revolutionary guards.

Foreign and Iranian academics have described a “subcontractor state” made up of hundreds of privatised firms with vague links to the guards but little co-ordination among themselves. This can lead to large-scale embezzlement, which can be risky. Last year Reza Zarrab, a businessman with close links to guard commanders, was arrested in Turkey on corruption charges. Mr Rohani has cancelled several government contracts in response to public outrage over corruption, and has refused to pay up for failed projects.

State within a state The hardliners are a diverse and internally divided bunch.

A former guard commander who fought in the Iran-Iraq war explains: “There are many differences of opinion. It is a vast organisation. There is not one single voice. That’s not how it works.”

Voting records in districts with guard barracks show that many support moderate candidates, including Mr Rohani.

For the most part, senior guard commanders have refrained from criticising the nuclear talks. Qassem Suleimani, the commander of the Quds Force and bête noire of the American armed forces, last year defended the doveish foreign minister and chief interlocutor of the Americans, Mohammad Javad Zarif, against radicals in parliament. Muhammad Qalibaf, the mayor of Tehran and former head of the guard air force, has championed a diplomatic solution. He takes holidays in London and occasionally flies an Iran Air jet to Paris to keep his civilian pilot’s licence up to date. In official media he is quoted as lauding “the culture of martyrdom and culture of jihad”. But privately the trained engineer talks admiringly of the co-operation between military and civilian manufacturers in Israel.

According to an academic close to the guards, “There is very little opposition in principle to a nuclear deal. General Suleimani is prepared to accept a decent deal. Iran does not want to confront America and lose. That’s not useful in terms of grand strategy. The revolutionary guards’ role after all is to stop America from feeling comfortable here.” This sentiment is echoed by other insiders. A former commander who survived a gas attack in the Iran-Iraq war says: “I don’t believe there are many hardliners who are against a deal with America in principle. A deal that preserves our dignity will encounter little opposition.” It is not clear what sort of deal would be acceptable to these kinds of Iranians, but it would certainly involve keeping thousands of centrifuges.

Hardliners have supped with the devil on past occasions, most notably in 1988, when Iran made peace with Saddam after eight years of terrible war, and in 2001, when it co-operated with America following the overthrow of the Taliban in Afghanistan.

Last year the supreme leader advocated “heroic flexibility” in affairs of state, an allusion to the controversial peace made by the second Shia imam, Hassan, with the Sunni Omayad caliphate in the 7th century. His conduct is often compared unfavourably with that of his brother Hussein, the third imam, who died fighting against overwhelming odds.

How far might Iran’s flexibility stretch? Its anti-Israel rhetoric has always sounded somewhat hollow. Yasser Arafat sided with Saddam in the Iran-Iraq war in the 1980s, for which many Iranians never forgave the Palestinians. Mr Ahmadinejad’s Holocaust-denying was mostly for foreign consumption. An Iranian attack on Israel would be devastating, but is highly unlikely to happen. The revolutionary guards are good at fighting guerrilla wars, but Iran’s conventional forces are in poor shape and most of their equipment is ancient. In its latest assessment, the Pentagon notes that “Iran’s military strategy is defensive.” 7 10

The economy

Melons for everyone A mixture of Western sanctions and bad economic management has hit prosperity ECONOMIC CONSIDERATIONS USED to play a vanishingly small role in Iranian politics. As Ayatollah Khomeini, who led the 1979 revolution, famously said: “We did not rise up to get cheaper melons.” For decades conservative ideologues chased Utopian visions, whatever the cost, while liberals hungered for political reforms.

That has changed in recent years. Debate in last year’s election focused on boosting the economy. Mr Rohani won because he was seen as the candidate most likely to achieve that. Conservatives used to be anti-trade, in keeping with the autarkic and socialist sentiment ofthe revolution. Now even the supreme leader endorses globalised capitalism. Asked why, a senior official laughs and says, “My son is in grade two and was recently standing for election as class president. I had high hopes. He is a popular guy and articulate, too, and yet he lost. I couldn’t believe it. I asked him, ‘what did you campaign for?’ ‘Justice and dignity’, he said. ‘And your opponent?’ ‘He promised the class better lunch and longer breaks between lessons.’ ” Iranians today live much more comfortably than they did a generation ago, but the past three years have been tough. Busi- 1 The Economist November 1st 2014

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the past, thanks to free-flowing oil revenues, governments had always been able to create jobs, feed the poor, rescue banks, subsidise industry and buy off critics. But now, for the first time in a decade, the coffers are empty and the budget is in deficit.

According to American government estimates, the Iranian economy is 25% smaller today than its pre-2012 growth trajectory indicated.

The proximate cause of this dramatic plunge was the launch by Western governments of one of the most stringent sanctions regimes ever, designed to force an end to Iran’s nuclear-weapons programme (see box, next page). Iran’s main oil customers in Europe stopped buying almost overnight. America’s government banned the clearing of dollar payments, most of which go through the American financial system, by Iran’s central bank and anyone dealing with it. Iran’s government assets abroad were frozen and hundreds of state-linked firms targeted directly. Oil exports, which in 2011had been running at about 2.5m barrels a day, declined by at least half. Imported industrial components became impossible to get hold of, fuelling unemployment and inflation.

Some non-Western states ignore the sanctions and continue to trade with Iran.

The Iranian government tries to pay them in gold and turns a blind eye to smuggling, profits from which have set off a construction boom. It is hard to know how much trade still gets through, but sanctions have certainly made a serious impact.

The debate on their effectiveness has created some strange bedfellows. Western and Iranian hardliners both argue that the country’s falling living standards are solely due to sanctions—the Westerners to claim a political victory, the Iranians to blame their enemies for an ill that is partly self-inflicted.

“The bazaar is ruined,” says one shopper.

“And I feel ashamed that I can no longer afford the same food.

I cannot invite anyone to my home”

2 nesses and consumers are suffering from the effects of much

tighter sanctions imposed in 2011. “You literally see fewer people with shopping bags on the streets,” says a banker in Tehran. “My normally busy plumber tells me he often doesn’t get his first client until mid-week.” The merchants in the bazaar in Qazvin report a drop in revenues of between 50% and 75%. A tomato-seller reckons these are the worst times he has seen in 25 years. Merchants open later or stack and restack shelves. “The bazaar is ruined,” says one shopper. “And I feel ashamed that I can no longer afford the same food. I cannot invite anyone to my home.”

Iran’s economy is the third-biggest and most mature in the Middle East. It has a large industrial base, an educated workforce and a service sector which in 2012 accounted for 52% of the economy. That year, though, GDP fell by 5.8%, according to the central bank, and last year it dropped by another 2%. Unofficial figures are even worse.

Over the previous decade the economy had been growing at an average rate of 5.1% a year. When it keeled over, inflation at one point shot up to over 50%, and salaries failed to keep pace. In real terms, private pay dropped by 35-40%, and government employees lost up to 50%. At least half the population suffered a dramatic loss of income. In one week in October 2012 the currency plunged by 40% against the dollar in the black market, creating panic. At its lowest point the rial was down 75%. Unemployment has rocketed. Car production, which used to account for 10% of GDP and employ 1m people, fell by about 70%, according to industry sources. A Mercedes factory in Tabriz that a few years ago was making 80 engines a day now produces just two.

All this has caused a surge of popular discontent. As former revolutionaries, the country’s leaders are aware of the dangers, yet they struggle to respond because the state has no money. In The Economist November 1st 2014

A black hole filled with oil Iran’s economy is so inefficient, corrupt and bloated that it was heading for a fall even before sanctions. Almost all Iranians receive cash transfers meant for the poor. Last year the state spent $100 billion on subsidies, a quarter of GDP. Until recently diesel cost the equivalent oftwo American cents per litre. Turkey, which has a population much the same size as Iran’s and is more industrialised, consumes about 60% less fuel. Iranian government offices are vastly overstaffed. The oil ministry has expanded from 100,000 employees in 2005 to 260,000 today. Many abuse their position. Transparency International, a Berlin-based lobby, classes Iran as “highly corrupt”. Officials routinely use public funds to invest in foreign property deals. According to one well-placed observer, “politics is a distraction from making money.” Parliamentary investigators have given warning that if the full extent of political corruption were revealed, it could cause “social shock”. Imports of luxury cars increased fivefold between 2011 and 2013, whereas sales of modest Iranian-made cars halved.

The misallocation of funds on a gargantuan scale has hurt the private sector. It accounts for only about a quarter of corporate revenues, and many firms are teetering on the verge of bankruptcy. The official figure for non-performing loans, at 18%, may be far too low. “The lack of investment capital is the coun- 1 11

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2 try’s biggest problem. We’re $300-400 billion short every year,”

says Mr Laylaz, the economist. Since 2006 investment in industry has fallen by 10-15% a year.

The banking sector is dysfunctional. Banks lend almost exclusively to state-affiliated firms. Small and medium-sized enterprises cannot get loans. The dearth of finance has spawned some ingenious solutions. For example, private landlords use apartments as collateral to borrow from tenants in lieu of rent.

Management of the Iranian economy had been poor since the revolution, but under Mr Rohani’s predecessor, Mr Ahmadinejad, it got even worse. During his eight-year tenure oil revenues more than tripled, thanks to steep price increases, and more money flooded into government coffers than in the preced-

ing century, $800 billion in total. He spent all of it, shovelling vast sums into construction projects. Provincial towns are littered with unnecessary bridges and bypasses. His prestigious Mehr housing project created 200,000 apartments throughout the country without access to water, gas or sewerage, most of which now stand empty.

In theory some of Mr Ahmadinejad’s policies were sound.

He tried to boost the private sector by selling state assets. Nine of the ten biggest companies on the Tehran stock exchange were listed in the past decade. Boards and shareholders are no longer toothless. Directors increasingly demand proper accounts, and annual general meetings can be contentious. The boss of the Asia Insurance Company was recently told by a shareholder: “A 1

Shackled The story of the world’s most elaborate sanctions regime FOR GOVERNMENTS THE world over, slapping sanctions on the Islamic Republic has proved popular and uncontroversial at home. America started it in 1979 in response to its diplomats being taken hostage in Tehran. It added more restrictions after Iranian-sponsored militants bombed its barracks and embassy in Lebanon in 1983, then tightened them further in the 1990s and again after 9/11, for which Iran was not responsible but which heightened sensitivities in the West.

After 2005 America got company, thanks to growing worries about Iran’s nuclear programme. Rich European and Asian countries and other governments sympathetic to America, from Australia to India, jumped

on the bandwagon, as did the UN. After 2010 the screw was tightened once more until in November last year negotiators agreed to ease sanctions for the duration of talks on Iran’s nuclear programme.

America had previously sanctioned Iran for sponsorship of international terrorism, domestic human-rights abuses and arms proliferation, but over the past decade most sanctions were a response to the nuclear programme. At first they were aimed at some of the companies and individuals involved, then at the entire economy.

The sanctions regime is made up of a bewildering multitude of laws, executive orders, agency directives and UN Security

Council resolutions. They affect Iranian assets held abroad, foreign aid, visas, insurance, shipping, trade and investment, currency transfers and other transactions, especially those involving the central bank in Tehran, oil sales and the energy sector generally. Even gifts over $100 are forbidden.

Some goods and services, notably medicine, are exempt, but the overall effect of the sanctions regime has been to make it very difficult for Iranian individuals, companies, banks and state institutions to interact with the outside world, despite a certain amount of cheating. As the charts show, the impact on Iran’s economy in recent years has been pervasive and profound.

Where it hurts GDP

Consumer prices

Youth unemployment rate

Oil production

% change on a year earlier

% increase on a year earlier

15- to 24-year-olds, %

Million barrels per day

2004

06

08

10

8 6 4 2 + 0 – 2 4 6

12 13

2004

06

08

10

Official exchange rate

12

2.0

5,000

1.5

10,000

0

10

12

14

30,000

1

20 2006

08

10

12

2004

14

Imports

2004

06

08

10

12 13

0

Exports

$bn

$bn

25,000 08

2

22

20,000

2004 06

3

24

15,000

0.5 12 13

14

0

Rials/$ Inverted Scale

1.0

10

4

26

10

Rials against the dollar

08

5

28

30

Vehicle production

06

30

40

20

Units, m

2004

50

06

08

10

12 13

80

160

60

120

40

80

20

40

0

2004

06

08

10

12 13

0

Sources: Economist Intelligence Unit; EIA; Statistical Centre of Iran; Central Bank of Iran

12

The Economist November 1st 2014

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2 donkey could run this company better.”

But the privatisation programme still leaves much to be desired. Majority stakes were regularly sold to entities close to the state, including public pension funds, which in some cases received their stakes in lieu of money owed to them by the government. Although asset sales were open to anyone, private investors at home lacked the capital to buy large stakes and foreigners were put off by sanctions. Analysts speak of the rise of a semiprivate sector.

Devaluations have made some parts of the economy more competitive. For years, Iranian goods were expensive in Iraq because of Iran’s overvalued currency. When sanctions caused the currency to slide, Iranian products almost overnight became cheaper than those from neighbouring industrial countries such as Turkey. At home, sanctions have also kept foreign competitors out; Iranian boutiques and supermarkets are full of domestic products for the first time in a decade.

The charms of self-sufficiency Bad economic management apart, Iran’s government also inadvertently boosted the effectiveness of sanctions in two other ways. First, it had been keeping taxes too low for decades, allowing the country to become too dependent on oil revenues.

Now it has to cut spending and raise taxes at the same time. Second, when Mr Ahmadinejad came to power a decade ago he abandoned the country’s long-standing policy of economic autarky. At the time Iran was almost self-sufficient. Seeing an opportunity to boost growth, the new president brought down tariffs and struck up new trade relations. The policy was a great success, but it made Iran much more vulnerable when sanctions hit home.

The government might have foreseen this. As Mr Zarif, the country’s foreign minister, wrote in an article in a Western policy journal a few months ago, “The ongoing process of globalisation, however conceived and defined, whether lauded or despised, has brought inescapable weight to bear on the foreign policies of all states, whether large or small, developed or developing…Today most nation states, regardless of their size, power, influence or other attributes, have come to realise that isolationism, whether voluntary or imposed, is neither a virtue nor an advantage.” It is the source of the article rather than the sentiment expressed in it that is remarkable. Iran has realised it has been hit by a triple whammy of oil dependency, sanctions and inefficiencies covered up by years of reckless state spending.

In his first year in office Mr Rohani has managed to stabilise the economy. The currency has levelled out and the trade surplus has gone up. Inflation is down from 45% to 15%. The president’s team of capable technocrats expects the economy to start growing again this year, perhaps by 1.5%. Cuts in subsidies have improved government finances, though they pushed up fuel prices by 75% overnight.

Yet there is a long way to go. Most energy prices continue to be subsidised by the state; petrol still costs only 28 cents a litre.

Unemployment remains stubbornly high. Further reforms are needed to accelerate growth. Experts say these should include reducing cash transfers to the poor, reining in the generous welfare state, cutting industrial subsidies and firing hundreds of thousands of government employees.

Iranians have endured greater hardships in the past. American sanctions in the 1980s caused fuel and food shortages. For now, Iranians are not going hungry and the economy is nowhere near collapse. But in the longer run something will have to give.

Reforms will become inevitable, but if Mr Rohani can cut a deal with the West to ease sanctions, they could be introduced more gradually and less painfully. 7 The Economist November 1st 2014

The neighbours

Moving targets Iran’s position in its region, increasingly influential until recently, is becoming more precarious IRAN’S LEADERS HAVE long had immodest ambitions in the Middle East, pining for the respect of the neighbours who once conquered and converted them and even dreaming of leading a pan-Islamic alliance, however unlikely. In recent decades they have been exporting their revolution, propelled by national pride and an urge to pass on lessons from the long road to independence, but also driven by a deep fear that they—Shia Persians facing mostly Sunni Arabs—are not so much independent as alone in a hostile region.

In the 1980s the Islamic Republic set out to cultivate friends in Arab countries after bloodily thwarting an invasion by Iraq. In Syria (pictured above) it became the main sponsor of the Assad regime after the collapse of the country’s traditional patron, the Soviet Union. In Lebanon the Islamic Republic nurtured the Hizbullah militia which became the dominant political force there and, with support from Tehran, repeatedly gave Israel a bloody nose. Iran also sponsored Hamas, the most successful of the Palestinian groups warring with Israel. Support for the fight against the Jewish state won Iran plaudits in the wider Arab world.

In the aftermath of 9/11, America, Iran’s arch enemy, presented it with two gifts by removing regimes in Iraq and Afghanistan that were hostile to both of them. Revolutionary guards made sure that Saddam and the Taliban were succeeded by Ira- 1 13

S P E C I A L R E PO R T IR AN

2 nian allies. They also acquired friends in places like Sudan and

Iraq a decade ago, it would not have to worry about those same militants occupying the country’s north-west now. It had originally handed weapons to some of them to kill Americans.

Gone is the talk of a Shia crescent. Now Iranians worry about being surrounded by a “Salafi circle”, bearing in mind the Taliban’s resurgence in Afghanistan. The growing Shia-Sunni divide in the region, fuelled in part by Iran’s paramilitary efforts, is a greater threat to it in the long run than to the Sunni majority.

Once again Iran is almost friendless. Even China, Iran’s biggest oil customer but no fan of separatist insurgencies, voted for Spring’s false promise sanctions against Iran at the UN. In August Sudan expelled an IraWhen the Arab spring began in December 2010, it seemed nian diplomat and closed a cultural centre. An Iranian agent in like a boon at first. Arab youths appeared to be following Iran’s Nigeria, where a Sunni insurgency rages in the north-east, has script, rising up against secular rulers. The Muslim Brothers that been jailed for arms-smuggling. were gaining ground across the region were quasi-allies of Iran.

Ayatollah Khomeini’s vision of Iran as leading Muslims The country’s Sunni rivals became alarmed. But before long the against the West is out ofdate. Since Saudi Arabia and Egypt have Arab spring went as wrong for Iran as it did for almost everyone become noticeably less friendly with America, they can no lonelse. The protesting youths had no interest in backward-looking ger be depicted as stooges. An ideological construct is crumbling.

Islamism and anti-Western sloganeering.

As the Iranian scholar Mohammad TaThe Iranian protests of 2009 were among baar put it, “There was a time when Iran their models and Facebook was their would rely on its revolutionary ideology friend. The Muslim Brothers were soon to project power. Today, Iran uses its powoutgunned by harder sorts who target Shier to project ideology.” as as unbelievers.

Even more worryingly for Iran, it is The greatest calamity awaited Iran in not immune to the extremist bug that has Syria. Thanks in part to Iranian aid the rebefallen its Sunni neighbours. Indepengime there did not fall, but Bashar Assad, dent Shia extremism, once unknown, is the president, did not regain his footing eion the rise. Based outside Iran, radical ther. Vicious fighting destroyed the counShia satellite TV channels such as Fadak try, and the Islamic Republic’s stature arpreach war against the Islamic Republic, guably suffered more damage than if he which they regard as insufficiently ferhad fallen swiftly. vent. Hizbullah in Lebanon, increasingly Support for the slaughter of Syrian enmeshed in the compromise-laden busirebels destroyed much of the goodwill ness of government, faces similar attacks.

Iran had painstakingly garnered among Intra-sect fighting could undermine Iran’s ordinary Arabs over decades. By drafting historic claim to be the Shias’ leader. in Hizbullah to fight for the Assad regime, Iran must now co-operate with powIran also damaged the Shia militia’s popuers in the region that are interested in preserving the status quo, as it itself has bedespite the revolutionary rhetoric.

Iran must now co-operate with powers in the region that come, Overstretched and broke, it can no longer handle its commitments. Engagement are interested in preserving the status quo, as it itself with rivals would suit its interests, now has become more closely aligned with theirs.

The Rohani government has taken larity. And Iran lost its close relationship with Hamas, which had first tentative steps to reach out to neighbours, not least following been headquartered in Syria but refused to support its hosts. In the rise of IS, which has altered the geopolitical calculus for evident disgust, and perhaps sensing Iranian weakness, Hamas everyone. Officials have held talks with the Gulfstates, including moved to Qatar, into the arms of a new sponsor.

Saudi Arabia. Joint military operations may be some way off, but All the while Iran spent billions of dollars propping up the informal co-ordination between once hostile forces is already in Assad regime, turning public opinion at home against the war. progress in Iraq. In the country’s north, American jets have University students openly grumble about the waste of money cleared the way for Iranian-controlled militias. America and Iran as tuition fees rise. “How do you say ‘quagmire’ in Farsi?” asked are also accommodating each other in Baghdad’s corridors of an American website last year, suggesting that Syria could be power. At American insistence, Nouri al-Maliki, Iraq’s highly di“Iran’s Vietnam”. visive prime minister, was forced to step down this summer by After three years of trying and failing to defeat the insurgenhis patron, Iran, and replaced by someone less sectarian. cy in Syria, another Iranian ally has now fallen victim to it. HardInternational relations in the Middle East still involve fierce line Salafi rebels who have made a habit of beheading Western competition for influence. Deep chasms remain. But the big powhostages this year swept across the border into parts of Iraq and ers know that the most likely solution to their multiple conflicts declared a Sunni “Islamic State” (IS). This damaged the Iranis a brokered peace, along the lines of the one that ended the Lebfriendly government in Baghdad and once again brought hostile anese civil war in 1990. Iran has already published a plan for a forces close to Iran’s borders—both Salafists and Americans. “political solution” in Syria. It is not especially attractive, yet it After decades of exporting revolution, Iranian generals are points the way forward. learning a new term: “blowback”. If Iran had aided rather than In the end, the likelihood of detente hinges on what haphindered America’s campaign against al-Qaeda insurgents in pens in the nuclear negotiations. A deal with the West on its own 1 elsewhere in Africa. Iran’s influence grew steadily.

Sunni neighbours worried about a “Shia crescent” stretching from Tehran via Baghdad and Damascus to Beirut. Longstanding rivals, especially Saudi Arabia and Israel, drew attention to Iran’s nuclear programme and suggested military action to destroy it. But after getting mired in Iraq, America lost interest and eventually pulled out in 2011. The Islamic Republic never looked mightier.

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The Economist November 1st 2014

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2 would not calm the region down. Saudi Arabia and Iran will con-

tinue to view each other with mutual suspicion. But a deal would remove the threat of a military attack by Israel and America on Iran’s nuclear infrastructure, and of the inevitable retaliation, which has hung over the region for years.

If such a deal can be reached, Iran stands to regain stature over time. America would draw down troops in the Gulf in due course—one of the prizes that is rarely acknowledged. Until 1986 America had almost no presence along the Iranian shore. Today 35,000 troops sit on Gulf bases. It is conceivable—even likely— that the majority of them will leave if the situation stabilises, given defence cuts in Washington, America’s “pivot to Asia” and the shale-gas boom which makes the country less dependent on energy from the Middle East.

The American government has already begun to move away from unquestioningly backing traditional Arab allies and is shifting towards a balance-of-power policy. If Iran can lure America farther down this path, it stands to reap big benefits. 7

Prospects

We shall overcome, maybe The chances of a deal with the West MILLIONS OF EDUCATED and prosperous Iranians resent being isolated from the rest of the world. Until sanctions started to emasculate trade, life had been gradually improving.

Now many people have lost their jobs or seen their pay and savings eroded by inflation. The government, too, is having a difficult time. Oil revenues have dwindled and allies around the region are wobbling. Is relief in sight?

After nine months of nuclear talks in Geneva, the broad outlines of a possible deal with the West are becoming clear. The aim is to ensure that Iran would need about a year to build a bomb, giving the West plenty of advance warning. To achieve that, the two sides are talking about limiting Iran’s enrichment of uranium to 5% for the next decade or so, and putting the plutonium programme at Arak to irreversibly civilian use. All this would be monitored closely by international inspectors, but without forcing Iran to acknowledge past weapons tests in any detail. In return, Iran could expect a rolling (though reversible) lifting of sanctions over several years.

According to one Western official involved in the negotiations, “technical issues are not the main problem.” The tough part is convincing the respective elites back home to accept the deal that is on the table. The real negotiations arguably take place in Tehran and Washington, not Geneva. A majority of American congressmen seem reluctant to approve anything negotiated by the White House, even if their own generals say it is in America’s national interest. Mr Rohani, for his part, faces pushback from conservatives, even though a deal promises to relieve economic and regional pressures.

Opposition is driven by each side’s suspicion of the other.

Some of that may be justified. Iran has repeatedly lied about and cheated over its nuclear programme. Equally, many of the Washington-based architects of the sanctions would like to see regime change in Tehran. Both sides have covertly and overtly harmed each other in recent years, compounding distrust.

However, mutual suspicion is also driven by pride, ignoThe Economist November 1st 2014

rance, historical grievances and partisan self-interest. American suggestions in the past that the Islamic Republic might be close to collapse still rankle in Tehran. One academic close to the revolutionary guards says testily, “America keeps thinking we are about to sink, that we’ll implode. I say, just come to terms with reality.

We have figured out a stable path.”

Iranians complain that America is being hypocritical, supporting autocratic Saudi Arabia while denouncing more democratic Iran. Americans retort that the Saudis have not tried to kill or kidnap them, and point out that Iran has its own double standards, supporting the crushing ofa revolution in Syria that is similar to its own in 1979. Iranian students at Tehran University are particular aggrieved by what they see as American hypocrisy in foreign military missions, asking why Americans supplied weapons to rebels in Soviet-occupied Afghanistan in the 1980s.

The students quote from a Hollywood film on the subject, “Charlie Wilson’s War”, in which American officials intone, “Let’s go kill some Russians.” So why, they ask, were Americans so offended when Iran used similar tactics against them in Iraq?

Historical grievances lurk everywhere. Three decades ago America shot down a civilian Iranian airliner, and Iran helped to bomb America’s embassy in Beirut. Hardliners on both sides are still looking for revenge. In April Mr Rohani tried to appoint his deputy chief of staff, Hamid Aboutalebi, as head of Iran’s UN mission in New York. But the ambassador was denied a visa after an outcry in Congress because he had played a minor part in the hostage crisis in 1979. America thus deprived itself of the chance to have a trusted interlocutor on its doorstep.

Many Iranian leaders have built political careers on bashing America. To a lesser degree the same in reverse is true for some congressmen with close links to Israel. Accommodation now would cause a loss of face, maybe even of factional support.

Yet overall, the greatest obstacle to reaching a deal is ignorance rather than self-interest. Iran’s supreme leader believes that the American government, not just its hardliners, wants to see him toppled. He misread the Ukrainian revolt earlier this year as an American plot.

Enigma variations No diplomat from either Iran or America has been posted in the other’s capital for 35 years, though some Iranians have served at the UN in New York. In a documentary called “The Fog of War”, Robert McNamara, who served as America’s defence secretary in the 1960s, said that America escaped disaster in the Cuban missile crisis because its officials knew their adversaries in Moscow and could work out what sort of deal they might accept. On the other hand, America came to grief in Vietnam because it knew nothing and nobody in Hanoi. A central premise of the war—America’s fear that North Vietnam might form a communist alliance with China—ignored the fact that the two regimes hated each other.

In the absence of knowledge, people will err on the side of caution. A politically active member of the Khomeini family forcefully makes this point: When I visit a new city I figure out two or three main roads and use them to go anywhere—even if it takes longer—because I fear getting lost. Eventually I will try new, shorter routes. But as soon as I’m no longer sure where I am I revert to the thoroughfares. Regime hardliners act much the same. Occasionally they try new, conciliatory routes, but as soon as they feel insecure they revert to familiar antagonism. They know they won’t get lost that way, even if it means travelling the long way round. You have to remember that most of them have spent very little time in the West and feel intimidated by it. Just listen to all the talk of past humiliations. They regard it as a hostile environment they don’t understand. It fits into the wider historical ex- 1 15

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2

perience ofthe Shia as a minority sect. We have long been the victims, or at least defined ourselves as such, dressing in black. The most successful strategy in our past has been to hunker down, wait and distrust rather than act.

Seen in this light, the nuclear negotiators have taken courageous steps. To get the talks going, America conceded that in principle Iran could enrich nuclear fuel for civilian use. In return, Iran froze its programme for the duration of the talks. Both sides appear committed to reaching a deal. They recognise that this is a rare moment. For the first time since 1979 the governments in Tehran and Washington both want to improve relations at the same time. Previously, one or the other was always on the warpath.

Many observers believe that a deal will either be done in the next few months or not at all. Both presidents have a narrow window to sell it at home. Mr Obama is likely to face an even more hostile Congress from next January and will soon become a lame duck. Mr Rohani is struggling to hold off hardliners and cannot afford to use all his political capital on this venture. If the November 24th deadline is missed by much, the naysayers on both sides will claim that no deal can be had, making a future agreement even harder.

Others think it is possible or even likely that the two sides will formally extend the talks. They see little sign of Iranian hardliners accepting the sort of deal that is available. Yet neither they nor the Americans want to see the talks fail conclusively. Negotiations may yet drag on into next year.

The prizes to be had If the negotiators do succeed, it will be because the potential benefits would be substantial, especially for Iran. In its foreign relations, it could breathe easier and come a step closer to fulfilling its ambition of leading other nations in the region. The partial withdrawal of American troops from the Gulf would be a strategic victory. The economy would be likely to pick up. Foreign investors are ready to return to Iran. Many have visited in recent months in anticipation of an opening. Rolling back sanctions would take a long time, and difficult economic reforms will

16

still be needed. But there would be some quick results. Car production could soon double, and so might oil exports.

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For classroom use or quantities over 50, However, if he is seen as garnerplease telephone for discount information. ing too much acclaim too quickPlease send your order with payment by cheque or money order to: ly, hardliners may decide to take Jill Kaletha of Foster Printing Service him down a peg, say, by blockTelephone 866 879 9144, extension 168 ing economic reforms or boostor email jillk@fosterprinting.com ing sponsorship of foreign ex(American Express, Visa, MasterCard and Discover accepted) tremists. People close to Mr Rohani suggest that he has a lonFor more information and to order special reports and reprints online, please visit our ger-term plan to use the mowebsite mentum he would gain from www.economist.com/rights lifting sanctions into reshaping Future special reports the political system. The next The Pacific Rim November 15th 2014 step would be to win more seats Luxury goods December 13th 2014 in parliament. But how much Energy January 17th 2015 more sway he could gain is unUniversities February 14th 2015 certain. Hardliners retain conPrevious special reports and a list of trol of many levers of power. forthcoming ones can be found online: The totems of their ideology, economist.com/specialreport from denouncing Israel to insisting on the veil for women, are unlikely to disappear. Progress will be slow.

Ifno nuclear deal is signed, the domestic pendulum is likely to swing in the opposite direction. Conservatives will reassert themselves. They have already talked of running a “resistance economy”, meaning one less reliant on trade. Hostility towards the West would increase. State media would resume their mantra that America is only interested in destroying Iran.

The likely American response The would be to impose more sanctions. In potential the absence of a deal, Congress will conclude that Iran is not serious about finding benefits of a solution and tighten its grip still further. a deal The question is whether other countries will go along with it. China may no longer would be be willing to curtail trade with Iran. Russia substantial, is already in talks about a $20 billion barter deal. Some of Iran’s old trading partespecially ners in Europe could peel away too, espefor Iran cially if they feel that America is to blame for the failure of the talks. Even so, as long as American banking sanctions remain in place, trade will continue to suffer.

And if Iran still refuses to budge?

Pressure to bomb its nuclear installations would increase, but until hope of a deal has completely evaporated America seems unlikely to attack Iran when it is also fighting Islamic militants in Iraq and Syria, protecting Europe from Russia and guarding Asian allies against an increasingly aggressive China. By comparison, doing a deal with Iran may seem easy. 7 The Economist November 1st 2014

Middle East and Africa

The Economist November 1st 2014 45 Also in this section 46 The meaning of Kobane 47 Secularists win in Tunisia 47 The politics of Libyan oil 48 Spinning Iran’s nuclear talks 49 The Mugabe family spat 49 Ebola on the retreat?

For daily analysis and debate on the Middle East and Africa, visit Economist.com/world/middle-east-africa

Extremist ideology

Jail, jihad and exploding kittens AMMAN

Today’s jihadists are too extreme even for leading ideologues of holy war

A

YEAR after his extradition from Britain, Omar Mahmoud Othman, better known as Abu Qatada, a burly preacher accused of being al-Qaeda’s man in Europe, relaxes in his plush sitting-room adorned with white lilies in the Jordanian capital, Amman. He is giggling at an Instagram picture of a kitten dressed in an explosive suicide belt. Then, with fellow jihadists, he guffaws at footage on a mobile phone of Theresa May, Britain’s Home Secretary, denouncing extremists and quoting from the Koran at the Tory party conference. “Who is she to speak in the name of Islam?” mocks his scrawny guest, Abu Muhammad al-Maqdisi, one of the leading ideologues of holy war.

For more than 30 years, Abu Qatada (pictured, right) and Mr Maqdisi (left) , both Jordanians of Palestinian origin raised on the idea that the West gave their homeland to the Jews, have inspired fighters waging jihad. They went to Afghanistan to support the fight against the Soviets in the late 1980s, when al-Qaeda was founded. Later, fleeing a Jordanian death sentence, Abu Qatada sought asylum in London in 1993.

He was arrested in 2002, following alQaeda’s attacks on America in September 2001. After a prolonged legal battle, he was deported to Jordan in 2013 and, to Britain’s embarrassment, was acquitted of terrorism in September.

Mr Maqdisi, for his part, spent a total of 16 years in a Jordanian prison, before being released in June. In jail he was mentor to a

generation of jihadists and acquired a reputation as the world’s leading ideologue of holy war. Among his protégés was Abu Musab al-Zarqawi, who became leader of al-Qaeda’s branch in Iraq, the forerunner of Islamic State (IS), which controls swathes of Iraq and Syria. Zarqawi was killed by an American bomb in 2006. “I’m labelled the world’s fifth-most-dangerous terrorist,” Mr Maqdisi smirks proudly, scanning an anti-jihadist website.

Now in their mid-50s and briefly reunited out of prison, the two men take pride in the fruits oftheir labour. From a struggle on the Somali and Afghan fringes of the Islamic world, the jihad they helped to kindle now burns in the Arab heartland and laps at the gates of Israel. Even some of their politically minded rivals in the Muslim Brotherhood, who embraced civil disobedience and democratic politics during the Arab Spring in 2011, are increasingly sympathetic, following the military coup that overthrew Egypt’s elected Islamist president, Muhamad Morsi, that they will only wrest power by spilling blood.

From Syria to Sinai, where Bedouin jihadists killed 30 Egyptian soldiers last week, militants are raising the black flag of jihad, and often in the name of IS. The large coalition led by America to roll back IS opens a new chapter in what ideologues hail as the climactic battle for Islam. As if anticipating the End of Days, Abu Qatada’s young son has a ringtone on his mobile phone of the crash of an incoming missile

followed by a jihadist anthem.

But the two ideologues also have concerns. Repeatedly the jihad they advocated has spiralled out of control in the hands of their protégés, particularly in the application of the concept of takfir, the pronunciation of apostasy, which in Islamic law is punishable by death. Early radicals had applied the concept to Muslim leaders who failed to apply God’s law; Mr Maqdisi extended it to their armed forces. “Remove the tent-pegs and the tent will fall,” he says.

But the jihadists of al-Qaeda and IS have stretched the rules of engagement much further, to include civilians, non-Muslim and Muslim alike. (No matter if righteous Muslims are killed as collateral damage, argue some younger jihadists; it will only speed their entry to heaven.) Shias, deemed rafida (“rejectionists”) for siding with the losing side in a schism dating back 1,300 years, are particularly hated.

In vain Mr Maqdisi appealed to Zarqawi to stop slaughtering Shias with suicide bombs in marketplaces. When he persisted, Mr Maqdisi recalled how Zarqawi had been a drug-injecting low-life whom he had introduced to the basics of Islam in the prison cell they shared in the 1990s. Mr Maqdisi called on IS to spare the American and British civilians they beheaded. At his trial in Amman, where he was released, Abu Qatada, called IS khawarij, or “rebels”, for twisting Islamic precepts.

In an attempt to claw back his authority, Mr Maqdisi has revamped his website, the Pulpit of Monotheism and Jihad, and reformed his Sharia council, grouping a dozen or so clerics from Mauritania to Yemen.

Some fighters are still listening. When the Syrian branch of al-Qaeda, the Nusra Front, captured 45 Fijian UN peacekeepers on the border with Israel, Mr Maqdisi issued a fatwa which led the captors to release the hostages. The group’s own spiritual guide, Sami Uraydi, sat on Mr 1

The Economist November 1st 2014

46 Middle East and Africa 2 Maqdisi’s council.

IS treats these ideologues mostly as hasbeens; by its brutal methods it has seized a population and territory the size of Jordan.

On social media younger jihadists ridicule them as armchair-bound pen-pushers who dare not risk their lives in battle, says Joas Wagemakers, author of a book on Mr Maqdisi. “I don’t do explosives,” Mr Maqdisi readily admits.

Abu Bakr al-Baghdadi, the IS leader who last summer proclaimed himself Caliph, not only fights but claims descent from the Prophet Muhammad and holds a doctorate in Islamic Studies from Mustansiriya University in Baghdad (in jail in Iraq, he acted as mentor to Mr Maqdisi’s son, Omar, who was later killed). Mr Maqdisi and Abu Qatada, by contrast, have no academic titles, are largely self-taught in prison, and quote not just from the Koran but also from Dan Brown’s Vatican thriller, “The Da Vinci Code”. “It shows how religious states work,” says Mr Maqdisi.

Earlier this year IS and the Nusra Front fought battles that cost many lives and diverted energies and arms away from the main enemy, the Syrian regime of Bashar Assad. Mr Baghdadi was delusional, crowed his detractors, a wannabe Messiah protected by former goons and Baathists from Saddam Hussein’s entourage. Mr Maqdisi egged the detractors on, denouncing IS in his “war of letters”. In July, after IS captured Mosul and pushed towards Jordan’s borders, Jordan released Mr Maqdisi from prison, perhaps hoping to have secured a new ally.

But America’s coalition of Western and Arab Sunni allies against IS prompted many jihadist preachers to rethink their priorities. Several left Jordan along with hundreds of followers to defend IS’s caliphate against the new alliance of “Crusaders and Kaffirs”. Reports of coalition bombs on civilian targets such as flourmills wins more converts. “Many people now view the coalition as waging war on Islam, not extremism,” says Usama Shehadeh, a Quietist preacher in Amman who fears he is losing his flock. Leaders of Jordan’s mainstream Muslim Brotherhood admit that they are struggling to rein in their followers.

After dithering, Mr Maqdisi earlier this month called on bickering jihadist groups to be reconciled and defend Islam against the coalition. Arab rulers (including Jordan’s King Abdallah II) who joined nonMuslims to fight Muslims were apostates, he opined. On October 27th Jordan again jailed Mr Maqdisi. Judicial authorities have announced their intention to put Abu Qatada back on trial. As the war intensifies and the mood darkens, any hope that the release of the two ideologues would sow division among extremists is giving way to fear that they could help unite the ranks around the black flag of jihad. 7

The war against Islamic State

The Kurdish Stalingrad Kobane has acquired huge symbolic significance for all those fighting for it

“W

E WILL resist to our last drop of blood together… if necessary we will repeat the Stalingrad resistance in Kobane.” The words of Polat Can, a Syrian Kurdish commander, to describe the fight against Islamic State (IS) jihadists for the town on the Syrian-Turkish border may exaggerate the scale ofthe fighting, but makes plain the emotional and strategic symbolism now attached to Kobane.

On October 29th about 150 Iraqi Kurdish fighters, the Peshmerga, dispatched by cheering crowds in Irbil, set off through Turkey to reinforce their brother Kurds. The deployment was sanctioned by the Turkish authorities, after much haggling.

For the other parties to the battle— America and IS—the confrontation, now in its seventh week, has also acquired increasing importance. For IS, the expectation was of an easy victory that would have given it control over a large section of the border and the main road between its stronghold in Raqqa and Aleppo. But it has now become a test of the group’s military prowess. Winning Kobane would not just deal a crushing blow to Kurdish resistance in northern Syria, but would also send out a message of invincibility in the face of American air power.

America, too, is increasingly committed to saving Kobane. A few weeks ago American officials were keen to downplay the importance of the city, seeing it as a distraction from the wider campaign against IS.

Pentagon briefings were resolutely downbeat, suggesting that, despite air strikes, the town might fall to IS at any time. By October 13th IS controlled more than half the town. But in the days that followed the aerial bombardment on IS positions in and around the town both intensified and increased in their accuracy, thanks to direct co-operation with Kurdish fighters on the ground. By the 19th there were air-drops of weapons, ammunitions and medical supplies by C-130 transports. Some ground lost to IS was recovered.

What changed? Partly it was a perception that defeat in Kobane in front of television reporters massed on the Turkish side of the border would only stoke criticism of America’s handling of the campaign.

Partly it was a recognition that the fighting qualities of Syrian Kurds could prove invaluable in the long war. And partly it was a realisation that Kobane could be turned into a meatgrinder for jihadists.

IS has been happy to accept the challenge. As well as pouring more men and equipment into the fight, on October 27th it distributed a bizarre five-minute video in which a British hostage, John Cantlie, appeared to dispatch a “news report” from Kobane. Its purpose was to refute the idea that the battle was swinging against IS. Dresssed in black, Mr Cantlie tells the camera that America and its allies “even with all their air power and all their proxy troops on the ground” cannot defeat IS. It is still not possible say who will prevail in Kobane. Kurdish defenders appear to be outnumbered but in street-to-street fighting the heavy weapons and vehicles that usually give IS its edge are of limited use. IS is up against a foe with nowhere to retreat, an improving supply of arms and continued air support. Kobane may not be Stalingrad, but if it holds out, the psychological damage to IS will be real. 7

Cheering on the defenders of Kobane, and the US Air Force

The Economist November 1st 2014

Tunisia’s election

The secularists have it

TUNIS

Nidaa Tounes resoundingly beats the Islamist Nahda party

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N A region gripped by jihadist violence, civil war and the return of authoritarian rule, Tunisia’s parliamentary election on October 26th was an exception on many counts. Alone among the countries that saw popular revolts in the “Arab Spring” of 2011, it has remained on a path to democracy. Seemingly against the trend ofArab politics, voters inflicted a firm rebuke on Islamists and instead gave victory to the secularist coalition known as Nidaa Tounes. And the defeated Islamists of the Nahda party bowed peacefully before the verdict. A stint out of power, said its leader, Rached Ghannouchi, could be salutary.

Nidaa Tounes (“Tunisian Call”) won 85 of the 217 seats in parliament, against 69 for Nahda (“Awakening”). Nahda can still count on loyalists nationwide and has an organisational reach that is envied by other parties. Nevertheless, voters have been unimpressed by the Islamists’ two years at the helm of government, in 2012–13, particularly its inability to pull the economy out of stagnation and its failure to quash the emergence of violent jihadism. Senior Nahda figures concede that the job of running the country proved to be harder than they had expected.

Though often fractious and tainted by the presence of members of the ancien régime of Zine el-Abidine Ben Ali, the ex-

Middle East and Africa 47 president overthrown by a revolt in January 2011, Nidaa Tounes was helped to victory by the popularity of its leader, Beji Caid Sebsi. Three times a minister, he emerged from retirement in 2011 as a reassuring figure and headed the interim government that handed over to the Nahdaled coalition at the end of that year. Rattled by the army coup that deposed Egypt’s Islamist president, Nahda handed power to a technocratic government in January, after two political assassinations raised tensions. It also softened the Islamist flavour of the proposed new constitution.

Nahda would like to join a coalition under Nidaa Tounes, which has not yet made its intentions clear. The secularists could put together a government with smaller factions, albeit a rather fragile one. Moreover, opposition to Islamists is part of the raison d’être of Nidaa Tounes. The party accuses the former Nahda-led government of having undermined the separation of religion and state that was laid down by Habib Bourguiba, Tunisia’s first post-independence president. Some admire the Egyptian army’s suppression of Islamists.

Beyond the economy and the balance between secularism and Islam, security has been an important issue. Many Tunisians reckon that the Nahda-led coalition government was culpably slow in responding to the spread of jihadist ideology in mosques after the fall of Mr Ben Ali. Just days before the election, a shoot-out with alleged jihadists left one policemen and six others dead (five women among them).

The presence of armed national guardsmen and soldiers outside polling stations made for a more sombre mood than the celebratory post-revolutionary election three years ago.

Nidaa Tounes still struggles to shake off claims that it represents an attempt by members of the previous ruling party, the Constitutional Democratic Rally (RCD), to regain influence. In what was in effect a single-party state, the RCD built clientelistic relations running from taxi-drivers to corner-shop owners, lawyers, senior civil servants and—importantly for its funding— business people. Although the RCD as an organisation is long dead, these networks may have played a role on polling day.

A government is unlikely to be formed before Tunisians return to the polls to elect a new president on November 23rd. The new constitution passed in January gives more powers to the prime minister and parliament, now produced by genuine elections, rather than the president. Given that Mr Caid Sebsi, 88 next month, is the front-runner to get the job (Nahda is not fielding a candidate), it is still unclear who will become prime minister.

One possibility would be to ask the popular outgoing technocrat, Mehdi Jomaa, to form another government. He has not entirely ruled out the prospect. 7

Libyan oil

A sticky problem

Warring factions quietly co-operate to keep up oil exports. But it may not last

T

HE surreal nature of Libya’s politics, with its two prime ministers and two parliaments claiming the right to rule from opposite ends ofthe country, is encapsulated in the gleaming glass building that houses Libya’s National Oil Corporation (NOC) in the capital, Tripoli. Here Mashallah Zwai, the oil minister appointed by a self-declared government in Tripoli (which the world does not recognise) says he is in charge and that he is working amicably with his rival, Mustafa Sanalla, the NOC chairman and the de-facto oil minister of the internationally supported government, based in the eastern town of Baida.

With the largest oil reserves in Africa, it is little surprise that Libya’s state-run petroleum industry is one of the prizes in a power struggle that many fear could tip into allout civil war. But despite the crisis, oil-production levels are rising. Some 800,000 barrels flow per day, around half of the amount pumped in summer 2013, before protests and blockades across the oil belt drove production as low as 215,000 b/d. All sides have an interest in maintaining output, given that oil revenues form the pillar of Libya’s economy. Proceeds from exports are channelled first into a state-owned bank overseas, then transferred to the Central Bank, which issues salaries to 1.7m public employees on both sides of the conflict.

An oil engineer, Mashallah Zwai was installed in the NOC by Omar al-Hassi, who heads administration formed in the wake of a weeks-long battle for control of Tripoli. It was won by an alliance including 1

Crude politics Libya’s oil production, barrels a day, m AUGUST 2014: TRIPOLI FALLS TO DAWN MILITIA FEBRUARY 2011: START OF PROTEST AGAINST QADDAFI OCTOBER 2011: DEATH OF QADDAFI

2010

11

Source: EIA

12

JUNE 2013 to JULY 2014: BLOCKADE OF EASTERN PORTS

13

14

1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0

The Economist November 1st 2014

48 Middle East and Africa 2 Islamists, led by militiamen from the town

of Misrata. In Baida, some 1,000km (621 miles) to the east, sits the internationally recognised prime minister. Abdullah alThinni, who vows he will return to Tripoli whenever militiamen loyal to him “liberate” the city. While fighters broadly aligned with Mr Thinni’s government hold sway over most of the oil-producing regions, particularly in the east, the militias backing

Mr Hassi control Tripoli, home to the NOC and the Central Bank, which holds billions in accumulated oil revenues.

Awkwardly, Libya holds the rotating presidency of the OPEC oil cartel. Who will represent Libya at an OPEC meeting this month in Vienna to discuss the decline in oil prices? Nobody knows. But at least both sides of the Libyan conflict agree on one thing: cheaper oil is a serious problem. 7

Nuclear talks with Iran

Diplomatic spin

Claims that a nuclear deal is at hand are probably wide of the mark

T

O HEAR President Hassan Rohani in full charm offensive one would think that, barring a few trivial details, a deal to settle long-running concerns about Iran’s nuclear programme by the agreed deadline of November 24th is very nearly in the bag. “I think a final settlement can be achieved...the world is tired and wants it to end, resolved through negotiations,” he declared on Iranian television earlier this month; a nuclear settlement was “certain”.

The Americans are trying to rein in expectations. Wendy Sherman, who leads the American delegation at the so-called P5+1 talks with Iran (the five permanent members of the UN Security Council and Germany), noted last week that Iran had met its commitments under the interim agreement reached last year, known as the Joint Plan of Action. The discussions since July, when an extension was announced, were going better than some had expected, but not as well as might have been hoped.

The problem remained Iran’s uranium-enrichment capacity: “Iran’s leaders would very much hope that the world would conclude that the status quo—at least on this pivotal subject—should be acceptable, but obviously, it is not”.

The Iranians want to tap into what they think is a yearning in the West, after years of stalemate, to seize the opportunity for an agreement; a sentiment made all the more intense by the regional chaos and the rise ofjihadists from Islamic State as a common enemy. If Iran were cut some slack on enrichment, suggests Mr Rohani, it could be more co-operative on other issues. More subtly, he implies that without some concessions by the West, hardliners at home will scupper any possibility of a deal; the supreme leader, Ayatollah Ali Khamenei, is known to be sceptical.

Profound differences between the two sides have been apparent for months. They concern four main issues: Iran’s uraniumenrichment capacity (which determines how soon Iran could achieve “breakout” by producing enough fissile material for a bomb); clarity over the evidence of Iran’s past work on nuclear warheads; how soon sanctions would be lifted; and how long Iran would be subjected to nuclear constraints before earning the right to be treated as a “normal” signatory of the NonProliferation Treaty.

On enrichment, the division is over what Iran’s “practical needs” really are.

The West thinks the nuclear-fuel requirements for Iran’s two research reactors (the Tehran Research Reactor and the controversial Arak heavy-water reactor) can be met with fewer than 2,000 first-generation centrifuges. This would be much less than the 10,200 machines now running and the 9,000 built but not yet installed. As for the nuclear power station at Bushehr, the West says a contract with Russia to supply fuel could be extended after it expires in 2021.

Iran says it will not dismantle any of its existing centrifuges and must be able to build them up to a level sufficient to fuel Bushehr—a tenfold increase in its current installed capacity. In July Mr Khamenei said that Iran would in due course need at least 190,000 “separative work units”, a technical term indicating more than 200,000 of the current IR-1 centrifuges.

The West wants any agreement to last for up to 20 years, with sanctions only coming off in stages. Iran expects the majority of sanctions to be suspended almost immediately and for constraints to bind it for no more than five years. As for the evidence of previous work on “weaponisation”, the Iranians assert (implausibly) that there is nothing to reveal.

Huge though the gap appears, there are compromise proposals that might work if there was greater mutual trust. One, devised by the Washington-based Arms Control Association and the International Crisis Group, a conflict-resolution outfit, would entail a three-phase process. First, during an initial three-year period, about halfofIran’s installed enrichment capacity would be mothballed, pushing back the breakout period from the current two or three months to between nine and twelve months. Over the next two phases, running up to 2031, Iran would be allowed to build up its capacity roughly back to current levels, while nuclear inspectors satisfied themselves that the programme was entirely peaceful. Tehran would continue research on new centrifuges in preparation for industrial-scale production, and would receive guarantees of fuel for Bushehr.

Such a deal would only be possible for the West if backed up by a highly intrusive inspection regime. But it would be far from humiliating for Iran, while making it a lot harder and riskier than it is now for the country to attempt to breakout (or “sneakout” through a clandestine facility).

The much likelier alternative to a comprehensive deal this month is not a collapse of diplomacy, carrying the risk of escalatory sanctions and accelerated centrifuge production, but another extension of talks. There could even be a new interim agreement, locking in some gains, such as conversion of the Arak reactor to a design producing less plutonium, in exchange for further minor sanctions relief. It is not in anyone’s interests to walk away from the table just yet. 7

The Economist November 1st 2014 Zimbabwe

The Mugabe brawl

HARARE

A fierce party spat surrounds Africa’s oldest leader. Did he engineer it?

T

HE Mugabe family loves a good punch-up. The old man, Robert, Zimbabwe’s president, has always been a brawler, though a sly and eloquent one. His specialism is to set up ambitious underlings in the ruling Zanu-PF party to fight so that he can eventually chide them for factionalism and push aside the likely winner, perpetually eliminating potential rivals. The system has worked well since he took over the party in 1975. Aged 90 now, he still commands the stage.

His wife, Grace, is a chip off the old block. Aged 49, she recently started a punch-up unlike any the party has seen, forgoing the subtle ambiguities with which Bob, as he is universally known, has often wrapped his verbal blows. Her barbs have been aimed at Joice Mujuru, the 59year-old vice-president, who was handpicked years ago by the old man and until last month seemed to be the front-runner in the treacherous race to succeed him.

The first lady’s attacks have been vitriolic in the extreme, even by local standards, suggesting that Ms Mujuru might be killed and that “dogs and fleas would not disturb her carcass”. During an ill-tempered cross-country tour, involving ten rallies, the first lady repeatedly called for the vice-president’s resignation and endorsed as a replacement the 68-year-old justice minister, Emmerson Mnangagwa, one of the party’s hard men.

In 2004 the former spymaster was himself purged as the party’s prospective number two under similar circumstances.

Then, as now, the rank-and-file had started to glance past the president toward possible successors. In the case of Ms Mujuru, the axe seems to be coming down very publicly. Front pages of official newspapers amplified the first lady’s accusations ofcorruption, leading many to suspect that Mr Mugabe, who stayed quiet in public, had given his consent.

A new twist in the old game is the suggestion that Grace could succeed to the presidency, establishing a Mugabe dynasty. She was recently made head of the party’s women’s league, putting her in the politburo. She was also awarded a dodgy doctorate in sociology, based on two months’ study, from the University of Zimbabwe (from the hands of her husband).

And posters of her suddenly adorn public buses. At one rally she asked, “why shouldn’t I be president?”

But few think the former typist, without

Middle East and Africa 49 liberation-war credentials, is made of the right stuff. Countless nicknames attest to the popular distaste she evokes: Lady McGabe, DisGrace, First Shopper (for her free-spending habits in foreign capitals).

Her recent speeches, seen as unsavoury, over-the-top and unworthy of a dignitary, have further tarnished her reputation.

While the vice-president has avoided responding to the allegations made against her, surrogates including war veteran leaders have returned fire, broadening the brawl. “This is the end game,” says Ibbo Mandaza, a prominent local analyst. But is it? On October 28th the president stepped back into the ring. He lambasted his party, neither mentioning his wife nor protecting her, but calling for an end to “the war”. Taking charge, he brought forward a party congress in December by a week. It will settle the senior line-up for the next five years.

The talk in Harare is of new rules for nominations to the politburo, even of an entirely new slate. The justice minister, who is suspected of complicity in the first lady’s crusade, seems as damaged by the past few weeks’ infighting as the vice-president.

The president, meanwhile, looks and sounds in fine form for his age. Regardless of who will be elevated or demoted, he has shown himself to be the ringmaster. Everything must change so that all can remain the same—until the president’s clock runs out and he can no longer defuse the bombs he plants. Investors, who are desperately needed in the ailing economy, are disconcerted either way. Under today’s regime, little can be trusted for long. Yet what comes after is even less clear. 7

By the Grace of Bob

Ebola

A glimmer of hope

BAMAKO AND FREETOWN

Some rare good news from the Ebola epidemic

J

UST two months ago the bodies of Ebola victims turned away from teeming treatment centres lay dead in the streets of Monrovia, the capital of Liberia. Now, in those same facilities, many of the beds lie empty. Could the outbreak that has so devastated the country finally be subsiding?

It is too early to say for sure but Bruce Aylward, who leads the World Health Organisation’s response to the Ebola crisis, is cautiously optimistic. The number of new cases in Liberia, which has been hardest hit, appears to be falling. The data are unreliable since many cases go unreported, not least because families are afraid of hospitals. But the trend seems real, says Dr Aylward, citing a levelling-off of lab-confirmed cases and a decline in burials. The Red Cross collected 117 bodies in the last full week of October in and around Monrovia, compared with a peak of 315 a week.

If the good news is confirmed, changes in behaviour—prodded by a vigorous public-awareness campaign—are the likely cause. Dr Aylward credits a “rapid scale-up” in safe burials and reduced contact between the healthy and the ill. Liberia has also isolated a “huge number” of Ebola patients and traced many of those who have come into contact with them.

With beds now lying empty, it may seem unnecessary for America to fulfil its promise of building 17 new 100-bed Ebola treatment centres in Liberia. But Dr Aylward believes the resources are still needed; there is a danger that the disease will be pushed back in one area only to re-emerge elsewhere. It has happened before.

The broader epidemic is far from over.

The overall number of infections has risen to 13,703, from 9,936 a week ago—though this is largely due to the late reporting of old cases. Almost 5,000 people have died.

In parts of Guinea and Sierra Leone the number of cases has surged recently. Suspicion runs deep. This week an Ebola ambulance was forced off the road in the Port Loko district of Sierra Leone after being stoned by irate youths, unhappy that their relatives were being taken away. An angry mob in Freetown ripped down Ebola posters, until police intervened with tear gas.

Meanwhile in Mali, the bus journey of an infected two-year-old girl from Guinea has raised worries that the epidemic might keep spreading. Dr Aylward says the first glimmer of hope does not mean that Ebola has been tamed. “It’s like saying your pet tiger is under control.” 7

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The Economist November 1st 2014

Europe

Also in this section 51 Russia and the West 51 Turkey and Europe 52 French public finances 52 Germany’s far left 53 Charlemagne: The environmental union

For daily analysis and debate on Europe, visit Economist.com/europe

Ukraine’s election

Good voters, not such good guys KIEV

The poll results were promising, but the future for Ukraine is dauntingly difficult

T

O ALL appearances, Ukraine’s parliamentary election on October 26th was a triumph. Reformists mostly won and voters rebuked the far right and far left. Western allies heaped praise on the pro-European, pro-democratic results. Yet Ukraine remains troubled and deeply divided.

In an upset, the People’s Front party of Arseniy Yatsenyuk, the prime minister, narrowly beat President Petro Poroshenko’s bloc by 22.2% to 21.8%. This means that Ukraine will keep two power centres, as Mr Yatsenyuk seems sure to stay in office. Mr Poroshenko had hoped to win a majority and install a loyalist instead. Now the People’s Front and the Poroshenko Bloc must form a coalition, probably with the third-placed Samopomich (self-help) party, led by the mayor of Lviv. The six parties that reached a 5% threshold will fill half of the 450-seat parliament (Rada) from their party lists. The rest will come from districts where deputies are elected directly and only later join party factions.

The vote reflected the western regions’ power in the new Ukraine. Turnout was highest in the west, and relatively low overall at 52% (down from 60% in May’s presidential election). In Lviv 70% of voters showed up, against only 40% in Odessa. In Ukrainian-controlled areas of the Donbas turnout was just 32%. Neither Crimea nor the separatist-held eastern regions voted (their 27 seats in the Rada will stay empty).

The Opposition Bloc, a revamped ver-

sion of Viktor Yanukovych’s reviled Party ofRegions, got into the Rada, after finishing fourth, with 9%. The party won much of the south-east—Donetsk, Luhansk, Kharkiv, Zaporizhia and even Dnipropetrovsk.

Joining them in parliament will be some 60-70 directly elected deputies aligned with the old regime. Their presence will incense first-time politicians drawn from the Maidan movement who fought hard to oust Mr Yanukovych. It will also upset Ukraine’s volunteer battalions, including commanders of three powerful anti-rebel paramilitary groups who were elected.

Co-operation with the Opposition Bloc, which includes Mr Yanukovych’s former chief of staff, Sergei Levochkin, will be unpalatable. But Hannes Schreiber, of the EU delegation in Kiev, argues it will be “decisive to have the former ruling side in the dialogue”. Failure to do so would increase feelings of exclusion in Russian-leaning regions, where Kremlin agents continue to sow dissent. (Ukrainian security services say they detained pro-Russian “diversion groups” in Kharkiv, Odessa, Zaporizhia, Mariupol and Kiev before the vote.)

Even more destructive would be infighting within the coalition. Whereas the parties’ broad pro-European aims are aligned, their business interests and personal ambitions are not. Horse-trading for jobs and squabbling over reforms has already begun. Mr Poroshenko and Mr Yatsenyuk have both put forward their own pro-

posals. Mr Yatsenyuk, who takes a hawkish attitude to Russia, has declared himself the election’s winner and put “restoration of sovereignty and territorial integrity” at the top of his cabinet’s priorities.

Mr Poroshenko, who has more allies among directly elected deputies, will not easily relinquish the reins. He seems determined to direct reforms from the presidential administration, where his aides have spent months preparing draft laws, with a focus on deregulation, judicial reform and decentralisation. After the 2004 Orange revolution, conflicts between the president and the prime minister plagued the government, which squandered the chance of broad change to the system. Mr Poroshenko and Mr Yatsenyuk must learn from those mistakes. “Delay with reforms is fatal for us,” Mr Poroshenko himself said.

At stake is the survival not just of the new government, but of Ukraine itself. The economy, teetering on the verge of collapse, depends on foreign aid that is linked to reforms. This week the EU promised more help. But reforms are likely only to increase the pain for people ravaged by war and facing a gas-starved winter.

Ukraine has to contend with its rebels and with Vladimir Putin (see next story).

The separatist republics in Donetsk and Luhansk will hold elections on November 2nd, a vote that Kiev condemns but Moscow will recognise. Ukrainian soldiers, two-thirds of whom did not vote because they could not leave their positions, still die on the front. On their way to the polls during a freezing election day in Kiev, voters expressed only tepid hopes. “The people won’t tolerate the politicians’ games any longer,” said Svetlana Ischenko, 68, in the foyer of Lesya Ukrainka Gymnasium.

“If we don’t change now, either Ukraine will fall to pieces or Putin will take us over.”

Unfortunately, she may be right. 7

The Economist November 1st 2014 Russia and the West

Hard talk MOSCOW

What lies behind Vladimir Putin’s latest anti-American rant

W

HEN Russia’s president, Vladimir Putin, gave a belligerent anti-Western speech in Munich seven years ago he was tense and angry. But on October 24th he was reportedly relaxed and happy as he delivered his most anti-American diatribe so far. He joked and smiled. He enjoyed flaunting his characteristic toughness in front of foreign journalists and experts who are members of the Valdai discussion club, leaving them stuck for words by his ability to twist facts and distort meanings.

In substance the speech contained little new. Mr Putin blamed America’s “unilateral diktat” for the world’s disorders, and accused the West of double standards and hypocrisy towards Russia, which was only “protecting the interests of the Russianspeaking population in Crimea” against “neo-fascists” when it annexed the peninsula and stirred conflict in the east. The message was clear: if America breaks rules in Kosovo, so can Russia in Ukraine. “The bear will not even bother to ask permission. Here we consider it the master of the taiga. It does not intend to move to any other climatic zones. However, it will not let anyone have its taiga either.”

Mr Putin recalled Khrushchev banging his shoe at the UN as a way to command attention. “The whole world, primarily the United States and NATO thought: this Nikita is best left alone, he might just go and fire a missile—they have lots of them, we had better show some respect for them.”

Yet the Soviet Union and America saw each other as equals not just because of their arsenals, but also because they were joint victors in the second world war. The Soviet Union helped to create the post-war order that Mr Putin now wants to destroy.

Soviet leaders were hostile to the West but not irresponsible; they harboured deep fears about using nuclear weapons.

Mr Putin is not open to a change of view. “In the past he did everything in his power to change the situation, but now all this is in the past,” says Dmitri Trenin, head of Carnegie Moscow Centre, a think-tank.

“He clearly does not trust America and sees no point in talking to it,” says Fyodor Lukyanov, editor of Russia in Global Affairs. The question is why he bothered to make the speech at all.

The answer may have more to do with Mr Putin’s domestic situation than with the West. Anti-Americanism is now a pillar of the Kremlin’s ideology. In 2007 Mr Putin’s Munich speech was a complement to

Europe 51 Russia’s strong growth. His latest effort is a substitute for it. Blaming Russia’s economic troubles, including falling oil prices, on America diverts criticism from the Kremlin. Opinion polls show that the Russian public first and foremost credits Mr Putin with the restoration of Russia’s place in the world. On this basis the Valdai meeting in Sochi, site ofthis year’s winter Olympics, provided a perfect setting for him to demonstrate his strength and agility while the club’s members inadvertently played the part of a television audience. Fittingly, Valdai is now organised by Dmitry Kiselev, a television propagandist who hosts a weekly talk show.

This does not mean that Mr Putin is ready for a real war with the West. The withdrawal of Russian troops from Ukraine suggests that his actions are constrained both by sanctions and by the unwillingness of Russians to lose more soldiers’ lives. But Mr Putin’s meddling in Ukraine is far from over. In many ways it is Russia’s weakness, not its strength, that is now the biggest danger. 7

Turkey and Europe

Problems with neighbours ANKARA

Recent actions push Turkey away from the West and the European Union

T

HE fallout from Turkey’s relations with Islamic State (IS) knows no end. Its global image is in tatters amid persistent claims of secret dealings with the jihadists, which Turkey denies. Shaky peace talks with the Turkish Kurds are near collapse, because Syrian Kurds in Kobane are still under siege by IS as Turkish tanks look on passively (see page 46). Friendship with America has soured because ofTurkey’s refusal to let coalition war planes use the Incirlik airbase to bomb IS. Now a spat with Denmark over a Danish jihadist is testing relations with the European Union.

Basil Hassan, a Dane of Lebanese extraction, is accused of attempting to murder Lars Hedegaard, a writer with anti-Islamic views, in Copenhagen. He was caught on April 16th by Turkish police at Istanbul’s Ataturk airport after a tip-off. The row erupted when it emerged that Mr Hassan had been freed by the Turks despite Danish demands for his extradition.

Some speculate that Mr Hassan was part of a hostage swap for the 46 Turks kidnapped by IS from the Turkish consulate in the Iraqi city of Mosul in June and released on September 20th. Others claim that Mr Hassan vanished before the deal. Turkey’s justice ministry refuses to comment. It is not clear if three IS fighters arrested over

the murders ofa policeman, a soldier and a member of the public in southern Turkey in March remain in custody.

Denmark’s prime minister, Helle Thorning-Schmidt, insists Turkey must face repercussions for its behaviour, though “taking the issue to the EU now would be out of place.” But a Social Democratic rival, Mette Gjerskov, says EU membership talks must be frozen and Danish troops in Turkey on a NATO mission be pulled out. The EU has also condemned the recent intrusion of Turkish ships into Cyprus’s territorial waters. “I see a genuine concern across the political spectrum as to where Turkey stands,” warns Marietje Schaake, a Dutch member of the European Parliament.

Turkey’s hopes of joining the EU were already dented after the government’s response to last year’s Gezi park protests left at least nine dead. Worries over efforts to quash corruption probes against the president, Recep Tayyip Erdogan, and his inner circle, to muzzle the press, to censor the internet and to stack the judiciary were all aired in the EU’s recent annual progress report on Turkey’s accession talks. Yet the government is proposing new laws granting the police sweeping powers, including the right to detain suspects for 24 hours without seeking prosecutors’ consent.

David Cohen, an American treasury official, dropped another bombshell by announcing that IS earns as much as $1m a day from illicit oil sales involving “Turkish middlemen”. Turkish officials retort that Turkey sees IS as a threat to its own security and that since the start of this year, 60m litres of contraband fuel have been seized and 65 kilometres (40 miles) of illegal pipelines ripped out. Yet until Turkey “unequivocally joins the coalition against IS,” warns Marc Pierini, a former EU ambassador to Ankara, doubts over its place in Europe and the West “will only grow.” 7

Flags that can drift apart

The Economist November 1st 2014

52 Europe French public finances

Budget, fudge it

Germany’s far left

Thuringia’s November revolution BERLIN

It may become the first state run by the heirs of East Germany’s communists PARIS

France wriggles free from the hard taskmasters of Brussels

I

T WAS billed as a dramatic showdown between the French miscreants and the European Union’s enforcers. But in the end the clash never came. On October 29th the European Commission decided not to request revisions to France’s budget for 2015, despite its clear breach of the euro zone’s deficit rules, after the French government offered enough last-minute concessions.

France had set itself up for a collision in September, when President François Hollande’s government unveiled its growth forecast. This showed that the country would fail to cut its budget deficit, as it had promised, to 3.8% of GDP this year and 3% next. Instead, the deficit would rise to 4.4% in 2014, before dropping back to 4.3% next year. France, announced Michel Sapin, the finance minister, would not reach the euro zone’s 3% ceiling, originally promised by 2013, until 2017.

This created predictable exasperation in Brussels, which had already given France an earlier two-year delay to reach the 3% target. It also enraged smaller eurozone countries that have been forced to impose severe budget cuts in far more difficult circumstances. And it was all the more grating because of French high-handedness. “France must be respected, it is a big country,” declared Manuel Valls, the prime minister. “We are the ones who decide on our budget.”

Amid rising frustration with France, Jyrki Katainen, the outgoing economics commissioner, asked Mr Sapin to explain why they were planning to miss their targets. Having initially insisted that they would not be bossed about by Brussels, the French then gave in. Two days before the commission’s verdict was due, Mr Sapin told Mr Katainen he would find an extra €3.6 billion ($4.6 billion) in revenues in 2015, enabling him to cut the budget deficit next year to 4.1%.

In reality, Mr Sapin’s changes have a lot more to do with luck and creativity. He is not proposing more budget cuts, relying instead on an optimistic wishlist of accounting changes, including lower debt-servicing costs, reimbursed EU budget contributions and extra revenues from a fresh clampdown on tax evasion. Thanks to these, the adjustment to the French structural deficit in 2015, on which the commission wanted to see a bigger effort, will rise from 0.2% to 0.5% of GDP. This was enough for Mr Katainen to say that he “cannot immediately identify cases of ‘particu-

N

EXT weekend Germany celebrates the 25th anniversary of the fall of the Berlin Wall. Yet a few days before that, Die Linke (The Left), the party that descends from the communists who ran the old East Germany, may take charge of one of reunified Germany’s 16 states (Thuringia) for the first time.

The mainstream parties treat The Left as pariahs in the federal Bundestag. The party jeers from the backbenches and fights internal vendettas. It hates capitalism and wants to scrap NATO. In debates over Ukraine many Leftists have blamed America more than Russia’s Vladimir Putin. Their parliamentary leader, Gregor Gysi, refuses to call the East German regime an “unjust state”.

In state and local governments in eastern Germany, however, The Left has become a home for many Ossis (Easterners), who tend to be apolitical and feel vaguely frustrated. They vote Left partly

Ramelow on the high road to power larly serious non-compliance’ ”.

The upshot is face-saving all around.

The commission can defend itself from accusations of giving in to big-country bullying, but has avoided a confrontation with the euro zone’s second-biggest country. (It also averted a similar clash with Italy.) The French, who have not had to make any extra spending cuts, can cry victory in the face of threatened sanctions.

There is still a second chance for the

for reasons of “Ostalgie”. In Brandenburg The Left governs boringly as junior partner in a “red-red” coalition with the Social Democrats (SPD). But Thuringia presents a new opportunity. In its election in September the Christian Democrats (CDU), the party of Chancellor Angela Merkel, came first, with 33%. But The Left came a strong second with 28%.

It could now eke out a tiny majority if it combined with the other two left-leaning parties: the SPD and the Greens.

To many on Germany’s centre-left such a “red-red-green” alliance is the holy grail at the federal level to replace governments led by Mrs Merkel. In Thuringia (as in the rest of Germany) the CDU rules in coalition with the SPD. The SPD has paid dearly there, winning a meagre 12% of the vote in September. So the state’s Social Democrats want to try joining with The Left and the Greens instead. Thuringia’s 4,300 SPD members are expected to say yes to the idea on November 4th. The Left could lead its first-ever state government

by December.

Its premier would be Bodo Ramelow.

A western transplant in Thuringia, he personally brings no baggage from East German times. And although he was a firebrand unionist once, he counts as a moderate by The Left’s standards. Thuringians fret less about him than about the stability of a government that would have only a one-seat majority.

The overarching question is whether a red-red-green government in Thuringia could foreshadow a similar experiment in the Bundestag (albeit with an SPD chancellor). It would be much harder to do in national politics, where foreign and security policy cleaves a wide gulf between the two red parties. And yet the SPD is in a terrible bind. Increasingly, it merely holds the stirrups for others to mount: Mrs Merkel in Berlin, now Mr Ramelow in Erfurt. The SPD’s thirst for national power may yet force it to turn to The Left in the Bundestag. commission to judge French rule-busting, when it reviews all national budgets at the end of November. In an ironic twist, the commissioner taking over from Mr Katainen is none other than Pierre Moscovici, who as French finance minister secured the previous two-year delay. If there was a victor this week it was neither France nor the commission, but the grand political fudge, a concoction for which Europeans are still justly famed. 7

The Economist November 1st 2014

Europe 53

Charlemagne The Environmental Union On climate change, if little else, Europe still aspires to global leadership

B

LISS was it in that pre-Lehman dawn to be alive. But to be European was very heaven. Before the world economy turned turtle in 2008, the European Union presented an attractive face to the world. Its scepticism about military force and love of global rules was a welcome counterweight to the cowboy unilateralism of George Bush’s America. The issue of climate change presented a golden opportunity for Europe to flex its soft power, economic muscle and high-minded internationalism for the good of mankind. Perhaps, mused some, the EU should rebrand itself the “Environmental Union.”

The crash, and the devastation unleashed across the euro zone, put paid to all that. But the environment is back. At their most recent summit, on October 23rd and 24th, Europe’s heads of government agreed on a climate and energy package that obliges the EU to ensure that by 2030 its emissions of greenhouse gases will be at least 40% lower than in 1990. To achieve that goal, each ofthe 28 members will have to meet its own legally binding target (these remain to be set). The deal succeeds an earlier one, signed in 2007, under which the EU agreed to a 20% emissions cut by 2020. It is supposed to pave the way to a reduction worth 80-95% by 2050.

The agreement was hard-fought and complex even by EU standards. Poorer countries such as Poland, which relies on coal for 90% of its electricity, demanded and won various sweeteners to ease their transition to cleaner fuels. Two “sub-targets” of 27%, on the renewable share of the energy mix and on improvements to energy efficiency, were included in the deal but have no teeth (the renewables goal is binding only at “EU level”, which leads one to wonder if the club will sue itself should it be missed).

Spain and Portugal secured commitments to let them export surplus energy over the Pyrenees into France. An accommodation was even found for Ireland’s methane-belching cows.

It is not enough, growled the green lobbyists. They fumed that the targets will leave too much to do to meet the 2050 goal, because later cuts will be much harder to make than earlier ones. A more ambitious deal was probably politically impossible. But such complaints obscure the deeper truth: that Europe is on its way to becoming an emissions pygmy. In 2012 the EU accounted for only 11% of global greenhouse-gas emissions, next to 16% for

the United States and 29% for China. And that number will continue to shrink as Europe’s economy declines relative to the rest of the world.

Developing countries argue that Europe has historical responsibilities to discharge, given the cumulative heat-trapping effect of its emissions over the centuries. Fair enough. But one reason why officials were so keen to strike a deal now is that on the climate (if on little else), the European example—they believe—can still inspire others. They hope that at a conference in Paris in December 2015, world leaders will be ready to sign a climate-change compact to govern emissions after 2020, having failed to do so in Copenhagen five years ago.

Indeed, in the run-up to last week’s meeting, officials wove a happy fable in which the EU deal would trigger movement in America, which in turn would inspire China. An “at least” formulation was attached to the 40% goal, enabling the EU to ratchet up its contribution if others show similar ambition.

Nor is Europe’s influence confined to the “soft” realm of cajoling and persuasion. Officials in California, for example, made several fact-finding visits to Brussels to investigate the EU’s emissions-trading regime when preparing their own, the world’s second-largest (it has since been extended to Quebec). Before its launch two years ago the Californians told sceptics that they had learned important lessons from the European example—even if these were largely about what to avoid.

The first cuts are the deepest Like so many predecessors, the Paris conference will be billed as the world’s last chance to avoid calamitous climate change. This time, developments elsewhere may offer slightly more justification for the wilder hopes of European officials, especially when compared with 2007. Barack Obama, who has been flexing his regulatory muscles at home, has an eye on his environmental legacy, even if a Republican-controlled Congress will do its best to thwart him. The Chinese have hinted they may offer a date by when their carbon emissions will peak.

So the power of the European example may not be a complete figment of officials’ imagination. But its power is waning. Already relatively green, the EU risks being taken for granted in global climate negotiations; it is hard to imagine influential countries— China, say, or America—making concessions to win the Europeans over. The emissions-trading scheme, which covers 12,000 industrial polluters and halfofEurope’s total carbon emissions, is at the heart of the EU’s plans—and it is a farce. The market is massively oversupplied with permits, which now trade for little more than €6 ($7.60) a tonne, meaning there is little incentive to ditch dirty fuels. Europe is actually burning more coal than ever. An Anglo-German plan to accelerate a withdrawal of permits from the market should help, although the Poles will yet again have to be talked round.

Although the EU will easily meet its 2020 target, that is thanks largely to its sickly economy. Recession is no remedy for climate woes. Indeed, the green rhetoric from European officials has lately taken a growth-friendly turn; with unemployment high and growth prospects flat, citizens will not take kindly to energy-price rises. As they translate their climate pledges into policies, Europe’s governments will have to tread carefully if they are to lead the world without leaving behind their voters. 7 Economist.com/blogs/charlemagne

54

The Economist November 1st 2014

Britain

Also in this section 55 Remembering Afghanistan 55 Britain’s sperm shortage 56 Bagehot: The European dilemma

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

Austerity and the law

Justice in a cold climate

As cuts take effect, the justice system is struggling to adapt

S

IR JAMES MATHEW, an Irish judge at the turn of the 20th century, is said to have quipped that justice in England is open to all, “like the Ritz Hotel”. Some worry that it is going that way again. Until last year, even those who could not afford lawyers could seek redress in areas such as family law or housing disputes. No longer.

Seeking to cut Britain’s budget deficit, the government has slashed legal aid. But in doing so, it has failed to reform the system.

Legal aid costs England and Wales around £2 billion ($3.2 billion) a year. That figure has remained steady for the past decade. It is expensive compared with other European countries, partly because of the system’s adversarial—rather than inquisitorial—nature, and partly because it has always been generous in the past. Now Chris Grayling, the justice secretary, is trying to lop £320m off the civil bill and £220m from the criminal side. Since April 2013 the areas covered by civil legal aid have been slashed. Means-testing has been tightened.

Aid for prisoners has been restricted. Fees for criminal work are being trimmed. The system continues to function—and still looks better than most—but it is struggling in the age of austerity.

Some of Mr Grayling’s proposals have been stymied. This week the House of Lords scuppered plans to curtail judicial review, through which citizens can challenge the legality of government actions. Howls of outrage, protests and strikes by barris-

ters, who say that the cuts will denigrate justice and gut their business, have persuaded the government to postpone some fee cuts until after next year’s election.

Where cuts have been made, they are being felt. The problems are particularly acute in family law. The government hoped that people would turn to cheaper out-of-court mediation for which money is still available. But the numbers using such services are down 40% compared with last year. Without legal aid many people are not getting advice from lawyers who might in the past have suggested mediation.

Instead more and more Britons are representing themselves (as “litigants in person”), often poorly. The proportion of family law cases in which neither party was represented grew from 17% to 29% between March 2011 and December 2013. Cases without lawyers take longer, pushing up costs, and the quality of justice suffers.

Defending themselves Litigants in person struggle to make their cases properly. One barrister likened watching them to “the frustration a surgeon would feel watching somebody try to take out their own liver with a spoon”.

Women are cross-examined by abusive former partners. People cannot afford experts’ fees or services, so critical evidence, such as paternity tests, may be missing.

More people are relying on limited free services. The Bar Pro Bono Unit saw applica-

tions increase by almost 50% in the year to March 2014. On October 23rd the government announced a paltry £2m in funding for legal advice, a helpline and online information for litigants in person.

Meanwhile, fees introduced elsewhere are limiting access to other kinds of justice.

Bringing complaints about discrimination or unfair dismissal against employers now costs £1,200. The number of cases brought has dropped 70% since last year. But the rate of success has not changed, suggesting the fall is not simply down to a decline in weak claims. Even the Confederation of British Industry, the voice of big business, has questioned the charges.

The impact of cuts to criminal legal aid is harder to quantify. Those charged with crimes are still defended. But in the long term, some barristers caution, such cuts will make the criminal bar in its current form unsustainable.

Cuts to legal aid and to the Crown Prosecution Service (CPS) mean the system is getting creakier. A quarter of lawyers at the CPS lost their jobs between 2010 and 2013.

Meanwhile its spending on overtime has more than quadrupled to £4.6m since 2009. Defence lawyers say it regularly fails to produce evidence, causing costly delays.

One barrister who prosecutes and defends criminal cases in London describes the CPS there as being “in meltdown”.

Meanwhile, in the first quarter of 2013 the rate of delays in crown-court trials caused by the prison escort service failing to deliver defendants on time was up by 75% compared with 2012. Problems with technology and court rooms caused as many trials to be delayed in the first quarter of 2013 as in all of 2012.

Austerity could have prompted innovation. For all its excellence, the system relies too much on justice secured in court by lawyers. More legal work could be done 1

The Economist November 1st 2014 2 online, reckons Roger Smith, a legal-aid ex-

pert who has studied other countries’ legal systems, easing the pressure on courts. The Dutch legal-aid board has developed an interactive website that offers information and advice to discourage people from going to court. In New South Wales in Australia a website is backed up by a telephone hotline and face-to-face advice.

More work could be removed from the courts, too. The government says those challenging motoring convictions could do so in town halls before magistrates. Sir James Munby, president of the family division of the High Court, asked whether registrars could handle “no-fault” divorces, instead of judges. If cuts continue—as seems likely—reform is necessary. That may mean less work for lawyers. It does not have to mean less justice. 7

Britain 55 Sperm donors

Nice to gamete you A solution to the shortage of donors

B

RITAIN’S first national sperm bank opened to the public in Birmingham on October 30th: a sign that the country is at last dealing with the fact that demand for sperm donors far outstrips supply.

The number of single British women seeking sperm rose by 55% between 2000 and 2012, which was also the first year in which more women over 45 used donor eggs than used their own. Various factors

War memorials

Bringing it home A memorial to Britons killed in Afghanistan poses difficult questions

R

EMEMBRANCE DAY, the annual commemoration of Britain’s war dead on November11th, will be especially poignant this year for two reasons.

Britons will mark the centenary of the start of the first world war. Already, sombre crowds throng the Tower of London, the castle by the Thames in whose moat 888,246 ceramic poppies are being planted, one for each British or colonial military fatality in that conflict.

The country will also be remembering its most recent war: against the Taliban in Afghanistan. On October 27th the last British personnel were flown out of Camp Bastion in Helmand province; 453 of their compatriots had died during the 13-year deployment.

No formal memorial to them exists yet. After a final military vigil on October 9th the wall of names at Bastion was dismantled and transported back to Britain. This is unusual—memorials at the sites of foreign battles are typically permanent—but not entirely unprecedented.

A wall of names at Basra air base in Iraq was taken down when British soldiers withdrew in 2009. It was rebuilt at the National Memorial Arboretum in the English county of Staffordshire.

The wall from Camp Bastion is heading there, too. It will be incorporated into a new memorial, the original brass plaques embedded in the structure behind engraved stone tablets better suited to the damp British weather. The dedication date is yet to be announced, but already foundations have been built on a patch of open lawn between the main existing memorial to Britain’s war dead

and a grove of saplings.

As well as providing a focus for commemoration, the finished memorial will pose difficult questions about the war’s legacy. Fears that the Taliban might desecrate the wall in Helmand reportedly motivated the decision to bring it home.

Afghanistan remains violent and anarchic, despite all the blood spilled.

Helmand comes to Staffordshire

explain the trend. The main one is that women’s greater financial independence has increased the appeal ofin vitro fertilisation (IVF), one of the uses for donated sperm. They are under less pressure to settle with a partner and more able to fund single motherhood. Another reason is the rise (by 17% between 2010 and 2011) in the number of lesbian couples undergoing donor insemination. The age at which women have children has also risen slowly since the 1970s. And yet the annual number of new sperm donors grew from 375 in 1992 to just 586 in 2013; not much for 25 years of encouragement. Figures released this week by the Human Fertilisation and Embryology Authority show that onethird of Britain’s newly registered sperm donors last year were abroad.

Why the shortage? Donating sperm is a convoluted process that requires tests and clinic visits over many months. Giving eggs is even tougher: it requires surgery. But donors’ compensation is meagre. British sperm donors get £35 ($56) each time (Americans get $75) and British egg donors receive £750 per donation cycle (Americans can earn up to $10,000). Moreover, a change in the law regarding anonymity means children can now track down their biological parents. In 2004, the year before it came into force, the number of new sperm donors fell to 239. In the United States and Denmark, by contrast, donation remains anonymous.

Britain may be hampering recruitment in other ways, too. Denmark’s slogans encouraging sperm donors are compellingly macho and patriotic: “These are the main Danish export products—beer, Lego and sperm!”, and “Congratulations, it’s a Viking!” The London Sperm Bank settles for the rather less inspiring “Lend a hand”.

Laura Witjens, CEO of the National Gamete Donation Trust, says that campaigns have focused on altruism, not masculinity, as “we don’t want to imply that infertile men are any less of a man”. Still, Britain is doing better than the Netherlands, which barely bothers to advertise.

For an ageing population like that of Britain, it would be wise to provide enough sperm to women who want it.

Denmark’s population would be shrinking were it not for IVF babies: they accounted for 3.9% of births in 2003. In Britain, that figure was 1.5%.

The new sperm bank will be a step forward. It intends to cut the cost of buying sperm to around £300 per sample. Birmingham’s diversity could help meet demand for ethnic-minority sperm, a specific area of shortage. And it will supply clinics equally, which should reduce inequality between donation-rich urban areas and those where supplies are scarce. The bank still needs help, however, making sperm donation sound desirable. Its slogan?

“Open your account today.” 7

56 Britain

The Economist November 1st 2014

Bagehot Ho for the open sea!

David Cameron is imperilling Britain’s place in Europe by making promises he cannot keep

“Y

ES, but if you were him, what would you do?” This is a question Bagehot has been asked repeatedly this week by Conservative MPs and functionaries. It is nice to play at being prime minister and undeniable that David Cameron, the pronoun in question, is in a tight spot, terrorised by the populist UK Independence Party (UKIP) and his Eurosceptic colleagues while a tough by-election looms. But the question misses the essential point of your columnist’s inquiry. Running Britain is supposed to be about serving the national interest. And Mr Cameron’s recent theatrics against the EU, over immigration and its demand for an extra €2.1 billion ($2.7 billion) owing to a decennial budgetary adjustment, are making it increasingly likely that Britons would vote to leave the union in the “in-out” referendum he has promised. That would represent a blow that Mr Cameron, who understandably considers EU membership more valuable than it is vexatious, does not want. So what is he playing at?

The answer is that Europe is an issue of which Mr Cameron has little grasp and may be about to lose control. He would rather not broach it—having understood that nothing contributes more to Tory politicians’ reputation for being a bit deranged than the animus many reserve for the EU. Shortly after becoming Tory leader, in 2006, Mr Cameron urged his colleagues to consider this tic the prime reason for their serial electoral failures: “While parents worried about child care, getting the kids to school, balancing work and family life, we were banging on about Europe.” And despite the rise of UKIP, fuelled in part by antipathy to the EU and the immigration it permits, there is no reason to think that has changed. Asked to name the most important issues affecting their family, hardly any Briton says Europe. But by flailing around, Mr Cameron keeps the issue in the headlines.

His original sin, evident even as he implored Tory Eurosceptics to lighten up, is that he is beholden to them. While campaigning for the Tory leadership he promised to quit the European People’s Party, the main centre-right faction in the European Parliament, in return for their support. This he duly did, and it has proved multiply damaging. It has sullied Mr Cameron’s standing in Europe, including with Angela Merkel, the German chancellor whose favour the prime minister counts on. It has deprived him of a much-needed means to understand the EU’s strange work-

ings. Worse, it showed the Eurosceptics that, when push comes to shove, Mr Cameron will shift.

That realisation has shrouded in uncertainty his pledge to renegotiate the terms of Britain’s EU membership, ahead of the referendum he has promised to hold if the Tories win re-election next year. Unveiling that two-part gambit in 2013, Mr Cameron made such a strong case for the EU that it was hard to imagine him recommending an “out” vote. Yet his Eurosceptic colleagues have since been clawing at the central incongruity of his strategy: the way it ties the referendum to a reform process in which none of the EU’s 27 other members seem terribly interested. In particular, the sceptics demand that Mr Cameron state the terms for his renegotiation even as they shower him with impossible suggestions— such as demanding a British veto on all EU edicts—intended to ensure it fails. In that event, they trust, it would be impossible for the prime minister to recommend an “in” vote. And by recently vowing to curb the EU’s founding principle of free movement, Mr Cameron appears to have swallowed the bait.

His advisers—including Nick Boles, a business minister and rare influential Tory liberal—say the popular rage against immigration has made this essential. “Unless we fix immigration, voters will want out whatever else we renegotiate,” says one. Yet this is on the one hand self-serving—their anxiety is mainly caused by UKIP, which is likely to win a second by-election in two months against the Tories in the Kent seat of Rochester and Strood—and on the other reckless, because it raises a question to which Mr Cameron has no good answer. There is almost no prospect of the Tories curbing free movement, which means they cannot, while remaining in the EU, satisfy those who rail against the immigration it causes. Merely wringing their hands over the issue is meanwhile raising its salience, to UKIP’s advantage, while giving credence to the populist party’s other rallying-cry: its claim that all mainstream politicians are useless.

Big promises and a dull reality Mr Cameron’s shouty refusal to honour the EU’s whopping financial demand—or at least, he says, its “scale and timing”—is of a similar kind. It is hard not to sympathise; in the run-up to the Rochester vote, the bill is rottenly timed. The suggestion that it must be settled by December1st is also absurd. Yet there is no reason to thinkthat, being based on an accounting process which the British support, it is erroneous. It is also probable that, perhaps after rejigging the terms a bit, Britain will in the end pay up. Steadfastness in upholding rules—unlike some continentals they could mention—is something on which the British pride themselves. So Mr Cameron’s ruddy-cheeked fuss is again in danger of raising Eurosceptic expectations he cannot meet. That, in the light of his renegotiation strategy, makes for a worrying pattern.

There is still hope for Britain’s EU membership. Mr Cameron’s flailing is making it likelier that the Tories will lose next year’s general election, which would mean no referendum. And if they win, the prime minister’s fecklessness will in itself be solace. If he is willing to do such damage to Britain’s place in Europe while claiming to be a fan of it, he can perfectly well argue for an “in” vote even after his renegotiation gambit has failed. But that is not altogether reassuring. With populists on the march, arguing for an unappealing status quo is getting harder, and Mr Cameron’s ability to do so diminishes daily. The result is that Britain looks closer to exiting the EU than ever. Such a mishap would outlive the memory of the Kentish by-election, and Mr Cameron. 7

The Economist November 1st 2014 57

International

Also in this section 58 Happiness and income

Illicit e-commerce

The Amazons of the dark net

Business is thriving on the anonymous internet, despite the efforts of law enforcers

T

HE first ever e-commerce transaction, conducted by students from Stanford and MIT in the early 1970s, involved the sale of a small quantity of marijuana. For decades afterwards, the online drugs trade was severely constrained by the ability of law enforcement to track IP addresses and the means of payment. The trickle of transactions threatened to become a flood with the emergence a few years ago of Silk Road, a drug-dealing site on the “dark net”.

These e-depths cannot be reached through a normal browser but only with anonymising software called Tor. Buyers and sellers transact there pseudonymously in bitcoin, a crypto-currency.

Silk Road was shut last year with the arrest of Ross Ulbricht, the 29-year-old American whom investigators believe to be Dread Pirate Roberts, the site’s founder. Mr Ulbricht is due to stand trial in New York next January on charges that include computer hacking and money laundering. But law enforcers who predicted that Silk Road’s demise would mark the beginning of the end for online black-market bazaars were wrong. Instead, dozens of dark-net Amazons and eBays (also known as crypto-markets) have sprung up to fill the void. They are not only proving remarkably resilient but expanding their offerings and growing more sophisticated.

The number of for-sale listings in the 18 crypto-markets tracked by the Digital Citi-

zens Alliance (DCA), an advocacy group, grew from 41,000 to 66,000 between January and August. The largest market until August, Silk Road 2.0 (whose logo, like its predecessor’s, features an Arab trader on a camel), has since been overtaken by two upstarts, Agora and Evolution, whose combined listings have grown by 20%, to 36,000 in the past two months. Each of these three has more listings than the original Silk Road ever did (see chart). It is unclear whether listings are a good measure of sales, which the markets do not disclose.

Vendors vary in size: the largest turn over several million dollars a month on a

Buzzing Largest dark-net markets By number of listings, Õ000

Sep 2013

Drugs

Other

Oct 21st 2014 20 15 10 5 0

Silk Road*

Evolution

Sources: Digital Citizens Alliance; legal filings

Agora

Silk Road 2.0

*Just before closure

single site, the smallest a few hundred.

They pay a fee to register and a commission per transaction, typically 3-6%. Buyers come from all over the world. Their purchases are sent by post—the vast majority appear to arrive undetected. Customer satisfaction is high.

Illegal and prescription drugs are the largest product category. (Some sellers are crooked pharmacists.) Silk Road 2.0, whose operators are avowedly libertarian, focuses almost exclusively on weed, powders and pills. Agora, whose mascot is an armed bandit, sells weapons, too. These are marketed mostly to Europeans, who face strict gun-control laws.

The fastest-growing of the big three, Evolution, is the least principled. Though, like the others, it bans child pornography, it hawks stolen credit-card, debit-card and medical information, guns and fake IDs and university diplomas. One-fifth of its listings are in its “Fraud” section or in “Guides and Tutorials”, which often explain how to commit crimes. Some see Evolution’s rapid growth as a worrying sign that cyber-criminals are looking to fuse their identity-theft operations with the “victimless” online drugs trade. (It is not, however, the most unsavoury corner of the dark net, where some make markets in contract killings.)

For drug buyers, online markets offer several advantages. They are less physically dangerous than street trades. This goes for dealers, too: a recent study found that a third or more of sales on Silk Road were to “a new breed of retail drug dealer”, a transformation of the wholesale market that “should reduce violence, intimidation and territorialism.”

Product quality is higher, largely thanks to an Amazon-like five-star customer-review system. With 29 reviews for the aver- 1

The Economist November 1st 2014

58 International 2 age listing on SilkRoad 2.0, a high score pro-

vides reassurance. MDMA (or ecstasy) is particularly popular on the site, presumably because the street version can be laced with lethal impurities. The dark net’s hundreds of forums provide further intelligence on dodgy gear and scammers. The FBI made over 100 purchases on Silk Road before closing it down. An agent testified that these showed “high purity levels”.

High ratings are sellers’ lifeblood. Reputation is crucial when clients know they cannot fall back on small-claims courts or arbitration. “It’s the ultimate irony: a den of thieves who don’t know each other but need to trust each other,” says a researcher with the DCA who requested anonymity for reasons of security.

As drug sales move online, power is shifting to buyers. The big markets’ customer service and marketing strategies increasingly resemble those of legitimate retailers. They are quick to apologise for technical glitches. Two-for-one specials, loyalty discounts and promotional campaigns are common (on Smoke Weed Day, say). Other methods borrowed from the corporate world include mission statements, terms and conditions, and moneyback guarantees. “It has become so prosaic it could be shoes,” says James Martin, author of “Drugs on the Dark Net”.

Markets are also innovating to cut fraud. In the free-for-all in the months after Silk Road’s closure, thousands of buyers lost bitcoins that were supposedly held in escrow, either because markets were hacked or because their administrators ran off with the money. The emerging solution is “multi-signature” escrow, from where funds can be moved only with the approval of a least two of the three interested parties (buyer, seller and market). Some markets are trying to build a community of trusted buyers and sellers with invitationonly participation. Those whose customers had bitcoins stolen have begun to devise schemes to make them whole.

Sites that specialise in stolen card data display their own brand of customerfriendliness. Some offer a service that allows buyers to verify purchased cards are still active, using compromised merchant accounts. The client’s balance is automatically refunded the value of cards that are declined. (Cards sell for anywhere from $10 to $100 each.) Others batch their cards for sale according to the location of the hacked retailer, says Brian Krebs, a cybersecurity blogger. Buyers favour cards stolen from consumers who live nearby because banks often treat transactions as suspicious if they take place far from the legitimate cardholder’s home address. A site that has pioneered this segmentation is McDumpals. Its logo features a gun-toting Ronald McDonald and its motto is “I’m Swipin’ It”.

Several factors make life hard for those

looking to crack down on the dark net, including its technical complexity, the physical separation of buyers and sellers, and their mobility (vendors typically post on more than one market, allowing them to keep selling if a site goes offline). Tellingly, the only market forcibly closed since Silk Road was Utopia, which was shut by Dutch authorities soon after it opened in February. Some law enforcers want to target Tor, but even if that were technically possible it would cause “collateral damage”, points out Nicolas Christin of Carnegie Mellon University, because the software has worthy uses, such as to protect whistleblowers.

Moreover, the deep web’s denizens will continue to adapt. Jamie Bartlett, author of “The Dark Net”, predicts: “The future of these markets is not centralised sites like Silk Road 2.0, but sites where…listings, messaging, payment and feedback are all separated, controlled by no central party”—and thus impossible to close. 7

Happiness and income

Everything that rises must converge Emerging markets are catching up with the West in the happiness stakes

P

OETS, songwriters and left-wing politicians hate the idea, but for decades opinion-poll evidence has been clear: money buys happiness and the richer you are, the more likely you are to express satisfaction with your life. Until now. A survey of 43 countries published on October 30th by the Pew Research Centre of Washington, DC, shows that people in emerging markets are within a whisker of expressing the same level of satisfaction as people in rich countries. It is the biggest qualification to the standard view of happiness and income seen so far.

The Pew poll asks respondents to measure, on a scale from zero to ten, how good their lives are. (Those who say between seven and ten are counted as happy.) In 2007, 57% of respondents in rich countries put themselves in the top four tiers; in emerging markets the share was 33%; in poor countries only 16%—a classic expression of the standard view.

But in 2014, 54% of rich-country respondents counted themselves as happy, whereas in emerging markets the percentage jumped to 51% (see chart). This was happening just at a time when emerging markets’ chances of converging economically with the West seemed to be receding.

Rich countries did not experience steep declines in happiness. The decreases in America and Britain were tiny (a single per-

centage point), while the share of happy Germans rose 13 points. A large drop in formerly joyful Spain ensured a modest overall decline for the rich. But the convergence happened thanks to huge improvements in countries such as Indonesia (+35) and Pakistan (+22). In 12 of the 24 emerging markets, halfor more people rate their life satisfaction in the top tiers of the ladder.

This is not to say the link between income and satisfaction has been snapped.

Poor countries still lag behind: only a quarter of the people there are in the happy tiers—half the level of the other two groups. There is also a clear link between happiness and income growth (as opposed to income levels). China’s GDP rose at an annual average rate of 10% in 2007-14 and its happiness level rose 26 points.

Within countries, richer people express more satisfaction than their poorer neighbours. The study divided respondents into categories with higher and lower incomes and fewer and more household goods. In every country in every group, richer folk with more goods expressed higher levels of happiness. So at a personal (as opposed to national) level, money does buy happiness. And if you ask people about different aspects of their lives—health, family life, religion, standard of living—it turns out that satisfaction with living standards still has the biggest influence on happiness.

But the secret of happiness has been scattered around. Women tend to be happier than men. Married people are happier than unmarried ones. Latin Americans are more satisfied than people in other emerging markets. Asians are the most optimistic; Middle Easterners the least. Income still matters. But it has been dethroned. 7

The happy medium % of people rating their life-satisfaction between 7 and 10*, 2014 Selected countries by income group Rich Emerging Poor 0 20 40 60

80

Mexico United States Vietnam Germany China France India Russia Bangladesh Ghana Kenya Egypt Median of countries surveyed 2007 2014 0 20 40 Rich

60

80

Emerging Poor Source: Pew Research Centre

*On a 0-10 scale, 10=best

The Economist November 1st 2014 59

Business

Also in this section 63 A clear-out of French bosses 64 Companies and the Ebola outbreak 64 Vaccine-makers and Ebola 65 The European periphery’s slow courts 66 Iran awaits a business boom 67 Schumpeter: Hollywood, an unlikely role model for other industries

For daily coverage of business, visit Economist.com/business-finance

Family firms

Business in the blood NEW YORK

Companies controlled by founding families remain surprisingly important and look set to stay so

T

HE “Lucky Sperm Club”, as Warren Buffett likes to call it, is still going strong in the commanding heights of business. On opposite sides of the Atlantic, Ana Botín and Abigail Johnson have recently succeeded their fathers in filling two of the most powerful jobs in finance, as chairman of Banco Santander and chief executive of Fidelity Investments, respectively.

Founding dynasties run, or wield significant clout at, some of the world’s largest multinationals, from Walmart to Mars, Samsung to BMW. Half a century ago management experts expected the hereditary principle to fade fast, because ofthe greater ability of professionally-run public firms to raise capital and attract top talent. In fact, family firms have held their ground and, in recent years have increased their presence among global businesses.

Family-controlled firms now make up 19% of the companies in the Fortune Global 500, which tracks the world’s largest firms by sales. That is up from 15% in 2005, according to new research by McKinsey, a consulting firm (which defines such firms as ones whose founders or their families have the biggest stake, of at least 18%, plus the power to appoint the chief executive).

Since 2008 sales by these firms have grown by 7% a year, slightly ahead of the 6.2% a year by non-family firms in the list. McKinsey sees these trends continuing for the foreseeable future.

This is largely because of rapid growth in big developing economies where family ownership is the norm among large businesses. Since 2005 the countries that have most increased their share of the Fortune Global 500 are Brazil, China, Russia, South Korea and Taiwan. By 2025, McKinsey forecasts, there will be more than 15,000 companies worldwide with at least $1 billion in annual revenues, of which 37% will be emerging-market family firms. In 2010 there were only 8,000 firms worldwide of this size, and only16% of them were familycontrolled and from emerging markets.

Around 85% of $1 billion-plus businesses in South-East Asia are family-run, around 75% in Latin America, 67% in India and around 65% in the Middle East. China (where the proportion is about 40%) and Sub-Saharan Africa (35%) stand out for their relatively low share of family firms, because in both cases many large firms are state-owned.

However, even in the rich world, big family firms are defying expectations of their demise. The tendency for founders and their heirs to abandon control to faceless institutional shareholders seems to have reached a limit. Of the American firms in the Fortune Global 500, 15% are family ones, only slightly less than in 2005.

Among them is the world’s largest family firm, Walmart, in which the children of the late founder, Sam Walton (pictured, third

from left) are still big shareholders. His eldest son, Rob, is the chairman, another son, Jim, is also on the board and their sister, Alice, also inherited a huge stake. In Europe, 40% of big stockmarket-listed companies still have a controlling family.

Until recently many emerging economies lacked the large, liquid capital markets that rich countries enjoy. So local firms could not rely on them to provide funds for expansion, and depended instead on founding families reinvesting their profits.

As such firms’ access to domestic and global stock and bond markets continues to improve, it is possible to imagine this situation changing; family owners could seize the opportunity to make a lucrative exit, as happened for a time in the rich world.

However, one reason why the experts’ predictions of 50 years ago have proved wrong is that stockmarkets and regulators have been so accommodating in letting founding families retain a fair degree of control despite selling large stakes to outside investors. One way they have done so is through special classes of shares—a trend that has lately featured in a number of technology-firm flotations: who knows, perhaps in future Facebook will be controlled by the Zuckerberg dynasty and Google by the Page and Brin clans.

Investors have accepted such arrangements as the price of getting a slice of these firms’ profits, but they rarely like them.

Some institutional investors were unhappy, for example, when a deal struck years ago by her father allowed Ms Botín to succeed him in the chair at Santander shortly after his death in September, even though the family owned only 2% of the bank.

Besides being able to access capital markets without losing control, there are at least four other reasons why so many big firms have defied expectations and stayed 1

60 Business

The Economist November 1st 2014

2 under family control. One is that they are

often the product ofa superbly talented entrepreneur like Sam Walton. While such founders are alive and on form, the combination of their abilities and the freedom they have as controlling shareholder to run by their own rules often gives them a strong competitive advantage. Even after they are gone, their heirs can keep up the firm’s success, simply by continuing to follow the founder’s successful principles.

Whether private or public, family firms also tend to take a longer-term perspective.

As Heinrich Liechtenstein of IESE business school in Barcelona observes, this is true both relative to non-family-controlled public companies, which tend to be obsessed with meeting the demands ofinvestors to maximise short-term profits, and companies owned by private-equity firms, which although able to take a longer view than public firms must still cater to investors who want to sell up for a juicy profit within a few years.

Family firms are also less likely to load up on debt. An obvious exception, and an illustration of why most family capitalists fear debt, is the recent collapse of Espírito Santo. Massive debts turned the familyowned Portuguese financial conglomerate into one of Europe’s largest corporate failures, ending in a state bail-out of the bank at the group’s core. A reluctance to borrow may limit growth in good times, but it can make family firms more resilient when the going is tough.

They also tend to have better labour relations, according to studies by Holger Mueler and Thomas Philippon of New York University’s Stern business school.

This may be because workers are readier to believe promises that they will be rewarded for delivering in the long run, if such pledges are made by founding families rather than outsider bosses who may be gone in a few years. And in situations where businesses have to push through efficiency improvements, family owners

Three generations of the Lucky Sperm Club may be more willing to act firmly when dealing with labour unions, because of their significant stake in the business, than salaried outsider bosses, the studies suggest. These are advantages especially in countries with generally hostile relations between workers and management, say the two economists.

Overall, those family firms that get big tend to have a superior corporate culture to their non-family peers, reckons Heinz-Peter Elstrodt of McKinsey. The firm has applied its index of “organisational health” to 114 family firms and around 1,200 other large companies. Family firms scored significantly higher on their culture, worker motivation and leadership, though they lagged slightly on innovation and being too internally focused.

The presence of a founding family seems to be good for a business’s image. In a recent survey in 12 big economies by Edelman, a (family-run) PR firm, 73% of people

Relatively successful Biggest family businesses* Country (founded)

Industry

United States (1962)

Retail

476.3

Germany (1937)

Automotive

261.7

Anglo-Swiss (1974)

Commodities

232.7

South Korea (1969)

Electronics

209.0

United States (1917)

Energy

157.7

Italy (1927)

Finance/Industrial

151.1

United States (1903)

Automotive

146.9

Russia (1991)

Oil

141.4

United States (1833)

Pharmaceuticals

137.6

Electronics

109.9

Taiwan (1974) Sources: McKinsey; Bloomberg; company reports

Revenue, 2013, $bn

*Founder or family has largest stake (of at least 18%) and power to appoint CEO

said they trusted family-owned companies, compared with 64% who trusted publicly-traded companies in general, and 61% for both private-equity-owned and stateowned firms. This is no doubt why S.C. Johnson, a household-products maker, has as its slogan, “A Family Company”.

There is evidence of a positive “family effect” on financial performance, according to a new study by Cristina Cruz Serrano and Laura Nuñez Letamendia of IE business school in Madrid. They calculated that €1,000 invested in 2001 in a portfolio of publicly traded family firms in Europe, weighted by market capitalisation, would have generated €3,533 by the end of the decade, compared with €2,241 from a portfolio of non-family firms. The difference is equivalent to five percentage points of extra return per year.

All this may be why, for all his professed disapproval of the Lucky Sperm Club, Mr Buffett wants his son, Howard (pictured, left, with his son, Howard Warren Buffett, an academic) to succeed him as chairman, and guardian of the firm’s culture. The elder Mr Buffett is such a big fan of family firms that he likes to buy them: in October he bought Van Tuyl Group, America’s largest family-owned car dealership chain. As with LVMH and Kering, two family-run French luxury-goods giants that have bought a number of European fashion houses, Mr Buffett’s spiel to founding families is: if you want to sell up but want your business’s culture preserved, it will be in safe hands with us.

Ultimately, whether big family firms will continue to defy expectations of their demise will depend on their ability to negotiate the rocks on which family businesses have a unique propensity to founder.

One is the risk of squabbles among relatives. This summer, for example, a family feud nearly destroyed Market Basket, an American supermarket chain. Workers went on strike when their popular boss, Arthur T. Demoulas, was fired at the behest of his cousin, Arthur S. Demoulas. Disaster was only averted after pleas to the family by the governors of Massachusetts and New Hampshire.

No issue is potentially more toxic than the transition from one generation of a family to the next. In India, an epic feud began in 2002 after Dhirubhai Ambani, the founder of Reliance Industries, died without naming a sole heir. The battle between his sons, Mukesh and Anil, eventually led to the group being split in two.

In some cases even strong and successful firms can implode soon after a generational succession, which is why so many countries have some variation of the saying, “from shirtsleeves to shirtsleeves in three generations” (clogs to clogs, kimono to kimono). Edelman’s survey found that the public’s trust in family firms falls once the baton is passed from the founder to the 1

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The Canada Summit 2014

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The Economist November 1st 2014 2 next generation. Alarmingly, a study of

2,400 family firms in 40 countries published last month by PwC, a consulting firm, found that only 16% of them had a “discussed and documented” succession plan in place.

The families that do best are those which understand that their interests and those oftheir business can diverge, and put in place processes to manage the consequences of these differences, says John Davis of Harvard Business School, the author of several books about family firms.

Some families are adept at training the next generation to work in the family firm.

Illycaffé, a coffee-maker now run by a third-generation Illy family member, has a pact setting the rules for when an Illy can go into the business: competence for the job is paramount. Sweden’s Wallenberg business empire is run by a fifth generation of the founding family: two cousins, Jacob and Marcus Wallenberg, were groomed from an early age to run the group’s industrial and financial sides respectively.

However, sometimes children do not want to join the family business, or turn out not to have inherited the entrepreneurial genes of the founder. It may then be in the best interests of the firm for a professional to run it, rather than a reluctant or incompetent scion, even if the family retains some control. Letting professionals take over can make a lot ofsense. Talented managers are more likely to join a firm where there is a chance of getting to the very top, or at least where they do not have to work under a useless heir. Some 40% of the family firms interviewed by PwC said that professionalising their business was among the main challenges they face in the next five years.

Even when they have agreed to let an outside manager run their businesses, families sometimes find it hard to keep their hands away from the wheel. Luxottica, an Italian maker of sunglasses, was well run by a professional chief executive for ten years, but recently lost him, and six weeks later his successor, reportedly following differences of opinion with the founder, Leonardo Del Vecchio, and his wife, Nicoletta Zampillo.

Even when independent outsiders are brought in to serve on a family company’s board, they can often fail to make the impact they should, notes Mr Davis. Outsiders often refuse to get involved in managing tensions within the family and assume their job is just to oversee the running of the business, when in reality they may be the last line of defence against a family breakdown destabilising the firm, he says.

In the rich world there is a strong contingent of firms which have demonstrated an ability to get the best out of being both family-controlled and professionally run.

In some emerging markets, however, things are not so clear. Many of their big

Business 63 firms are still run by a founder with strong links to those in power, and only time will tell if they have what it takes to survive the passing of either the founder or the regime.

However, the positive examples of Tata in India and Samsung in South Korea suggest that it is possible, even in places with a strong tradition of crony capitalism, for world-class, professionally run family firms to emerge.

As big emerging-market firms pass from the founders to their heirs, the challenge will be, as it has been in the rich world, to reconcile the family’s needs and desires with the demands of running a successful business. They will need to learn that when it comes to company matters, as Michael Corleone put it in “The Godfather”, that great study of a family firm, “It’s not personal...it’s strictly business.” 7

French companies

Room at the top PARIS

France’s largest companies are losing their bosses at a remarkable rate

T

HE once-familiar line-up of bosses at France’s largest firms is getting less familiar all the time, as one after another is moved, fired or quits. This week it was the turn of Christopher Viehbacher, the German-Canadian chief executive of Sanofi, a drugs giant, who was sacked mainly due to poor relations with the company’s board (or so the board said).

Sanofi’s board promises to continue Mr Viehbacher’s policy of global expansion. But many believe it was the recent decision by the firm’s first non-French boss to move his office to Boston—closer to much of the research on which Sanofi relies—that provoked the rupture. The row, plus news that the firm’s important diabetes business was struggling against its competitors, had knocked 16% off the value of Sanofi’s shares by mid-week.

Until then it had been France’s largest quoted firm by value.

It has yielded that place to Total, the world’s fourth-biggest oil company. It was no boardroom row but a fatal aviation accident that removed Christophe de Margerie from its executive suite. For varying reasons, the bosses of the three other companies that dominate the

Adieu, Monsieur Viehbacher

French energy sector are on their way out. Last month, a day after the National Assembly passed a law to cut France’s dependence on nuclear power, officials made it known that Henri Proglio, the staunchly pro-nuclear boss of EDF, a state-controlled power utility, would not be staying on. Shortly thereafter, Luc Oursel, the boss of Areva, a state-owned nuclear-engineering firm, announced his early departure for health reasons. And GDF Suez, another giant utility, consecrated an heir apparent, Isabelle Kocher, to take over in 2016 on the departure of its current chief, Gérard Mestrallet.

Other bosses saying adieu include Baudouin Prot, who leaves the chairmanship of BNP Paribas after the huge fine the American authorities imposed on the bank for sanctions-busting. Vivendi, a media conglomerate and Danone, a food-maker, have just changed bosses; Pernod Ricard, a drinks company and Safran, a defence giant, will do so soon.

The precise reasons for the moves are different. But there are some common themes. In several cases—those of EDF, GDF, Pernod and Safran—it is about a generation of high-flying executives, born in 1949-50 and graduates of France’s most prestigious higher-education institutes, hitting retirement age.

Another is the tension between the increasing globalisation of French industry and a centuries-old principle that business should serve the narrow national interest. France’s big firms have gone out into the world, in part to escape high taxes, strict labour laws and low growth at home. Vivendi seems to be embracing globalisation by choosing as its new boss a Frenchman who has been running an American publisher’s British operations.

But the decision by Sanofi’s board to drop the international-minded Mr Viehbacher suggests that it shares the nervousness of French politicians, and indeed many voters, when such corporate jewels come loose from their settings and start to lose their Frenchness.

The Economist November 1st 2014

64 Business Companies and the Ebola outbreak

African Ebola outbreaks

Still open for business

2014 (as of October 27th)

GUINEA 1,906

ALGERIA

997

How firms are adapting to a virus that threatens economies as well as lives

T

HE death toll and the devastation caused by the Ebola outbreak continue to rise. As many as 5,000 people are now recorded as having been killed by the virus rampaging through Liberia, Sierra Leone, and Guinea (with a few cases elsewhere), and about double that number have been infected. Although there were some encouraging signs this week that the outbreak is being curbed in Liberia, its real toll may be much higher than official figures show.

The economic damage is rising, as fields lie fallow and traders stop going to market.

Prices of basic foods have more than doubled in some parts ofthe affected areas and incomes are plummeting. The World Bank reckons that the cost to the region’s economies may be as much as $33 billion over the next 18 months if the virus is not quickly contained. Countries that have struggled to emerge from civil wars or strife may be set back years. Yet some businesses are continuing to operate, keeping open essential transport arteries and generating export earnings that will provide a base for recovery once the disease is contained.

Among the first consequences of the outbreak were the cancellation of most international flights and the closing of land borders. One of the remaining air-links is provided by Brussels Airlines, Belgium’s largest carrier. It has continued to fly scheduled flights to Monrovia (Liberia), Freetown (Sierra Leone) and Conakry (Guinea), with some flights hopping from one capital to the next. “It’s become the Ebola express,” says a businessman who has been flying the route frequently.

The airline is not flying directly from Brussels to the three cities because it does not want its staff to have to stay overnight.

So its flights are stopping at Dakar (Senegal) to change crews—though not passengers, because Senegal has banned flights to or from the affected countries. To assure its crews they are safe, the airline has a small jet on standby to whisk them out should the passenger plane develop technical faults. It also carries technicians on every flight to make repairs and turn the plane round. “We’re not making a lot of money,” says Geert Sciot, a spokesman. “But we see it as our humanitarian duty to continue.”

One group of firms the affected countries especially need to keep operating is miners: in Sierra Leone, for example, they generate 80% of export revenues. African Minerals and Sierra Rutile, two big miners operating in the country, have isolated

themselves as much as possible, and built a buffer in the surrounding villages by giving them training and equipment to fight the disease, from soap and chlorine to thermometer guns, some of which are used at checkpoints on roads leading to the mines.

Sierra Rutile takes workers’ temperatures twice a day and asks them where they have been if they leave the area around the mine. Those who have been in outbreak areas are quarantined. Anyone who falls ill with the virus will go to a specially-equipped isolation unit before being transferred to a hospital. One benefit of enhanced screening is that diagnosis and treatment of other diseases, such as malaria, has also improved. The firm’s boss, John Sisay, says employees are complying well with the safeguards. “There is an overwhelming desire to keep the virus out of the area,” he says. It too has jets standing by to evacuate employees should the remaining scheduled flights be stopped.

African Minerals is running regular charter flights between its mine in Sierra Leone and South Africa, the home country of most of its 800 expatriate employees and contractors. It has started importing all its food. African Minerals and Sierra Rutile have stockpiled food, fuel and spare parts to tide them over should flights be halted.

Businesses that deal with the public, such as banks, cannot both isolate themselves and keep operating. Standard Chartered says it has imposed strict hygiene protocols and is providing lots of hand sanitiser and chlorinated water at its branches and offices. It checks the temperatures of staff and customers. One worry for almost all foreign firms in the region is that air-ambulance services are refusing to carry patients with fevers, never mind confirmed Ebola cases. Staff falling ill from malaria, for instance, can no longer be flown out.

Many companies have been given informal undertakings by Western governments that they will evacuate their own citizens using either military or government-chartered flights such as those currently used to transport infected aid workers. But not all governments have agreed to do so. Firms worry that whereas British or American expatriates will be taken home, those from poorer countries in Africa or South Asia may have to be treated on site.

Despite these risks, most big firms say that expats have elected to keep working rather than return home. “We’ve had no defections, so to speak,” says Mike Jones of

WORLD TOTAL†: Infected = 13,703 Dead = 4,920

LIBYA

11 MALI

SENEGAL* 1

EGYPT

NIGER CHAD SUDAN

20 8 IVORY COAST

NIGERIA*

C.A.R.

5,235 1,500

66 49 CONGO‡

6,535

SIERRA LEONE

2,413

Number of people:

LIBERIA

ANGOLA

ZAMBIA

NAMIBIA

infected

BOTSWANA

of whom:

dead Sources: WHO; UN; The Economist

*Declared Ebola-free †Excluding Congo ‡To October 26th

SOUTH AFRICA

Interactive: Find latest figures at Economist.com/ebolamap

African Minerals. “Guys are comfortable with the situation.” Comfortable may be a strong word, but businesses are proving adaptable and resourceful. Even so, there is a widespread feeling that international agencies and governments wasted the opportunity to curtail the outbreaksooner. “If we had just 10% of the resources we have now a few months ago, the problem would have been handled,” says an executive. 7

Vaccine-makers and Ebola

Giving it a shot Drugmakers bet that vaccines will help in the fight against Ebola

I

N MAY 2013 GlaxoSmithKline (GSK), a British pharmaceuticals firm, bought a small Swiss vaccine-maker for $325m. It acquired Okairos because it had the technology to create vaccines that stimulate stronger than normal immune responses. In a press release Okairos said the deal included a “small number of early-stage assets”.

That passing remark turned out to be a big deal. What GSK had paid for included a preclinical Ebola vaccine candidate, and in March this year it contacted the World Health Organisation (WHO) to let it know what it had. The WHO told GSK at first that its focus was on implementing diseasecontrol protocols, and it was not until August that the company was asked to accelerate work on its vaccine.

The pharmaceutical industry has long neglected vaccines, not least because they 1

The Economist November 1st 2014 2 are mostly needed by countries too poor to

pay much for them. However, as concern about the current Ebola outbreak has grown, work on several candidates has been stepped up. This has involved unprecedented collaboration between companies, regulators, governments and bodies such as the WHO. Two candidates, GSK’s and one from NewLink Genetics, an American firm, will be ready for testing in West Africa by the end of the year. Healthcare workers will be the guinea-pigs, so if the vaccines work this would have the fortunate side-effect of protecting a vital group of people.

Johnson & Johnson (J&J), another

Business 65 American firm, is a slightly later entrant and its double-jab vaccine will begin human trials in January. Nevertheless it has just made a commitment of $200m to accelerate and expand production of one of its jabs, and has spent more than $187m on a licensing deal with a Danish vaccine maker, Bavarian Nordic, to acquire the second. This deal includes upfront payments, equity investments, payouts at each important stage of progress and a supply contract. GSK says it can make 230,000 doses

by April and 1m a month by the end of 2015.

All this suggests it sees strong demand throughout next year.

Staff at GSK and J&J say they are work-

Insolvency and commercial disputes

Caught up in the courts Doing business in Europe’s periphery is hampered by sluggish legal systems

O

N OCTOBER 29th the World Bank released its annual “Doing Business” report, ranking189 economies by how attractive they are to firms. That Singapore led the list again this year, with Eritrea stuck in last place, was less surprising than the fact that Ukraine leapt up the rankings. This was in part due to improvements to its tax-collection system, introduced before its conflict with Russia flared up. The World Bank’s indicators seek to cover many aspects of a country’s business climate, but not the risk of invasion by a belligerent neighbour.

The report’s most interesting data—on the time it takes to settle a commercial dispute or to wind up a company—shed light on the problems facing Europe’s periphery since the global financial crisis.

Countries where it is quick and easy to do these things are usually more attractive to investors than places with lethargic legal systems. In much of southern Europe, which has been hit hard by the crisis, the courts are far slower than places such as France and Germany (see chart). This helps to explain why investment has been slow to revive there.

In some places the situation is getting worse. It now takes more than two months longer to enforce a contract in the Slovenian court system than it did a year ago. And in Greece, it now takes more than four years, up around 18 months since 2010. In both places, strikes by judges, and politicians’ reluctance to push through legal reforms, have caused a backlog of cases to mount up.

Some countries, however, have started to introduce reforms to make life easier for firms and their creditors. Since 2011 Portugal has been strengthening its out-of-court settlements system for disputed contracts, to relieve pressure on its

Keeping them waiting Ease of doing business, 2014 Number of years enforce a taken to: contract 0

1

2

resolve insolvency 3

4

5

Greece Slovenia Italy Cyprus Poland Ireland Portugal Slovakia Netherlands Spain Britain France Germany Finland Luxembourg Sweden Source: World Bank

courts. Earlier this year, Spain adopted new rules making it less hard to restructure failing firms. And reforms by Italy’s new government, designed to help companies stay in business by providing protection from creditors at an early stage, have been relatively well-received.

The European Commission has been pushing hard for insolvency reform across the EU. Next year new rules are likely to come into force, that seek to harmonise procedures across frontiers and preserve the value of insolvent firms in financial difficulties. But changing the letter of the law will be no magic pill: much of the legal dysfunction in the periphery is caused by judicial resistance to change, rather than unhelpful red tape.

Laws can be changed much faster than legal culture.

ing around the clock to accelerate production and that efforts are being driven by humanitarian need rather than any assumption that they will be profitable, or even work at all. Other vaccines are now being pushed forward but are not as far ahead as these three. Profectus BioSciences recently got two government contracts worth $17m to speed up work on its vaccine.

A lot ofcollaboration is likely in production, distribution and purchasing. Rival firms’ jabs may be combined into a single treatment. Pfizer, another American firm, is offering to share its specialised production capacity. GAVI, an international agency that procures vaccines for poor countries, is working on a plan to make big advance orders of Ebola jabs, but it will need more money if its work on other diseases next year is not to suffer.

Besides the short-term help with the outbreak that it is providing, Britain has made a commitment to Sierra Leone, a former colony, to help finance the development of any vaccines it needs over the medium term. Other countries are being urged to follow its example. Governments have already provided around $500m since 2008 towards research costs for Ebola drugs and vaccines for poor countries.

In late October drug regulators, industry executives and other officials and experts gathered in Geneva to discuss what were the obstacles to delivering Ebola vaccines, and how to remove them. Regulators in America and Europe are trying to rush out guidelines on the data they would require to grant approval for vaccines to be put into widespread use. Since vaccines are given to healthy people, they must be put through stringent safety tests. Unapproved Ebola drugs, however, have been given to some patients. Pharmaceutical firms say if regulators could harmonise their approvals processes, that could speed up the delivery of new vaccines.

There are also plans for a liability fund overseen by the World Bank. This would recompense those who suffer adverse reactions after being inoculated. Vaccinemakers usually buy insurance for such eventualities, but given the shortened testing schedule for the proposed Ebola jabs, insurers may be reluctant to provide it.

If mass vaccination across West Africa proved necessary, there might be a need for tens of millions of doses. That may sound like an exciting business opportunity for the pharmaceutical firms. But even if the urgency of the situation prompts regulators to waive some of their strict requirements on testing, and even with a liability fund in place, the vaccine-makers will be putting their reputations on the line. If their jabs are rushed into production, at great cost to donors, but prove ineffective or, worse, have serious side-effects, the companies that made them are bound to suffer recriminations. 7

66 Business

The Economist November 1st 2014

Business in Iran

Awaiting the gold rush TEHRAN

Foreign firms are keen to get back into Iran if sanctions are lifted—but it will not be an easy place to do business

T

HE currency traders plying the halfempty arrivals hall of Tehran’s international airport have a simple view ofthe nuclear talks that Iran’s government is conducting with assorted foreign powers. If a deal is made, one says, “the planes will come in from everywhere.”

Hopes are high among businesspeople, in Iran and abroad, that the country may soon cease to be a commercial pariah.

After decades of ever more stringent sanctions, imposed mostly by Western countries to prevent Iran from building a nuclear bomb, they are licking their lips in anticipation. America’s chief negotiator, Wendy Sherman, heightened excitement recently when she said, “I have to tell you, as soon as we suspend our major sanctions—which will happen very early in the agreement—the world will flood into Iran.”

And in a small taste of things to come, on October 22nd Boeing said it had made its first sale to Iran since the Islamic Revolution in 1979: $120,000-worth of aircraft manuals and other data.

Officials in Tehran have started receiving foreign business delegations, hoping to win allies in the battle against sanctions. A waiter at a luxury hotel shows off a wallet full of tips from around the world. Local lawyers, consultants and bankers are peddling their services in what one calls “the last major closed market in the world”.

Familiar faces have returned, such as managers from Peugeot, a French carmaker which had a 30% market share in Iran before pulling out in 2012.

The opportunities in a post-deal Iran would be vast. Sanctions have depressed

its GDP by 25% in the past three years, according to the American government; but it is still $1.2 trillion at purchasing-power parity, making Iran the world’s 18th-largest economy. The population of 80m is welleducated; the country’s oil and gas reserves are huge. The Tehran stockexchange is the second-biggest in the Middle East, with a capitalisation of about $150 billion, according to Turquoise Partners, the first foreign investment fund dedicated to Iran.

But foreigners own only 0.1% of listed companies’ shares, compared with 50% on Turkey’s main exchange in Istanbul.

The Tehran stockmarket is pretty well run. Its operator and its regulator have been separated and live market data are available online. About 8m Iranians own shares and 500,000 trade actively. Last year the market rose by 130%. Local pension funds are keen to sell some of their holdings. This presents an opportunity for foreign investors to buy into and revamp inefficient and potentially undervalued companies with good links to the regime.

Among the most attractive sectors for foreign investors is manufacturing. Iran’s motor industry used to account for 10% of GDP, and until sanctions bit a few years ago it was employing 1m people. Retail is another promising sector. Downtown Tehran is full of fake Apple shops; consumers would be delighted to buy the real thing.

The industry that perhaps most needs foreign expertise and capital is banking.

But a thicket of regulation and a legacy of bad debt are deterrents. Last year Parviz Aghili, a veteran of American finance, opened what is in effect the only privately

owned bank, Middle East Bank. It took him two years to get his licence, although he says he is hopeful for the future.

Foreign miners might find it easier to enter Iran, since much of the industry is already privatised. Iran has the world’s 9th largest copper reserves and the 11th in iron ore. And of course there is oil—of which it has the fourth-largest reserves. New oil contracts for foreigners are already being written by officials awaiting the big day.

President Hassan Rouhani met foreign energy bosses at the Davos conference earlier this year and made welcoming noises. In the longer term, gas is an even more promising prospect for foreign investment: Iran’s reserves are the world’s largest, yet it has only a 1% share of the world market.

Persia requires perseverance So the prospects are mouth-watering but even if sanctions are lifted completely, foreign businesses and investors will not find the going easy. For a start, the gold rush will be tempered by Iran’s limited capacity to absorb foreign capital. The labour market, banking system and government are thick with red tape. “Expect logjams,” is the advice of a Western diplomat in Tehran.

For the rehabilitation of the Iranian economy, privatisation and economic reform are even more important than the lifting of sanctions, argues Suzanne Maloney of the Brookings Institution, an American think-tank. Since Mr Rouhani was elected last year the government has cut subsidies and talked of boosting the puny private sector. But the state is still involved in every part of the economy. Even where firms have been privatised, they are often still subject to price controls.

For businesses undeterred by such challenges, there is then the question of finding business partners in Iran. Many important fiefs in the economy are occupied by unsavoury entities connected to the Revolutionary Guard, part guerrilla army and part intelligence agency. It has expanded its presence in business greatly in recent years. Western firms will be wary of going anywhere near companies like Khatam olAnbia (Seal of the Prophets), which claims to have $50 billion in government engineering contracts, says Patrick Clawson of the Washington Institute for Near East Policy, a think-tank and lobby group.

Given the decades of isolation and propaganda, some Iranians will remain suspicious of outsiders, no matter what their government says. Nationalists could easily stir up antagonism against foreign businesses. The sanctions regime will take time and effort to unpick, even if American negotiators sometimes claim otherwise. And it could all too easily be reimposed were Iran to breach the terms of any nuclear deal. In all, Iran offers foreign businesses a wealth of potential rewards—but also more than its fair share of risks. 7

The Economist November 1st 2014

Business 67

Schumpeter Creative capitalism Other industries have a lot to learn from Hollywood

T

HE main building on Disney’s studio lot has seven huge replicas of Snow White’s dwarfs holding up its roof, a reminder of how Hollywood does not take itself too seriously. Nor do many outsiders. Film is an eccentric business, filled with egos and excess. For most of their history, studios have had neither the stunning returns of startups nor the steady profits of mature firms.

They are famed for blowing vast sums on high-profile turkeys.

“Heaven’s Gate”, an extravagant flop in 1980, crushed United Artists, the studio Charlie Chaplin and other stars founded in 1919.

Few business-school professors would ever think to walk the red carpet and use Hollywood as a case study. However, it is time they tuned in to Tinseltown. One reason is that other industries are coming to resemble the film business in some ways. In today’s knowledge-based economy, bosses are having to spend more time managing flighty “stars”. Food and consumer-goods makers are, as the studios have already done, seeking to focus more on a narrower range of “blockbusters”; and in industries from electronics to carmaking, the pace of product and brand launches is increasing, so Hollywood’s ability to create a buzz rapidly about a new film may offer valuable lessons.

Furthermore, movie-making is an American success story. It is one of the few remaining industries in which the country’s grip on the global market is as strong as it has ever been. China’s Chollywood and India’s Bollywood do not make films that people in other countries line up to see. America’s film and television industry reckons its exports are worth around $16 billion a year.

Every company that employs creative people must think about how to harness their strengths for commercial gain without strangling their free-spiritedness. Hollywood has a century’s experience in this. Studios recruit a fresh creative team for each film, leaving its members to work intensely together with a minimum of interference, stepping in only when things are clearly going wrong. This gives team members a feeling of control and pride in their project; and to cap it all, everyone has their contribution duly acknowledged in the closing credits.

Such teamwork is rare in other businesses, argues Mark Young of the University of Southern California’s Marshall School of Business. People work hard and collaborate well in the movie business in part because they have little job stability. Many are freelancers, who will not get hired for the next film unless they prove themselves on the current one. The tough lesson from Hollywood, then, is that job insecurity can lead to greater productivity, as long as workers believe in what they are doing and have

their achievements recognised.

Hollywood is a land of retakes. Everyone understands that constant revisions improve the product. In a recent book, “Creativity, Inc.”, Ed Catmull, the founder of Pixar and president of Disney Animation, argues that every film starts out as an “ugly baby”, growing through countless changes into a graceful adult.

“Up”, Pixar’s hit film from 2009 about a widower who travels around the world with the help of balloons, began with a completely different premise. It was reworked drastically on the advice of the “Braintrust”, an internal group set up to give frank feedback. Mobile-app firms can also be adept at adjusting products in response to internal and external feedback, and makers of consumer goods are learning to tweak their products and packaging in response to reviews. But in many businesses, bosses still tend to spurn constructive criticism.

Like Hollywood, California’s other world-beating industrial cluster, Silicon Valley, has overcome the fear of failure. Films are like tech startups in that flops are tolerated because they are so common, even when the initial idea seemed promising. In both cases, the value of failure as a learning experience is well understood. So in this part of American life, there are second, and third, acts. Studio heads sometimes roll when a film flops, but executives, directors and other talent can find redemption.

Perhaps Hollywood’s most remarkable skill is in launching brands that achieve global prominence in a matter of days. Each film is a separate product that needs its own marketing, and the stakes are incredibly high: if it has not gained sufficient momentum by its opening weekend, it may sink without trace. Studios spend vast sums on promotional campaigns, often as much as they spend on producing the film itself. Businesses that are sceptical about the value of marketing, and about the possibilities for creating consumer awareness rapidly, should look closely at how Hollywood manages to come up with new brands on a nearweekly basis. The key is to treat the marketing as a core part of the project, rather than as an afterthought.

Sunrise Boulevard For all the film industry’s reputation as a licence to lose money, the media conglomerates that own the big studios nowadays run them more professionally, and keep a closer eye on profitability.

Three of the six Hollywood “majors” are now managed by business-school graduates. Film companies no longer have extravagant numbers of projects in development, and focus more on action-packed “franchise” films featuring comic-book characters, which sell well abroad and lend themselves to sequels. Learning from Silicon Valley, Hollywood is relying more on outside financing, which means sharing the profits from hits but also protects against crippling losses when a film flops.

No one likes to talkabout age in Hollywood, but it has enjoyed remarkable longevity. The studios have survived the threats from new technologies like television and the internet, and “pivoted” repeatedly to adjust their output to audiences’ shifting tastes. Few businesses have refreshed their product line-ups so often. And few have restructured so thoroughly: studios have evolved from being vertically integrated groups that owned cinemas and kept actors on the payroll to become asset-light, flexible renters of talent. In the 102 years since the founding of Universal Pictures, the oldest of the majors, Hollywood may have provided plenty of “how not to” examples for business—but it has plenty of positive ones too. 7

68

The Economist November 1st 2014

Finance and economics

Also in this section 69 Buttonwood: Coping with volatility 70 European banks pass their stress test 71 Japan invests in South-East Asia 72 Big investors cut out the middlemen 73 Free exchange: The rights and wrongs of QE

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

Deutsche Bank

A weary lender Frankfurt

Germany’s flagship bank is in trouble. Some is of its own making

H

AMLET, Shakespeare’s Danish prince, may blame “the slings and arrows of outrageous fortune” for his plight, but those watching often conclude that indecisiveness lies at the root of his troubles.

Deutsche Bank, Germany’s biggest financial firm, faces lots of slings and arrows: a never-ending barrage of fines from American regulators, tough new rules on bank capital, a stagnant European economy and listless financial markets. Together, they have pummeled its prospects and punctured its share price. But the modern-day audience of investors, clients and policymakers are beginning to ask themselves whether Deutsche’s biggest problem is its failure to make difficult decisions.

Deutsche’s story, thus far, is hardly a tragedy. But the bank is in an oddly fragile position. It is barely profitable, having earned only €681m ($901m) last year on assets of €1.6 trillion—a return of just 0.04%.

Its shares are priced at 0.6 times the value of its tangible net assets, half the level of American titans such as JPMorgan Chase and Goldman Sachs, to which it considers itself a potential rival (see chart 1). Investors, it seems, do not. It is Europe’s thirdbiggest bank by tangible assets, but only its thirteenth-biggest by market capitalisation.

It is almost 25 years since Deutsche started its transformation from sleepy German lender to global investment-banking powerhouse. It got into the trading of

bonds, currencies and commodities (known in the jargon as “FICC”) so that it could offer services such as the issuing of bonds or the hedging of foreign-exchange risks to its corporate clients, notably the midsized manufacturers of Germany’s Mittelstand. Plugging into global markets also gave Deutsche’s bankers the chance to speculate for the bank’s own account. In the go-go years such “prop trading” made profits fizz: Deutsche’s shares traded at twice the value of its tangible net assets.

An outsized FICC business now seems like a liability, however. These days the higher the share of a bank’s income that comes from trading, the lower its share 1

Falling behind Ratio of price to tangible net assets per share

Deutsche Bank Goldman Sachs

Citigroup JPMorgan Bank of America 1.8 1.5 1.2 0.9 0.6 0.3 0

2010

11

Source: Bloomberg

12

13

14

price. The industry’s profits from FICC are tumbling, from $200 billion in 2009 to less than half that this year, according to the Boston Consulting Group, a consultancy.

Other European banks such as UBS and (to some extent) Barclays are retreating from FICC. Deutsche, however, is sticking to the argument that a bank needs trading floors to serve corporate clients. Sentimentality may be a factor: Anshu Jain, the bank’s co-chief executive with Jürgen Fitschen since 2012, was for over a decade before that the principal architect of Deutsche’s push into FICC. The investment bank generated €14 billion of Deutsche’s €32 billion in revenues last year. But it is struggling. Having regularly claimed a spot as one of the world’s four biggest investment banks by revenue (alongside Goldman, Citigroup, Bank of America and JPMorgan), it has fallen short in every quarter for the past two years.

Some of Deutsche’s problems are universal. Thanks to low and stable interest rates, markets for bonds and currencies have seesawed far less than usual. Such calm conditions deprive trading desks of business from clients rejigging their holdings. In Deutsche’s case these challenges are compounded by its heavy exposure to Europe’s faltering economy (around 70% of its nearly 100,000 employees are based there). Europe’s weakness has sapped its corporate clients’ demand for both loans and more esoteric financial products.

Another shared woe is the sudden barrage of fines meted out to banks by regulators, notably in America. Deutsche has already paid $4.5 billion and set aside a further $4.1 billion to settle various lawsuits and investigations, according to Morgan Stanley, which expect $5 billion more to be paid out by 2016. Much of the activity concerned happened on Mr Jain’s watch.

Both Deutsche and Mr Fitschen personally 1

The Economist November 1st 2014 2 also face legal troubles at home.

The third big drag on global banks is the heavy burden of new regulation intended to avert future financial crises. They are now required to hold much more equity (the money shareholders have put into the business) and other loss-absorbing buffers relative to their assets (mainly loans and investments), by various different measures.

Each of these has meant more costly funding for banks, especially “systemically important” ones such as Deutsche.

The introduction of a blunt leverage ratio, which sets a minimum buffer banks must hold against assets irrespective of

Finance and economics 69 their perceived riskiness, is particularly taxing for European banks, which have long had bigger but more conservative holdings than American ones and have also raised less capital since the crisis.

Deutsche puts its leverage ratio at 3.2%, just above the incoming minimum of 3%, which itself may well rise. American rivals do much better, and even by European standards Deutsche is lagging.

Mr Jain admitted this week that “litigation, regulation, coping with all that has been more challenging than we thought”.

Further provisions for fines drove the bank to a loss in the third quarter, although FICC

did better thanks to more volatile markets.

From next week, the task of supervising Deutsche will pass from BaFin, the German regulator, to the European Central Bank (ECB). BaFin has long been seen as a complaisant ally reluctant to hobble a national champion. The ECB is expected to be more demanding. Next year Deutsche will face additional scrutiny in America, too, as rules imposed on domestic lenders will be extended to big foreign banks. Regulators last year privately excoriated it for having “low quality, inaccurate and unreliable” reporting; they might limit payouts from its 1 American unit to the German parent.

Buttonwood Eliminate the negative A new strategy reduces pension funds’ risks, but it has a cost

P

ITY the pension-fund manager. Cash pays close to zero in many developed economies and ten-year Treasury bonds offer a yield of 2.3%. But many managers need much higher returns if they are to pay the benefits they have promised. That forces them to pile into equities, despite the risks of big bear markets like 2001-02 or 2008-09, not to mention minor scares like mid-October’s wobble.

The problem afflicts firms that maintain “defined-benefit” pension plans, which pay retirement incomes linked to a worker’s final salary. A plunge in the stockmarket creates a big deficit in the pension scheme and a nasty hole in the sponsoring company’s balance-sheet.

That can weigh on the share price: a new study by Llewellyn Consulting found that a £100 increase in the pension deficit of a FTSE 100 company reduces its market value by £160.

The alternative approach, of avoiding risk altogether, may be no more palatable.

The company would have to invest in inflation-linked government bonds that offer very low real returns. There would need to be a big increase in contributions to ensure benefits were paid.

The holy grail would be a combination of equity-like returns with reduced volatility. It is unattainable, of course. But it may be possible to get part-way there.

Redington, a consultancy firm, says the latest compromise, which is being adopted by many clients, revolves around a “volatility-control index”, such as the one created by Standard & Poor’s.

The approach aims to keep the volatility of an equity portfolio (the amount by which it fluctuates) constant at, say, 10%. If market volatility falls below that level, then investors take more risk by borrowing money to invest in equities. When volatility surges above that level, investors

Fewer white knuckles January 1999=100 S&P 500 index with constant volatility of 10%

250 200 150 100

S&P 500 index 50 0 1999

2005

10

14

Source: Bloomberg

sell shares and hold more cash.

The effect is to produce a portfolio with a much smoother ride than a conventional investment in the stockmarket (see chart).

Of course, there are no free lunches: in return for eliminating the downside, some upside can be lost as well. Such a strategy will underperform in a steadily rising market, but can make up the shortfall and more in bear markets.

There is a further risk. Sometimes, bad news can appear from nowhere. Low volatility, in other words, can be a sign of complacency. To protect against such events, investors buy put options on the volatility-control index. That gives them the right to sell their holdings at a given price. Put options on a portfolio that tracks the broader market are very expensive; options on the volatility-control index are much cheaper, because it tends to move less sharply.

Nevertheless, the cost of these options (around 0.68% a year) does reduce returns.

That may be a price worth paying, however, for a firm worried about its balancesheet. The biggest peak-to-trough loss this approach produced in the past 20 years

was 28%, compared with a 56% loss for an unhedged investment in the S&P 500.

Those with good memories may also feel that the strategy is reminiscent of “portfolio insurance”—an earlier attempt to reduce risk. This required institutional investors to protect themselves against stockmarket falls by selling contracts in the futures market. Some people believe this tactic led to “Black Monday” in October 1987, when the Dow Jones Industrial Average fell almost 23% in one day. As the market dropped, investors sold futures, causing the price to plummet; the decline in the futures price triggered a further selloff in the underlying equity market, triggering more futures sales and so on.

Something similar could happen with this controlled-volatility approach if it were adopted by a large chunk of the pension industry. If the market became more volatile, such investors would sell equities, making the market more volatile still, necessitating further sales and so on.

For the moment, however, that is unlikely to be a problem, since the approach is still new. The adoption of these strategies also suggests that pension funds are taking a more sophisticated attitude towards investment risk, instead of just placing their chips on equities and hoping for the best. In a similar vein, some funds have attempted to hedge their longevity risk (that workers live longer) and the inflation risk (that wages, and thus benefits, rise faster than expected).

What such strategies cannot do is create higher returns out of thin air. Public-sector pension funds in America that are still counting on long-term returns of 7-8% when the risk-free rate is so low, are living in fairy-tale land. Indeed, their best hope might be to buy some magic beans.

Economist.com/blogs/buttonwood

The Economist November 1st 2014

70 Finance and economics 2

Worse, the assault of new regulations has targeted FICC in particular. Prop trading is now banned or strictly curtailed in most places. Some lucrative activities, such as trading derivatives, are being forced onto exchanges, dramatically lowering margins (see chart 2). The rules about the sort and amount of capital needed to back a FICC business are especially exacting.

By sticking with the bond traders, however, Deutsche is in effect betting that FICC’s troubles are mainly cyclical. That could be a reasonable wager. European policymakers, after all, have promised to foster capital markets, in particular assetbacked securities peddled by big investment banks. Plenty ofpoliticians fret about having four American firms acting as sole gatekeepers to global markets.

Moreover, Deutsche has few other options. Its retail business in Germany, which generated almost €10 billion in revenues last year, commands only an 11% share of a heavily fragmented, unionised market in which myriad state-backed rivals depress returns. Barclays, in contrast, has a lucrative domestic market to fall back on, plus a profitable credit-card operation. UBS is focusing on asset management, an historic strength. Deutsche tried to offload its assetmanagement arm as recently as 2012, although it has since invested heavily in it.

Other businesses such as trade finance are reliably profitable but also weighed down by heavier regulation.

Yet competing in FICC requires scale: the big profits are made by the top two or three banks. Hefty investments in technology and compliance (Deutsche is spending $1 billion in America alone, taking on 500 new staff) are in essence sunk costs more easily absorbed by the titans in the field.

Deutsche’s relatively weak balancesheet will limit such investments. Although it raised €8.5 billion of new equity in June, and €3 billion a year before, much of that will be absorbed by fines or higher costs, sending it back near minimum levels. Some question whether it will be able to continue paying its annual dividend of €0.75 a share, which was not fully covered by earnings of €0.67 per share last year— down from over €7 in the glory years. Its stronger American rivals, meanwhile, can offer cheap loans or credit lines to firms in the hope of winning investment-banking business from them, for example.

Deutsche has diluted existing shareholders twice in two years by issuing new equity. Another round seems unlikely. “Anshu cannot raise capital and keep his job,” says one observer. Instead, Deutsche is improving capital ratios by shedding assets: at end-June it held around $600m less than it did before the collapse ofLehman Brothers in 2008, a 27% drop. More cuts can always be found, its senior managers say.

That has not been enough to allay concerns about its leverage (Barclays and Cred-

2

FICCle fate Investment-banking revenues, $bn

Deutsche Bank Goldman Sachs

Citigroup JPMorgan Bank of America 10 8 6 4 2 *

2010

11

12

Source: Morgan Stanley

13

0

14 *Estimate

it Suisse have gone further, trimming assets by 36% and 39% respectively), but it is also raising fears that Deutsche is harming the very businesses that it will need to escape from its rut. It has cut back drastically on the trading of Japanese shares, for example, and, like other banks, pulled out of commodities altogether.

Some suggest a new model is emerging: taking more risk. They reckon Deutsche has started buying riskier investments (or issuing loans to riskier counterparties, such as property developers) to pep up profits. It has ramped up “junk” lending to companies backed by private-equity, one of the areas where it lost money in the 2008 crash. “They have a different view of risk than the rest of us,” says one banker, who says Deutsche has plumped for deals his firm considered too dicey. (Higher-ups at Deutsche say they adapt their risk appetite to market conditions, but deny a wholesale change in strategy.)

So far, Deutsche’s approach has not paid off. It is now the 36th biggest bank in the world by market capitalisation. All 35 above it bar one have delivered positive shareholder returns (taking in dividends and share-price movements) since the beginning of 2012. Deutsche has not.

Nonetheless, it is just possible that there might be a happy ending. If regulators stop tightening the ratchet on profits through ever more stringent capital requirements, for example, and markets turn in its favour, Deutsche might thrive. Profits could reach around €6 billion a year as early as 2016, analysts reckon, close to the glory years pre-2007. Even muddling through could see its shares trade closer to net asset value.

But many German banks—Dresdner, Commerzbank, WestLB and others—have briefly built themselves into a global force in investment banking, only to retreat again. If events continue on their current trajectory, Deutsche’s strategy of being neither out of FICC nor quite able to compete with the biggest banks could lead to a similar outcome. With capital tight, but with the current management unable to raise more, further cuts loom. Like Hamlet, it may eventually succumb to its wounds. 7

European banks

Stress relief Europe’s banks are in decent shape—but that is not enough to repair its economy

F

IVE years ago this month, the discovery of a black hole in Greece’s public finances marked the start of the euro-zone crisis. Policymakers have scrambled to contain it ever since. The outcome of their latest ploy, a probe of the continent’s banks intended to demonstrate their solidity, was revealed on October 26th. Results were mostly encouraging, at least outside Italy.

But more will be needed to prod Europe’s economy back to growth.

Run over several months and involving 6,000 staff, the “stress tests” were certainly more diligent than Europe’s past attempts, which on several occasions resulted in banks faltering soon after they were pronounced healthy. Much of the work was overseen by the European Central Bank (ECB), which is taking over regulation of the euro zone’s biggest lenders next week.

Probing the books of the 130-odd banks involved unearthed minor flaws rather than the graveyards of skeletons some had feared. The ECB found €136 billion in troubled loans banks had not already owned up to, bringing the European total to €879 billion ($1.1 trillion). But the correction is piddly compared to the €22 trillion of assets they hold.

Regulators used the revised numbers in a simulation of how banks would fare in a severe recession. They concluded 25 of them would experience losses big enough to reduce their capital below the regulatory minimum, with a collective shortfall of €25 billion. But given the tests were run on end-2013 figures and most weak banks have been busily raising capital since, only €9.5 billion more is now needed, at just 13 1

The seven biggest shortfalls ECB stress tests on European banks Total assets, FY 2013, €bn

Capital shortfall*, €bn

0 0.5 1.0 1.5 2.0 2.5

Banca Monte dei Paschi di Siena (Italy) Eurobank Ergasias (Greece)

Banco Comercial Português (Portugal) National Bank of Greece (Greece) Österreichische Volksbanken (Austria) Permanent TSB (Ireland)

Banca Carige (Italy) Sources: European Banking Authority; Bloomberg; company accounts

199.1 77.6 82.0 110.9 20.9 37.6 42.2 *Under the adverse scenario

The Economist November 1st 2014 2 banks—a small fraction of the €200 billion

raised since mid-2013. Only seven have more than €500m to raise (see chart on previous page).

Sceptics question how tough the tests really were. Even the worst-case economic scenario failed to gauge the impact of deflation, for example, which would cause defaults to soar, since it would reduce firms’ and households’ income relative to their debts. Nor did it assess most stateowned banks in Germany, which will remain the purview of the national regulator and many of which are believed to be full of dud assets. But in most respects they were as rigorous as stress tests carried out in America in 2009, which proved a turning point for the financial sector there.

The tests did highlight weakness in Italy’s banks, home to four of the institutions still in need of fresh funds. Monte dei Paschi di Siena, the country’s third-largest bank, was by far the most prominent lender to flunk; its shares slumped this week and it is now considering “strategic options”. Most other failures were in the small, struggling economies of the euro zone’s periphery.

One immediate outcome of the tests was encouraging: the interest rates banks pay to borrow decreased slightly, as fears over their solvency abated. As banks rely on short-term borrowing to fund around half the loans they extend, that is equivalent to a factory getting a big price cut from a supplier. The rebate should be passed on to borrowers in the form of lower rates.

This change will be felt most strongly in the periphery, where firms have been paying higher interest rates on loans than their rivals in the euro zone’s core.

Banks still hold a disproportionate amount of their own country’s sovereign debt, however, so any sign of a fiscal crisis could easily undo them. The creation of a “banking union” underpinned by a single supervisor within the ECB is part of a broader plan to cut the “doom loop” that has tethered Europe’s banks to the fortunes of their government (and vice versa)—one of the biggest flaws in the design of the single currency.

For now, the main problem for Europe’s banks is the continent’s anaemic economy.

They have been proved (mostly) solvent, but whether they are viable depends on whether they can find customers both willing to borrow and able to repay. Few firms are bullish enough to expand, even if banks are ready to back them.

Before the stress tests, banks were seen as an obstacle to growth, giving ammunition to policymakers reluctant to boost demand, for example through a bond-buying scheme at the ECB or by slowing budget cuts. Those arguments have now been weakened. A healthy financial sector is a necessary but not sufficient condition for a revival of the euro zone. 7

Finance and economics 71 Japanese investment in South-East Asia

Outward bound

Anywhere but at home Japan’s direct investment in: $bn

25 South-East Asia 20 PHNOM PENH and TOKYO

A weak domestic economy is spurring Japanese firms to expand abroad

15 10

I

T IS not every day that the opening of a shopping centre attracts a prime minister, but then Aeon Mall in Phnom Penh is not any old shopping centre. The Japanesebuilt complex is Cambodia’s biggest, complete with an ice rink, television studio and bowling alley. For Hun Sen, the attending prime minister, it is a symbol of Japanese investment. Governments across SouthEast Asia are courting Japanese firms, and a torrent of yen is surging their way.

Japanese investment in the region doubled to 2.3 trillion yen ($24 billion) last year, the latest in a series of sizeable increases (see chart). Part of that is mergers and acquisitions by Japanese firms, which have skimped on investment at home and so have a cash hoard of some ¥229 trillion.

SoftBank, a Japanese mobile carrier, just led a $100m investment in Tokopedia, an Indonesian e-commerce firm; Toshiba, a conglomerate, has pledged to invest $1 billion in South-East Asia over five years. A year ago Mitsubishi UFJ Financial Group, Japan’s biggest bank, spent ¥536 billion to buy 72% of Thailand’s Bank of Ayudhya.

During the first wave of Japanese investment, in the 1980s and 1990s, money poured into Thailand, Malaysia and Singapore, building up their automotive and electronics sectors. That flow largely ceased after the Asian financial crisis of 1997-98, when Japanese firms began to focus on China’s vast, cheap labour force.

Yet with labour costs now steadily ris-

Hun Sen is shopping, just like Japan Inc

China 5 0 2004 05 06 07 08 09 10 11 12 13 Source: JETRO

ing in China, and political tensions between Japan and China continuing to flare, South-East Asia looks attractive again. Japanese investment in China fell by nearly two-fifths last year, even as it grew in places like Cambodia. Although China is still Japan’s biggest trading partner, Japanese firms invested nearly three times more in South-East Asia last year. For South-East Asian countries, too, Japan is an important hedge against China.

But the embrace of South-East Asia is not without its critics. Some worry that the headlong rush to the region by Japanese banks, in particular, may prove short-lived.

In 2013 the Bank of Japan began buying bonds with newly created money (quantitative easing), as part of a plan by Shinzo Abe, the prime minister, to banish deflation and boost growth. The central bank’s purchases left Japanese banks with lots of cash: they keep roughly 15% of their assets as excess reserves at the BoJ, earning minuscule returns. Since demand for loans in Japan is still subdued, they are hunting for borrowers abroad. Lending by Japanese banks to the rest of Asia, including China, has grown quickly since the end of 2012 and stood at $465 billion in June. But if Japan’s monetary policy changes, such flows could reverse.

Meanwhile, Japan’s government wants local firms to invest more at home. Quantitative easing has weakened the yen, making it more attractive to do so. But Japan’s rapidly ageing population means the domestic market is shrinking, undermining the incentive to build new factories. For every Canon, a camera-maker, which recently said it would increase the share of its production in Japan, there are several counter-examples, such as Mitsubishi Motors, a carmaker, which is building a new factory in Indonesia. Japanese firms focus more on profits than in the past, thanks to improvements in corporate governance, notes Robert Feldman of Morgan Stanley, an investment bank; that is prompting them to look for better prospects abroad.

With more production shifting abroad, Japan’s exports are also suffering. Deutsche Bank estimates that outbound invest- 1

The Economist November 1st 2014

72 Finance and economics 2 ment reduced Japan’s trade balance by as

much as 16 trillion yen in 2012, by providing local substitutes for Japanese exports.

That is more than Japan’s trade deficit that year of 7 trillion yen. Profits from abroad were not sufficient to make up for the damage to the current account. As overseas ventures accelerate, they will help tilt Japan towards a trade deficit more often, leaving its financial system more vulnerable to the fragilities built up over decades.

The risk is that Japan could become a “rentier” economy, says Martin Schulz of the Fujitsu Research Institute in Tokyo. In this scenario, Japanese firms do not make the investments in Japan that are needed to generate broad-based wage growth, and focus instead on their foreign ventures.

That would leave Japan living off the “rent” from its foreign assets, rather than the fruits of domestic economic activity.

That prospect does not seem to be deterring Japanese firms. Just outside Phnom Penh is a new industrial park set up to lure Japanese manufacturers such as Minibea, which makes tiny motors for mobile phones, and Ajinomoto, which makes food seasonings. There is a constant stream of new tenants; the zone is now in its third phase of development, says Hiroshi Uematsu, who oversees it. “As a private firm, you need to go somewhere,” he says. 7

Institutional investors

In-house revolt Big pension and sovereign-wealth funds are cutting out the middleman

H

EY finance hotshot! Want to trade in the London penthouse and 90-hour working week for something totally different? Do you prefer big mountains to big buildings, long summer evenings to long commutes and yet want to pursue a rewarding career in finance? Why not move to Juneau! “You will find all these things and more at the Alaska Permanent Fund Corporation,” promises the website of the government agency which manages the oil revenue Alaska is setting aside for the future. Sovereign-wealth funds and other big institutional investors from Ottawa to Oslo and—if icefishing isn’t your thing— Abu Dhabi to Auckland are hiring. The intention is to lure talent from private-equity firms and hedge funds in order to make the same sort of investments in-house.

Sovereign-wealth funds made direct investments of around $186 billion last year, nearly triple the level of 2012, according to the Sovereign Wealth Fund Institute, a consultancy. Pension funds, insurers and family offices are doing the same—a response

Mayfair, Manhattan, Juneau in part to the exorbitant fees and disappointing returns of many asset-managers.

ADIA, Abu Dhabi’s sovereign-wealth fund, with assets of $773 billion, now employs 1,500 people. South Korea’s National Pension Service ($430 billion) will boost its investment team by 60 people this year. Canada’s Pension Plan Investment Board recently opened a fourth international office, in São Paulo, to enhance its ability to “source and manage complex, sizeable investment opportunities”.

The trend is a logical extension of the practice of co-investing, in which institutions put money directly into specific deals alongside funds in which they have also invested. Institutions have demanded such opportunities both to cut the overall cost of investing via private-equity funds and to gain experience that might help them initiate deals of their own in future.

The next step is to ally with other likeminded investors. A Canadian pension fund, a British one and Kuwait’s sovereignwealth fund last year bid (unsuccessfully) for Severn Trent, Britain’s second-largest publicly traded water company. Some big institutional investors are now going it alone: a Singaporean sovereign-wealth fund recently bought a significant share in RAC, a British car-breakdown service, outbidding private-equity firms such as Blackstone, CVC and Charterhouse.

The financial crisis made big investors realise they had little understanding of their own portfolios, were overpaying middlemen—fees of 2% of the sum invested and 20% of profits were once common— and were working to different schedules (sovereign-wealth funds invest for generations; private-equity funds for five years). A long investment horizon is the institutional investor’s greatest competitive advantage, yet asset-managers’ cycles have become ever shorter, says Ashby Monk, an

adviser to such investors.

Insourcing is easier said than done, counters one private-equity manager, who says his clients all claim to want to co-invest but most do not really have the capability or nerve to assess deals. Building an investment team is too expensive for all but the biggest. Attracting top talent is also hard when government salaries are restrained by law (as in America), or when the investor is based in a desert or by a glacier. But lay-offs during the financial crisis left lots of experienced moneymen willing to consider jobs in Juneau or Abu Dhabi.

Whether internal asset managers earn higher returns is another question. A study released earlier this year by CEM, a Canadian research firm, showed that internal private-equity investments (including co-investments) outperformed external ones by over three percentage points and beat funds of funds by five. This was almost entirely due to lower costs.

Things can easily go wrong: the Korea Investment Corporation’s $1 billion of direct private-equity investments underperformed those it made through private-equity funds by nine percentage points last year. But when they go right, institutional investors tend not to look back. Mark Redman left 3i, a private-equity firm, to head the private-equity arm of OMERS, the Canadian pension fund that bid for Severn Trent, drawn by the “extreme attractiveness of permanent and patient capital”.

Over the past five years, gross returns from its direct private-equity investments have exceeded those it has made through external funds by 44%. As a result, OMERS reduced the share of private-equity investments it farms out from 59% in 2007 to 27% by the end of 2013 and plans to cut it even further. Even the private-equity types who have not moved north of the Arctic Circle will shiver at such figures. 7

The Economist November 1st 2014

Finance and economics 73

Free exchange Early retirement Ending quantitative easing may be penny-wise, pound-foolish

O

N OCTOBER 29th the Federal Reserve said it would end “QE3”: the programme of asset purchases it first announced in September 2012 and began shrinking last December. Quantitative easing, or the buying of assets with newly created money, has been the workhorse of monetary policy since rich-world interest rates fell almost to zero in 2008-09. Despite its expansive use since then, many still see it as an exotic and possibly dangerous monetary tool. They raise three pressing questions: did it work, did it have unacceptable side effects, and was the Fed right to stop?

Though QE is often described as an “unconventional” form of monetary policy (as opposed to mundane adjustments to interest rates), it has actually been in use for some time. The Federal Reserve tried it from 1932 to 1936, and the Bank of Japan in the early 2000s. Both have used it again since the financial crisis, along with the Bank of England.

QE is thought to work in a few ways. Early in the recession asset purchases were primarily intended to ease credit by directing a firehose of liquidity into fearful markets. Other effects became more important over time, such as portfolio rebalancing. A bank that has sold bonds to the Fed will typically wish to spend the proceeds to buy some other asset. When banks buy new securities, the newly created money flows through the system, raising asset prices and reducing interest rates. That, in turn, should boost demand by making investment more attractive. If banks buy foreign assets, that may weaken the exchange rate, giving a boost to exporters. Finally, QE is also thought to work as a signal: research suggests that it reinforces central banks’ policy guidance, making promises to keep rates low more credible, for instance.

QE’s detractors point out that central banks around the rich world have expanded their balance-sheets by trillions of dollars in recent years (see chart), yet are still nurturing lacklustre recoveries. Nonetheless, there is a consensus among researchers that QE has indeed lowered borrowing costs, and thus increased both economic output and inflation, as its advocates intended.* In both America and Britain, for instance, several studies have concluded that it helped to lower interest rates. Those declines are generally held to have boosted economic growth. Recent work by Martin Weale and Tomasz Wieladek of the Bank of England found that for every 1% of GDP the Fed spent on bonds, both real output and inflation rose by about a third of a percentage point.

Given how close so many economies now are to outright deflation, even a small boost to inflation is not to be sneered at.

Easing off Central banks’ balance-sheets, Jan 2008=100 500 Bank of England 400 Federal Reserve 300 ECB

200 100

Bank of Japan

0 2008

09

Source: Thomson Reuters

10

11

12

13

14

Why haven’t central banks done more in that case? Excessive optimism is one reason; the Fed, for example, has repeatedly overestimated how quickly the American economy was likely to grow. The fear ofpossible side effects has also stayed central bankers’ hands. In some cases, those are subsiding: claims that the new trillions coursing through the economy would lead to hyperinflation no longer seem credible, given how static prices remain.

Central bankers are also increasingly confident that their pneumatic balance-sheets will not interfere with conventional monetary policy. The Fed, for instance, has begun paying interest on the excess reserves banks keep with it. By raising that rate it can attract extra reserves and thus curb bank lending.

The worry that QE is generating dangerous financial instability has been more persistent. Jeremy Stein, who served on the Fed’s Board ofGovernors from 2012 to 2014, thinks that persistently low interest rates have caused investors to embrace frighteningly risky assets in a search for yield. If QE spurs the construction of a financial house of cards, the argument runs, its eventual collapse may hurt more than QE ever helped.

Risk-maker or risk-taker?

These fears will be difficult to judge until more time has passed, yet there are good reasons to believe they are overstated. Most central bankers insist they have the regulatory tools to keep excessive risk-taking in check (although their recent record in that respect is inglorious). Recent research by Gabriel Chodorow-Reich of Harvard University finds that the “reach for yield” QE has prompted has been modest relative to its benefits. Asset purchases helped recapitalise ailing banks, he reckons, and higher asset values have dampened the incentive to make risky bets. Anyway, it is important to weigh QE’s risks against those of other policies. Were the European Central Bank to resort to QE, it might lead to undue risk-taking, but if the policy also reduced the odds of a catastrophic break-up of the euro it would be worthwhile.

Critics’ third complaint is that QE raises inequality. Asset purchases, naturally, raise asset prices. Since the rich own most financial assets, QE tends to increase inequality through the “portfolio” channel. Yet to the extent that QE boosts growth, it reduces inequality, for joblessness is regressive: poorer workers suffer higher unemployment rates and more significant loss of income in weak economies. Higher inflation also makes debts easier to bear, because they can be repaid with money that is worth less.

Since borrowers tend to be poorer than creditors, QE diminishes inequality in that way too. Recent research suggests that tight monetary policy tends to raise inequality while expansionary policy reduces it.

If QE works and its potential costs are overstated, should the Fed not keep at it? Those cheering its demise note that growth has been strong and steady for most of2014, and that unemployment, at 5.9%, is near its long-term average. Yet history suggests that leaving QE behind is never simple. As long as interest rates remain near zero any nasty new development will force the Fed to resume it or stand by while the economy deteriorates. And low and falling expectations of inflation suggest that markets doubt the Fed’s ability to leave Japan-style stagnation behind. A premature exit from QE3 is a good way to make sure there is a QE4. 7

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

Studies cited in this article can be found at www.economist.com/qe14 Economist.com/blogs/freeexchange

74

Science and technology

The Economist November 1st 2014 Also in this section 75 A failed rocket launch 75 Genes and behaviour 76 Orphan technologies

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

Stem-cell research

Having the stomach for it “Organoids” derived from stem cells help show how embryos develop and why adults get certain diseases. They may even be used as treatments

J

UST over a year ago, a group of researchers in Austria announced with much fanfare that they had pulled off a spectacular feat of stem-cell science. They had taken induced pluripotent stem cells (which behave similarly to embryonic stem cells, but are made from skin cells and thus do not require the destruction of human embryos) and coaxed them into differentiating and growing into objects known as organoids.

An organoid is not a proper organ, but it resembles one in scientifically useful ways, both in the mixture of cells it contains and in its anatomical features. In choosing which organ to mimic, Madeline Lancaster of the Institute of Molecular Biotechnology, in Vienna, who led this research, went for the big one—the brain.

Dr Lancaster’s organoid was not the first, however. That honour had fallen, a couple of years earlier and largely unnoticed by the world, to a humbler part of the body, the intestine. Intestinoids were created in James Wells’s laboratory at the Cincinnati Children’s Hospital Medical Centre, in Ohio, in 2011. Now, another group of researchers at Dr Wells’s lab have produced a third sort. As they report in Nature, Kyle McCraken and his colleagues have grown simulacra of stomachs.

Stomachs, like intestines but unlike brains, develop from a layer of the embryo called the endoderm (brains develop from the ectoderm). One reason for choosing the stomach was to understand the endo-

dermal developmental process better, for the details of the stomach’s genesis were obscure when the team started work. A second, more practical reason was that there is no good animal model for those stomach diseases (peptic ulcers and gastric cancer) caused by a bacterium known as Helicobacter pylori. Since 15-20% of people suffer a gastric ulcer sometime in their lives, and 2% get stomach cancer, that is a serious omission from the biomedical-research arsenal. Human gastric organoids, as Dr McCraken and his associates call their invention, may help plug the gap.

Proof by induction The process by which a fertilised egg turns into a complete animal, human or otherwise, is orchestrated by proteins called growth factors, which stimulate or suppress the functions of particular genes.

Tweaking these, along with a few other chemicals, including one known as retinoic acid that is important in lots of developmental processes, can guide stem cells down the right path to arrive at a particular tissue type. And that was what Dr McCraken’s team did.

Despite the mystery of the stomach’s origin, the team suspected the involvement of several things known to assist the formation of other organs. They lighted in particular on epidermal growth factor (EGF), fibroblast growth factors (FGFs), bone morphogenetic proteins (BMPs, an-

other type of growth factor) and WNT (a cellular signalling pathway whose name is a combination of “W” for “wingless” and “NT” from “integration”, two originally separate names for the same gene, which it acquired because it was discovered independently in fruit flies and mice).

Like chefs developing a recipe the researchers applied a sprinkle of this and a pinch of that to their stem cells, to coax them into becoming the desired item on the menu. First, they found they could make endoderm into “generalised foregut” (which can turn into stomach or oesophagus) by promoting the activity of particular versions of FGF and WNT, while inhibiting BMP. Then, to turn that foregut into stomach tissue, they worked out you need to add a dash of retinoic acid. Finally, they discovered that a touch of EGF produces the stomach-lining epithelium that secretes the organ’s digestive enzymes.

After about five weeks’ growth the result looked, under a microscope, like tissue from real embryonic stomachs. To double check, the team examined their creation’s transcriptional profile. This is the mixture of messenger molecules, copied from a cell’s genes, which tell that cell what proteins to make. The organoids’ profiles matched those of natural embryonic stomach tissue. Dr McCraken thus seems to have worked out the system of signals that create stomachs in embryos. He has thereby added a piece to the jigsaw whose eventual picture will describe embryonic development completely. But he has also made something of immediate use.

Induced pluripotent stem cells are thought by many to have a bright future repairing worn-out tissues and even—if organoids can be used as a stepping stones to the creation of real organs—in the replacement of entire diseased or damaged body parts. In the short term, though, they are 1

The Economist November 1st 2014 2 being peddled as a way of improving med-

ical testing, particularly by doing tests that have proved hard or impossible in the past.

Dr McCraken has shown that his organoids open one such possibility: to create a laboratory model of the interaction between H. pylori and human stomach tissue, and thus obviate the need to continue searching for an animal-based one.

To try this out, he and his colleague Yana Zavros introduced the bug to some organoids and watched. The bacteria behaved, as far as the researchers could tell, exactly as they would have done in natural stomach tissue. They bound themselves closely to the epithelium and caused the cells in it to react by, for example, doubling their rate of reproduction. This reaction is promoted by a particular bacterial toxin so, as further confirmation, Dr McCraken and Dr Zavros repeated the experiment using a different strain of the bug, which had

Science and technology 75 had the gene for that toxin excised. This time, the epithelium did not react.

It looks, therefore, as if those who study the interaction between bacterium and stomach will be able to do so more easily in the future, using gastric organoids. Moreover, subsequent experiments suggest that organoids might be employed for repair, as well as research. The team have used them successfully to plug holes in the stomachs of mice with peptic ulcers—though human trials are still a long way off.

The upshot is that Dr McCraken and his colleagues have not only extended the range of organoids that can be made (and, with a bit of luck, it will soon be extended still further, because lungs, livers, pancreases and bladders are all derived from the embryonic endoderm). They have also confirmed that induced pluripotent stem cells, and organoids derived from them, have a bright future. 7

Private space flight

Oops...

One of America’s rocket-launching companies suffers an embarrassment

“R

OCKETS are tricky,” quipped Elon Musk, the founder of SpaceX, a firm that builds and launches them, just after one of his blew up. That thought will surely have crossed minds at Orbital Sciences, another such company, whose latest mission exploded spectacularly on October 28th, 11 seconds after it took off from the Wallops Flight Facility in Virginia. The mission-control staff themselves sent it a self-destruct order when something was clearly amiss.

SpaceX and Orbital are the only American outfits that ferry supplies to the International Space Station. The station’s crew will not be short of rations.

A Russian ship docked the following day and SpaceX is making a delivery in December. But the loss is unfortunate because a large number of scientific experiments, including many devised by schoolchildren, have gone for good.

Orbital gives its missions the names of pioneers of commercial space flight.

This week’s was “Deke Slayton”, who was one of America’s first crop of astronauts, though a heart condition meant he never flew into space. (He went on to direct a small rocket-launching firm that will, for a fee, put cremated ashes into orbit.) Orbital’s mission controllers wore, as a joke, 1960s-style shirts during the launch, but the firm’s connection to the past runs deeper than mere fashion, for the shirt style was of an age with the engines in the failed rocket itself.

In the mid-1990s, a contractor Orbital works with bought a job lot of rocket

Genes and behaviour

Next candidate More evidence that certain versions of some genes can encourage violence

O

NE of the scientific subjects best guaranteed to get people hot under the collar is genetic determinism, especially if what is allegedly being determined is behavioural. Studies of adopted children (and particularly of twins adopted at birth by different sets of parents) suggest some behavioural traits are indeed heritable. Geneticists, though, have had difficulty identifying specific genes whose variants, known as alleles, cause different predispositions in those possessing different versions. That is why a new piece of research on one of the few genes for which such evidence exists is likely to get considerable scrutiny and cause much controversy—not least because the work in question suggests that a second gene, hitherto fingered as a cause of behavioural variability, has no effect, while a third, hitherto unfingered, does.

The first two genes are called MAOA and HTR2B. The behaviour they allegedly predispose people to is aggression. The latest data, collected by Jari Tiihonen of the Karolinska Institute, in Stockholm, and his colleagues, and published in Molecular Psychiatry, come from convicted criminals in Finland, some of whom were banged up for violent crimes and some for offences such as theft that involved no violence.

Breaking the code encodes monoamine oxidase A, an enzyme that degrades molecules called monoamines. This group includes some of the best-known neurotransmitters, substances that carry signals between nerve cells. Among them are serotonin and dopamine, both of which affect mood and behaviour. HTR2B encodes one of the receptor molecules for serotonin.

Dr Tiihonen picked MAOA for investigation because two previous studies had suggested some of its alleles (specifically those with low activity, which thus increase levels of the neurotransmitters in question), might have a role in promoting violence.

The first of these investigations involved a Dutch family, many of whose members had low-activity MAOA. The second, conducted in New Zealand, suggested that a combination of low-activity MAOA and an abusive upbringing promotes a violent temper, though low-activity alleles by themselves do not. HTR2B had previously been flagged up as a risk factor for violence in only one human study, but experiments on mice confirmed the idea was plausible. 1 MAOA

Guy Fawkes night comes a week early motors built for the N1, the Soviet Union’s entry in the race to put a man on the Moon. These, which had been languishing in a warehouse in Siberia, have been refurbished and are being fitted to Orbital’s vehicles to propel them into space.

What caused the launch failure was, as The Economist went to press, unclear.

But if it does turn out to have been the engine then Mr Musk, whose firm developed its own motor from scratch, will no doubt have a wry smile on his face.

The Economist November 1st 2014

76 Science and technology 2

Dr Tiihonen and his colleagues divided their convict volunteers into those who had never committed a crime of violence (defined as homicide, attempted homicide and battery—though sexually motivated assault was excluded, to avoid confusing the data) and those who had. They then subdivided the second category into the moderately violent (who had committed fewer than ten such crimes) and the extremely violent (who had committed ten or more).

Non-violent prisoners, the researchers discovered, were not more likely than the average Finn to have a low-activity MAOA gene. Violent ones, however, were. And extremely violent ones were a lot more likely to. This result does indeed suggest that lowactivity alleles of MAOA can have an effect on the development of violent tendencies.

By contrast, the suspect version of HTR2B was as common in non-violent as in violent prisoners, and also as in the population at large.

Dr Tiihonen’s examination of these two genes was a proper, hypothesis-driven investigation. The idea that a third, CDH13, might be involved, though, was the result of a genetic fishing expedition, or genomewide association study as they are known in the trade. This looked for stretches of DNA more common in violent prisoners than non-violent ones, and then identified what they were.

Such studies should be treated with caution because, since the whole genome is being examined, spurious correlations are inevitable. However, the team did check their conclusion against another set of prisoners before publishing it, and found the same result. Moreover, cadherin 13, the protein encoded by CDH13, also affects nerves. It helps regulate the growth of axons—the filamentous and often extremely long protuberances of nerve cells that reach out to convey a nerve’s message to the place where it is needed, so this gene’s candidacy as a violence enhancer is at least plausible.

The net effect of Dr Tiihonen’s work, then, is to confirm the idea that one particular gene’s alleles can affect violent behaviour, while eliminating a second candidate and introducing a third. But the crucial question is, what is meant by the word “affect”? Something like half the population has a low-activity MAOA allele, and, obviously, the overwhelming majority of them are not violent criminals.

Dr Tiihonen and his colleagues estimate, on the basis of their study, that pertinent alleles of MAOA and CDH13 together play a part in 5-10% of Finland’s violent crime, so even their own research suggests these genotypes are minority causes of such offences. Part of the explanation for the former’s role may lie in the New Zealand study, which showed the importance of interactions between someone’s up-

bringing and his genes. Also, as Dr Tiihonen observes, in Finland, most violent crime takes place under the influence of alcohol or amphetamines, both of which boost dopamine levels. There is evidence that high dopamine levels are linked to violent behaviour, so perhaps the double whammy which is created by adding the drug-boost effect to that of the enzyme tips some people over the edge.

That is speculation. But what Dr Tiihonen and his team have done is provide a third data point for the hypothesis that low-activity MAOA can, in the right circumstances, trigger violence. This does not prove the hypothesis. But it should make people take it more seriously. 7

Orphan technologies

A phoenix rises Ground-effect vehicles are a clever idea whose time has never come—so far

S

OME technologies look wonderful on paper but don’t quite make it in the big, bad world. Airships. Autogyros. Hovercraft. They all work. They even have niche applications. But they have never lived up to their promise and been widely adopted.

So it is with ground-effect vehicles—aircraft-like machines which skim a few metres above the sea by acquiring part of their lift from aerodynamic interaction with the surface beneath. This means they use less fuel than a true aircraft while travelling faster than a ship.

Many attempts have been made to build them. Boeing tried in the 1990s, with the Pelican Ultra Large Transport Aircraft.

The Soviet Union tried with the Ekranoplan, whose prototypes now moulder in the naval base at Kaspiysk. Two German engineers even attempted to construct

Ready for take-off?

what was, in essence, a ground-effect aquatic sports car. All failed—or, rather, failed to make something that was better than established alternatives. But hope springs eternal, and the Wing Ship Technology Corporation, a South Korean company, is trying to revive the idea. The country’s armed forces have already agreed to buy some and the firm says it hopes to announce its first commercial sales (to an oiland-gas firm and a Mediterranean ferry company) shortly.

The prototype (pictured below) is powered by two turboprops and can carry 50 passengers. It has a catamaran-style hull and a reverse delta wing. Its cruising speed, 180kph (110mph), makes it faster than a jetfoil, its principal rival. And the production version will have a range of1,000km.

The crucial breakthrough, the firm believes, is the delta wing. This approach was actually devised in the 1960s by Alexander Lippisch and Hanno Fischer, the makers of the putative “sports car”. Their single-seater Aerofoilboot, as they dubbed it, was not a commercial runner, but Wing Ship Technology believes the idea of a delta wing is sound and, though Lippisch is now dead, Mr Fischer is one of their advisers.

The delta wing’s geometry amplifies the ground effect, allowing the new craft to cruise as high as five metres above the water’s surface. That means it is less likely to be confined to harbour by rough seas, which was one of the problems encountered by previous designs. It also launches itself by directing some of the airflow from the turbo props downwards, to create a temporary hovercraftlike effect until it is travelling forwards at full tilt. The difficulty of getting airborne was another bugbear of previous designs.

It remains to be seen whether Wing Ship Technology’s craft actually will be the breakthrough that enthusiasts of groundeffect vehicles are hoping for. But if it is, it will be an example of the value of persistence. There may yet be hope for the hovercraft, the autogyro and the airship. 7

The Economist November 1st 2014 77

Books and arts

Also in this section 78 American photography 78 Nepal’s recent history 79 Capitalism through the ages 80 The art of surgery

For daily analysis and debate on books, arts and culture, visit Economist.com/culture

New fiction

Amazing grace

Marilynne Robinson returns to mid-century Iowa with another tour de force

O

VER the course of three novels set in the fictional town of Gilead, Iowa, Marilynne Robinson does what novelists are supposed to find impossible: she makes virtuous people interesting. Perhaps even more impressively, she makes their virtues interesting. The novels have an old-fashioned preoccupation with virtue, grace and their relation to lives as lived; though they are set in the 1950s their concerns are distinctly 18th-century.

John Ames, a 76-year-old Congregationalist preacher whose letter to his young son makes up the entirety of “Gilead”, the first of the three books, has had a tragic life, losing his first wife and child, as well as three siblings, but he remains both personally devout and devoted to pastoral care. In the hands of a less clear-eyed novelist his loving parochialism and thoughtful piety might have melted into something treacly; instead Ms Robinson makes him wise and his quotidian decency beautiful, even heroic.

The central figure in “Home”, the second novel in the trilogy, is Robert Boughton, Ames’s boyhood friend and a Presbyterian minister. His patience and paternal concern for his ne’er-do-well son Jack wear thin over the course of Ms Robinson’s thoughtful recasting of the Prodigal Son story, but are no less real and sincere for doing so.

Lila, Ames’s late-in-life wife and the

Lila. By Marilynne Robinson. Farrar, Straus and Giroux; 272 pages; $26. Virago; £16.99 eponymous protagonist of Ms Robinson’s most recent novel, is perhaps the richest and most appealing character of the three: fierce, proud and stubborn, but possessed of a bone-deep decency. Boughton and Ames both have deep roots in Gilead, while Lila has no roots at all: when the book opens she has been abandoned by her biological family and taken in by Doll, a shrewd old drifter.

Ms Robinson never explicitly states where Doll and Lila are—somewhere along the mountainous edges of the Dust Bowl, sometime during the Depression.

They themselves do not know: Lila, Doll and the others they fall in with just “walk south ahead of the weather, walk north in time for the crops.” Their lives have a prelapsarian roughness. They have no religion, and view preachers as little better than hucksters. None save Lila can read; they sleep rough and move from town to town, largely by choice.

Eventually Doll commits a necessary crime, leaving Lila on her own. After a brief stint working in St Louis, first as a prostitute and then as a cleaner, she wanders into Iowa, and at the edge of Gilead finds a shack where she plans to stay a while. One day she shelters from a rain-

storm in Ames’s church: it happens to be a Sunday and he happens to be preaching.

Ms Robinson’s readers have the pleasure of witnessing this scene twice: once from Ames’s perspective in “Gilead”, and then from Lila’s in this novel. The meeting knocks them both off their orbits, but for different reasons. Ames has lived in lonely abstraction for so long that he does not know what to do with the prospect of worldly attraction, and therefore turns it unworldly; he describes Lila to their son as “someone with whom the Lord might have chosen to spend some part of His mortal time.” Lila, whose life until she moved to Gilead and met Ames has been wholly defined and circumscribed by the always-fulfilled prospect of disappointment, is terrified of wanting anything.

When Ames asks her if they are getting married (she had raised the possibility a day earlier), she replies, “If you want to, it’s alright with me, I suppose. But I can’t see how it’s going to work.”

Of course it does work. At the end of his life Ames finds himself delightfully tethered to this world by family, while Lila ultimately manages to accept the prospect of something good happening to her. They both come to understand that “grace is not so poor a thing that it cannot present itself in any number of ways.”

This realisation, like Ames’s character and his romance with Lila, avoids turning sappy. A lesser or more explicitly evangelical author could have made Lila’s tacit and barely understood acceptance of grace synonymous with such outward manifestations of becoming a Christian as regular church attendance or Bible study.

Ms Robinson is too attentive to human nature and too suspicious of certainty for such a pat ending. She is also a dedicated defender of John Calvin, and gives her 1

The Economist November 1st 2014

78 Books and arts 2 characters a Calvinist grace that is all-en-

compassing, unconnected to merit or good deeds, soul-deepening: “If [Lila] ever took to praying it would be for that time and all those people who must have wondered what had become of them, what they had done to find themselves without so much as a good night’s rest to comfort them. She would call down calm on every one of them, on the worst and the bitterest ones first of all.”

Such capacious forgiveness is something that Ames, with his settled and placid life, never had to do. Lila never wholly discards her old life in favour of the new.

But she comes to understand that joy and love have as much place in the world as misfortune and misery. More importantly, she understands through the experience of having gone without them that joy and love unshared are wasted. 7

American photography

Hotshots Group f.64. By Mary Street Alinder.

Bloomsbury; 399 pages; $35 and £22.99

“T

HE camera should be used for a recording of life, for rendering the very substance and quintessence of the thing itself, whether it be polished steel or palpitating flesh.” So wrote Edward Weston, an American photographer who would go on to be recognised as a 20th-century master, in 1924.

Turning away from pictorialism—the previously dominant, painterly style of photography that emphasised soft-lensed craftsmanship—Weston made images that astonished Europeans at an exhibition in Stuttgart in 1929. Three years later, united in a belief that photography should show the world “as it is”, devoid of shading or manipulation, Weston and Ansel Adams formed an association of like-minded snappers, Group f.64. This first full-scale biography of the group focuses on how a zealous band of San Franciscan photographers revolutionised ways of seeing in the early 1930s.

Named after the smallest aperture in a large-format view camera, which produced diamond-sharp images, Group f.64 had 11 members, including Imogen Cunningham, Preston Holder and Weston’s son, Brett. They announced themselves to a sceptical art world at the M.H. de Young Memorial Museum in San Francisco in November 1932. The members were convinced to band together by the work of the European painters of the Blaue Vier (Blue Four) group—among them Wassily Kandinsky and Paul Klee. Like Kandinsky they felt

bound by an “inner relationship” despite differences in style.

Group f.64 photographers created lustrous prints using glossy, rather than matt, textured photographic paper. If an image needed cropping, it was a failure. The group’s “straight” photography was a riposte to the influential, opinionated New York photographer, Alfred Stieglitz, whose recognition they craved. Their prints, complained one critic, were “Black, oh, very black and white! Angular. These pictures do not sing. They shout.” While Laszlo Moholy-Nagy, a European avant-garde Bauhaus teacher, focused on ideas in his images (Adams criticised his “muddled tones”) Group f.64 favoured the intricacies of the darkroom to create perfect prints.

Weston and Cunningham—f.64 was one of the first modern-art movements to include women as equals—pioneered a particularly Californian modernism. They captured beauty in natural forms, whether through Weston’s rocks, still lifes and nudes or Cunningham’s formal calla lilies and other botanical studies (her “Agave Design 1” is pictured). Adams, meanwhile, focused his lens on the grandeur of the landscape, for instance California’s Sierra Nevada or Yosemite National Park.

Group f.64 dispersed in 1935, after just three years, prompted in part by Weston’s return to Los Angeles. Yet the images that its leading members would go on to create, such as Adams’s “Moonrise, Hernandez, New Mexico” or “Migrant Mother”, the Great Depression masterpiece by Dorothea Lange (a late member), entered mainstream American culture. A copy of Weston’s “Shell” (1927), a solitary nautilus shell set against a black background, which he originally sold for $10, fetched $1.1m at auction in 2010.

Mary Street Alinder, a photographic historian and Adams’s former assistant,

Fewer shades of grey

has written a lively, minutely researched tribute to the group’s achievements. It is in some ways a pity that Weston and Adams—the focus of myriad individual biographies, including one by Ms Alinder— tower over members such as John Paul Edwards, Consuelo Kanga and Alma Lavenson. As a result, any group biography is hampered by the presence of the more obscure artists; this book is possibly best suited to collectors and enthusiasts. 7

Nepal

Between a rock and a high place Kathmandu. By Thomas Bell. Random House India; 461 pages; 330 rupees Battles of the New Republic: A Contemporary History of Nepal. By Prashant Jha. Aleph Book Company; 384 pages; $39.75. C. Hurst; £17.99

N

EPAL is a country of nearly 30m people occupying a strategic spot between India and China. It has immense hydropower potential—the Himalayan rivers could run enough turbines to light much of northern India. If only it were stable and properly run, an already attractive country could become richer and far more appealing to investors, tourists and residents.

After two decades of turmoil, signs of progress can be hard to divine. The world’s only Hindu monarchy survived a massacre by a drunk, disgruntled, heavily armed prince in 2001, but then collapsed within seven years. A Maoist-led civil war spread misery. Clashes between a brutal army and guerrillas, as well as torture, kidnapping and murder by both sides, dragged on for a decade and killed some 18,000 people before a stalemate in 2006. The war achieved little, but the Maoists at least ended up switching to politics.

Yet Nepal’s politics can be dispiriting.

Leaders look venal, wasteful and self-centred. By one estimate 80% of aid is stolen in some rural districts. A Constituent Assembly had four years to draw up a constitution and failed. Another is under way. Politicians haggle, betray and rarely think of their countrymen. To prosper, young Nepalese toil in Qatar and Saudi Arabia. Over halfofall households now rely, to some extent, on the nearly $5 billion sent back each year in remittances .

Two new books on Nepal, both by journalists, offer sharp assessments of how the country is faring. Thomas Bell (formerly a contributor to The Economist) makes Kathmandu his focus. His account is part memoir (he marries and settles in the capital), part war reporter’s travelogue and part po- 1

The Economist November 1st 2014

Books and arts 79

2 litical history. He is captivated by Kath-

mandu’s art, architecture and unpredictable layers of history. But with its thriving cartels and gangsters, the city is growing monstrous, smelly and chaotic. The next big earthquake could cause appalling destruction to its poorly built towers. It is a “mixed-up small town, swallowed by a giant conurbation”, concludes Mr Bell.

His passion, and his frustration with those who misrule, are well expressed, though his tone is occasionally too scathing. Politicians perform a “farce of shameless, naked greed and short-sighted incompetence”; one party’s leaders are “flabby hypocrites”; the political “system” serves only to extract resources to benefit the elite.

Donors are no better. If they are not looting artistic treasures, they connive in graft. He posits that much of Nepal’s $1billion annual aid grant ends up as salaries for foreigners or in the wrong Nepalese pockets.

Worse yet are the British spies who played a secret, shameful part in the civil war with an anti-terrorist scheme, “Operation Mustang”. If ever a Truth and Reconciliation Commission considers the war, he says, Britain should be held to account.

Prashant Jha, a Nepalese journalist now based in Delhi, is more hopeful. He too is frustrated by horse-trading politicians, inequality of wealth and caste, incessant Indian meddling and the dreadful former king. Yet perhaps with the benefit of distance, he is able to discern a welcome pattern: Nepal is becoming more open, democratic, inclusive and just. An “ambitious transformation” is under way, which he sees mostly through a leftish lens.

His connections with senior Maoist leaders and politicians from his native area—low plains known as the Terai—allow him to deliver an admirably clear and well-told narrative. It is striking, for example, to track how much the once-feared Maoists have conceded since laying down their weapons in 2008. They ensured that Nepal would be a secular republic. But they backed down on most other demands for land reform, for 20,000 Maoist soldiers to get army jobs (only 1,500 did), and for Nepal to get a powerful presidency rather than a parliament.

That readiness to compromise suggests Mr Jha’s limited optimism is nicely judged.

He also applauds changes in India’s behaviour. True, it continues to meddle: Nepal was never colonised by the British; nor was it fully independent, a pattern that continues with India. But India shows more dexterity these days, dropping its old support for the monarch, while keeping links to Nepal’s army, and moving from outright hostility to accommodation of the Maoists. Under India’s current prime minister, Narendra Modi, relations with Nepal look warmer than ever, with big investments set to pour across the border.

Just as welcome are tentative signs that

Hoping to take flight Nepalese politicians are growing a little less awful. Elections in 2013 showed voters becoming more assertive. Once-popular Maoists were thumped, even as a breakaway Maoist faction failed to enforce a boycott of the polls. In 2015 the country may just get a constitution and some sort offederal reorganisation. The people ofthe Terai, long discriminated against, now get papers proving citizenship and have more elected representatives than ever (as do the low-caste), even if high-caste mountain folk retain more power. At the same time, statistics on poverty, education and the like are showing some steady gains. It is far too early to talk of Nepal becoming a Shangri-La but, as Mr Jha suggests, a bit of progress deserves a cheer. 7

Capitalism through the ages

A grand tour The Cambridge History of Capitalism.

Edited by Larry Neal and Jeffrey Williamson.

Cambridge University Press; 1,400 pages; £150

E

CONOMICS publishing has recently undergone a great democratisation.

High-quality academic writing was once confined to a handful of journals, mostly accessible in academic libraries. The journals still exist, but mostly serve to influence university hiring decisions. Writing has overwhelmingly gone online, where ambitious academics release free working papers, plug them on Twitter, and watch the discussion unfold. Though this democratisation has critics, it has vastly expanded the audience for economics writing.

This, in turn, may prime the market for another throwback: the authoritative col-

lection of essays. For readers whose interest has been piqued online, the anthology provides an appealing way to learn about a range of subjects. “The Cambridge History of Capitalism” is an excellent example of the genre. In two volumes edited by two eminent economic historians, Larry Neal and Jeffrey Williamson, the collection provides a wide-ranging tour of capitalism.

The editors define capitalist systems as having secure contracts, property rights and markets with flexible prices, and surviving long enough to make big investments worthwhile. The story of such systems begins early. Through most of pre-industrial history Malthusian logic reigned; workers laboured in subsistence agriculture and productivity gains quickly led to unsustainable population growth.

Yet now and again civilisations broke this mould and developed economic features that were recognisably capitalist.

Michael Jursa of the University of Vienna examines the mercantile spirit of Babylonians in the first millennium BC. Peace and good governance (including investment in things such as irrigation systems) enabled a sustained rise in agricultural productivity to take place. This in turn boosted population growth and freed workers from the land, allowing for the development of specialised urban trades.

Ancient capitalism was a distant varietal. In ancient Greece income grew at between 0.07% and 0.14% per year—outstanding by the standards ofall but the past three centuries. Manufacturing took place on a small scale. Though capital occasionally meant machinery—waterwheels, for example—technology was not systematically applied to production. Most capital was held in the form of land and slaves.

When Malthusian dynamics do reassert themselves, shifting political conditions are typically to blame. Persia’s control of Babylon weakened those who depended upon commercial activity for their wealth, eventually contributing to a long decline. And the destruction of the western Roman Empire led to a political and economic fragmentation that made western Europe an economic backwater for half a millennium.

Trade may be instinctive, but the institutions of capitalism are a product of social evolution. The rise of the West seems to have had little to do with local smarts or work ethic. Indeed, some of the earliest capitalist innovations in Italy—like rules on issuing credit—were imported from the Abbasid caliphate, which ruled much of the Middle East from the eighth to the 16th century, reckons Sevket Pamuk of the London School of Economics.

But as the second volume shows, it was in the West that capitalist institutions flourished, especially from the late 17th century.

Government intervention went hand-inhand with growth. Robert Allen of Oxford 1

The Economist November 1st 2014

80 Books and arts 2 University credits Alexander Hamilton, a

Founding Father of America, with sowing the seeds of prosperity by supporting public investment in infrastructure. Prussia established universal primary education by 1763, thereby creating a workforce capable of boosting economic development.

Non-Western economies struggled, by contrast, often because of Western influence. Mr Allen argues that colonisers saddled Africa with corrupt governments that hindered growth. Farsighted investments were typically neglected in favour of projects dedicated to resource extraction.

This history emphasises that the capitalism upon which Western wealth was built was not particularly laissez-faire.

Without the cheap cotton produced by African slaves, reckons Gareth Austin of the Graduate Institute in Geneva, the industrial revolution would have been less revolutionary. Western businesses benefited

from conquest: during the mid-19th-century Opium Wars with China, governments supported the drug-smuggling activities of firms like Jardine Matheson.

Messrs Neal and Williamson have compiled a thoughtful account of capitalism.

Rarely is economic history so accessible.

Yet it is unclear who is meant to read it. University libraries will buy a copy, but the material is not especially rigorous by academic standards and is better suited to the ordinary reader. The price, however, is not.

At £150, the work may not appeal to the casual economics readers who have benefited most from the online revolution. The publishers will have their reasons: large margins may be earned on limited sales to libraries and rich bankers. There is talk of a paperback version. But the upshot, for the moment at least, is that most readers will turn elsewhere for their economic history.

That’s capitalism for you. 7

The history of surgery

Suffering for their art

A new exhibition compares depictions of military surgery now and 100 years ago

E

NTERING the small room that houses “War, Art & Surgery” at the Hunterian Museum in London, the visitor encounters two images hung one above the other. On top, in sepia tones, is “The Birth of Plastic Surgery” (pictured), painted in 1916 by Henry Tonks; below, strikingly similar though tinted in the blues and greens of the modern operating theatre, is “Hands, hands, hands”, by Julia Midgley, a contemporary artist. Her work has been paired with Tonks’s in this thoughtful show marking

the centenary of the start of the first world war. The public might be forgiven for growing a little weary of the anniversary, but here at the Royal College of Surgeons, the subject is approached in an unusual light.

Tonks, who was a surgeon himself as well as a subtle and perceptive artist, was not indulging in hyperbole in his painting’s title. The image depicts the operating theatre of Harold Gillies, the pioneer of facial reconstructive surgery. The two first met at the Cambridge Military Hospital in

Aldershot, where Gillies was developing the techniques that laid the foundation for modern surgeons’ ability to rebuild the human face, using as his subjects the young men who had been horribly disfigured in the trenches.

“The Birth of Plastic Surgery” gives way, in this exhibition, to a wall of the remarkable pastel drawings Tonks made of the soldiers’ injuries. (The exhibition catalogue also shows photographs of the wounded and the work performed on them; it, much more than the exhibition, is not for the faint of heart.)

Tonks’s drawings, which have rarely been seen together in this way, are both accurate and humane. The eyes gazing out of shattered faces show confusion, fear—and then, just sometimes, when the surgeon’s work has been completed, hope, as in the images of Robert Davidson, who was serving as a medical orderly when he was wounded in 1916, losing his whole upper lip and left cheek. Gillies’s work enabled Davidson to “speak his native brogue again”, as the surgeon noted.

Opposite Tonks’s images hang those of Ms Midgley, who retired last year as Reader in Documentary Drawing at Liverpool School of Art & Design, and who previously worked as artist in residence at the Royal Liverpool and Broadgreen University Hospitals Trust. For this project, which “doffs its cap to Tonks”, as she says, she spent time not only with wounded servicemen and women at Headley Court in Surrey, where the Defence Medical Rehabilitation Centre is based, but also at Strensall Camp in Yorkshire, observing “Hospex” training—simulations in which amputee actors, equipped with elaborate prosthetics and body paint, help train military medical personnel to evacuate the wounded from Afghanistan and other conflict zones. And it was at the Royal College of Surgeons itself that she observed high-intensity refresher courses for army surgeons. Her work is not as graphic as that of Tonks, not least because facial injury is much rarer in 21st-century warfare. Improvised explosive devices are modern war’s most destructive weapon, so much of Ms Midgley’s work focuses on limb amputation and its after-effects.

Tonks did not think that his work should be exhibited. “They are, I think, rather dreadful subjects for the public view,” he said. But the Hunterian Museum, with a collection that bridges the worlds of art and science by illustrating the history of surgery and people’s fascination with their own anatomy, provides a thoughtprovoking setting. Ms Midgley’s delicate but forceful work is proof, if such were needed, that the courageous eyes into which Tonks looked so clearly still hold the artist’s gaze 100 years later. 7

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“War, Art & Surgery” is at the Hunterian Museum, in London, until February 14th 2015

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Economic and financial indicators Economic data % change on year ago Gross domestic product latest qtr* 2014† United States China Japan Britain Canada Euro area Austria Belgium France Germany Greece Italy Netherlands Spain Czech Republic Denmark Hungary Norway Poland Russia Sweden Switzerland Turkey Australia Hong Kong India Indonesia Malaysia Pakistan Singapore South Korea Taiwan Thailand Argentina Brazil Chile Colombia Mexico Venezuela Egypt Israel Saudi Arabia South Africa

+2.6 Q2 +7.3 Q3 -0.1 Q2 +3.0 Q3 +2.5 Q2 +0.8 Q2 +0.6 Q2 +0.8 Q3 +0.1 Q2 +1.3 Q2 -0.3 Q2 -0.3 Q2 +1.1 Q2 +1.2 Q2 +2.5 Q2 +0.3 Q2 +3.9 Q2 -0.3 Q2 +3.3 Q2 +0.8 Q2 +2.6 Q2 +1.4 Q2 +2.1 Q2 +3.1 Q2 +1.8 Q2 +5.7 Q2 +5.1 Q2 +6.4 Q2 +5.4 2014** +2.4 Q3 +3.2 Q3 +3.7 Q2 +0.3 Q2 nil Q2 -0.9 Q2 +1.9 Q2 +4.3 Q2 +1.6 Q2 +1.0 Q4 +3.7 Q2 +1.2 Q2 +4.0 2013 +1.0 Q2

+4.6 +7.8 -7.1 +2.8 +3.1 +0.3 nil +0.8 -0.1 -0.6 na -0.7 +2.8 +2.3 +1.4 +0.8 +3.1 +3.7 na na +2.9 +0.8 na +2.0 -0.6 +3.1 na na na +1.2 +3.5 +3.9 +3.5 +3.6 -2.4 +0.6 -0.6 +4.2 +3.6 na +1.9 na +0.6

+2.2 +7.3 +1.0 +3.1 +2.3 +0.8 +1.0 +1.0 +0.4 +1.5 +0.4 -0.2 +0.6 +1.2 +2.6 +0.9 +3.0 +2.2 +2.7 +0.4 +2.1 +1.5 +3.0 +3.0 +2.4 +6.0 +5.2 +6.0 +5.4 +3.5 +3.5 +3.7 +1.4 -1.4 +0.4 +2.0 +5.0 +2.3 -2.5 +2.1 +2.0 +4.1 +1.6

Industrial production latest

Current-account balance Consumer prices Unemployment latest 12 % of GDP latest 2014† rate, % months, $bn 2014†

+4.3 Sep +1.7 Sep +8.0 Sep +1.6 Sep +0.6 Sep +3.3 Aug +2.5 Aug +1.2 Sep +4.7 Jul +2.0 Sep -1.9 Aug +0.3 Sep -3.7 Aug +1.6 Sep +0.5 Aug -0.1 Sep -0.3 Aug +0.3 Sep -3.0 Aug +0.8 Sep -5.6 Aug -0.8 Sep -0.7 Aug -0.2 Sep +1.4 Aug +0.9 Sep -1.8 Aug -0.2 Sep -5.2 Aug +0.7 Sep +1.1 Aug +0.5 Sep +3.1 Aug -0.5 Sep -0.7 Aug +2.1 Sep +4.2 Sep -0.3 Sep +2.9 Sep +8.0 Sep -2.4 Aug -0.4 Sep +3.1 Q2 -0.1 Sep +12.5 Aug +8.9 Sep +4.6 Q2 +2.3 Q3 +2.2 Q2 +6.6 Sep +0.4 Aug +6.5 Sep +4.7 Aug +4.5 Sep +6.5 Aug +2.6 Sep +5.3 Aug +7.7 Sep -1.2 Sep +0.6 Sep +1.9 Sep +1.1 Sep +10.3 Sep +0.7 Sep -2.7 Aug +1.8 Sep -2.9 Aug — *** -5.4 Aug +6.7 Sep +0.2 Sep +4.9 Sep +0.2 Aug +2.9 Sep +1.4 Aug +4.2 Sep +0.8 Sep +63.4 Aug +36.0 Aug +11.2 Sep +5.7 Aug -0.3 Sep na +2.8 Sep -1.4 Aug +5.9 Sep

+1.8 +2.1 +2.8 +1.7 +1.9 +0.6 +1.7 +0.7 +0.7 +1.0 -1.5 +0.3 +0.8 nil +0.5 +0.7 +0.2 +2.0 +0.2 +7.5 +0.1 +0.1 +8.9 +2.6 +3.7 +8.0 +6.3 +3.1 +8.0 +1.5 +1.5 +1.5 +2.1 — +6.3 +4.3 +2.8 +3.8 +62.2 +10.1 +0.5 +2.9 +6.0

5.9 Sep 4.1 Q2§ 3.5 Aug 6.0 Jul†† 6.8 Sep 11.5 Aug 4.7 Aug 8.5 Aug 10.5 Aug 6.7 Sep 26.4 Jul 12.3 Aug 8.0 Sep 24.4 Aug 7.3 Sep§ 5.0 Aug 7.4 Sep§†† 3.7 Aug‡‡ 11.5 Sep§ 4.9 Sep§ 7.2 Sep§ 3.2 Sep 9.8 Jul§ 6.1 Sep 3.3 Sep‡‡ 8.8 2013 5.7 Q1§ 2.7 Aug§ 6.2 2013 2.0 Q2 3.2 Sep§ 3.9 Sep 0.7 Aug§ 7.5 Q2§ 4.9 Sep§ 6.7 Aug§‡‡ 8.9 Aug§ 4.8 Sep 6.7 Jul§ 13.3 Q2§ 6.4 Aug 5.6 2013 25.5 Q2§

-389.2 Q2 +206.0 Q3 -5.5 Aug -147.5 Q2 -50.4 Q2 +325.4 Aug +3.7 Q2 +7.4 Jun -47.1 Aug‡ +279.7 Aug +2.3 Aug +33.5 Aug +86.3 Q1 +4.7 Jul -0.5 Q2 +23.2 Aug +5.9 Q2 +57.9 Q2 -7.4 Aug +60.3 Q3 +36.6 Q2 +78.4 Q2 -48.9 Aug -42.8 Q2 +4.4 Q2 -18.4 Q2 -26.3 Q2 +18.7 Q2 -3.0 Q3 +56.5 Q2 +86.7 Sep +64.0 Q2 +12.5 Q2 -6.2 Q2 -83.6 Sep -6.5 Q2 -14.9 Q2 -24.5 Q2 +6.9 Q3 -2.4 Q2 +8.5 Q2 +132.9 Q1 -18.8 Q2

-2.5 +2.0 +0.2 -4.2 -2.6 +2.3 +2.7 -0.7 -1.4 +6.8 +0.5 +1.2 +9.7 +0.4 +0.3 +6.8 +1.8 +11.1 -1.2 +2.6 +6.0 +11.8 -6.0 -2.5 -0.1 -2.0 -3.0 +5.7 -2.0 +20.2 +5.5 +11.8 +2.6 -0.9 -3.6 -2.0 -4.0 -1.7 +1.3 -2.5 +3.4 +14.2 -5.2

Budget Interest balance rates, % % of GDP 10-year gov't 2014† bonds, latest -2.8 -2.9 -8.0 -4.5 -2.4 -2.6 -3.0 -2.5 -4.4 +0.4 -3.5 -3.0 -2.7 -5.6 -1.6 -1.4 -2.9 +12.2 -3.5 +0.4 -2.2 +0.3 -2.5 -1.9 +0.7 -4.9 -2.4 -3.5 -5.5 +0.5 +0.5 -1.3 -2.1 -2.7 -3.9 -2.2 -1.5 -3.6 -12.2 -12.0 -3.3 +2.4 -4.4

2.35 3.57§§ 0.46 2.54 2.06 0.90 1.12 1.24 1.28 0.90 7.57 2.51 1.05 2.15 0.97 1.15 3.98 2.18 2.60 10.05 1.21 0.57 8.80 3.30 1.86 8.32 na 3.82 12.40††† 2.28 2.71 1.64 2.97 na 12.37 4.46 6.59 5.78 15.54 na 2.16 na 7.67

Currency units, per $ Oct 29th year ago 6.11 108 0.62 1.11 0.78 0.78 0.78 0.78 0.78 0.78 0.78 0.78 0.78 21.7 5.83 242 6.64 3.31 42.8 7.30 0.95 2.19 1.14 7.76 61.3 12,081 3.27 103 1.27 1,047 30.4 32.5 8.50 2.44 575 2,043 13.4 12.0 7.15 3.74 3.75 10.8

6.09 98.1 0.62 1.04 0.73 0.73 0.73 0.73 0.73 0.73 0.73 0.73 0.73 18.7 5.42 214 5.89 3.04 32.1 6.37 0.90 1.99 1.05 7.75 61.4 11,103 3.15 107 1.24 1,061 29.4 31.0 5.89 2.18 509 1,884 12.9 6.29 6.89 3.51 3.75 9.87

Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. ***Official number not yet proven to be reliable; The State Street PriceStats Inflation Index, Sep 39.79%; year ago 18.81% †††Dollar-denominated bonds.

The Economist November 1st 2014

Markets % change on Dec 31st 2013 Index one in local in $ Oct 29th week currency terms United States (DJIA) 16,974.3 +3.1 +2.4 +2.4 China (SSEA) 2,484.5 +2.0 +12.2 +11.1 Japan (Nikkei 225) 15,553.9 +2.4 -4.5 -7.1 Britain (FTSE 100) 6,453.9 +0.8 -4.4 -6.7 Canada (S&P TSX) 14,527.6 +1.5 +6.7 +1.4 Euro area (FTSE Euro 100) 993.2 +0.7 -2.6 -9.9 Euro area (EURO STOXX 50) 3,022.4 +0.5 -2.8 -10.1 Austria (ATX) 2,166.9 +1.7 -14.9 -21.3 Belgium (Bel 20) 3,117.6 +1.8 +6.6 -1.4 France (CAC 40) 4,110.6 +0.1 -4.3 -11.5 Germany (DAX)* 9,082.8 +1.6 -4.9 -12.0 Greece (Athex Comp) 933.1 -6.1 -19.7 -25.8 Italy (FTSE/MIB) 19,157.4 -0.6 +1.0 -6.6 Netherlands (AEX) 401.1 +1.3 -0.2 -7.7 Spain (Madrid SE) 1,038.8 -0.5 +2.6 -5.0 Czech Republic (PX) 957.1 +1.6 -3.2 -11.8 Denmark (OMXCB) 663.9 nil +17.3 +8.7 Hungary (BUX) 16,898.9 -2.3 -9.0 -18.9 Norway (OSEAX) 645.0 +1.9 +7.0 -1.8 Poland (WIG) 53,617.4 +0.6 +4.5 -4.7 Russia (RTS, $ terms) 1,059.6 +1.2 -5.0 -26.6 Sweden (OMXS30) 1,390.0 +3.4 +4.3 -8.6 Switzerland (SMI) 8,654.5 +1.7 +5.5 -0.8 Turkey (BIST) 79,589.1 +1.9 +17.4 +14.4 Australia (All Ord.) 5,431.1 +1.1 +1.5 +0.7 Hong Kong (Hang Seng) 23,819.9 +1.8 +2.2 +2.2 India (BSE) 27,098.2 +1.2 +28.0 +29.1 Indonesia (JSX) 5,074.1 nil +18.7 +18.7 Malaysia (KLSE) 1,839.6 +2.4 -1.5 -1.4 Pakistan (KSE) 30,113.2 +0.6 +19.2 +21.7 Singapore (STI) 3,224.0 +0.7 +1.8 +1.0 South Korea (KOSPI) 1,961.2 +1.2 -2.5 -2.0 Taiwan (TWI) 8,903.7 +1.8 +3.4 +1.4 Thailand (SET) 1,562.7 +2.0 +20.3 +21.8 Argentina (MERV) 10,226.5 -3.1 +89.7 +45.5 Brazil (BVSP) 51,049.3 -2.6 -0.9 -5.5 Chile (IGPA) 18,676.5 -0.4 +2.5 -7.1 Colombia (IGBC) 13,160.9 -0.2 +0.7 -5.3 Mexico (IPC) 44,238.9 +1.8 +3.5 +0.5 Venezuela (IBC) 2,838.2 -7.7 +3.7 na Egypt (Case 30) 8,952.3 +1.6 +32.0 +28.3 Israel (TA-100) 1,284.9 -0.4 +6.4 -1.3 Saudi Arabia (Tadawul) 10,082.0 -0.8 +18.1 +18.1 South Africa (JSE AS) 49,116.8 +1.9 +6.2 +2.4

Economic and financial indicators 85

Gender equality For the sixth consecutive year Iceland has come out best in the World Economic Forum’s gender-gap index, which examines disparities between men and women in terms of political empowerment, economic opportunity, health and education. It scored 0.86 on an index in which one denotes perfect equality. The Nordic countries all did well, taking the top five positions of the 142 countries in the ranking. Some emerging economies also have high gender equality. Nicaragua ranked sixth; Rwanda, included for the first time this year, was placed seventh overall and first in Sub-Saharan Africa, thanks to a particularly small gap between men and women in the politicalempowerment category.

0.4

Rank, out of 142

0.5

0.6

0.7

0.8

0.9

Iceland Nicaragua Rwanda Philippines Germany United States Britain Thailand Italy Russia Mexico China Japan India Yemen

1 6 7 9 12 20 26 61 69 75 80 87 104 114 142

Source: World Economic Forum

*1=perfect equality

The Economist commodity-price index

Other markets

Index Oct 29th United States (S&P 500) 1,982.3 United States (NAScomp) 4,549.2 China (SSEB, $ terms) 260.7 Japan (Topix) 1,270.6 Europe (FTSEurofirst 300) 1,319.3 World, dev'd (MSCI) 1,686.3 Emerging markets (MSCI) 1,004.9 World, all (MSCI) 414.2 World bonds (Citigroup) 927.0 EMBI+ (JPMorgan) 712.4 Hedge funds (HFRX) 1,218.3§ Volatility, US (VIX) 15.2 CDSs, Eur (iTRAXX)† 65.6 CDSs, N Am (CDX)† 67.1 Carbon trading (EU ETS) € 6.4

Global gender-gap index* 2014, selected countries

% change on Dec 31st 2013 one in local in $ week currency terms +2.9 +7.2 +7.2 +3.8 +8.9 +8.9 +0.8 +3.8 +2.8 +2.8 -2.4 -5.1 +0.8 +0.2 -7.3 +2.4 +1.5 +1.5 +1.8 +0.2 +0.2 +2.3 +1.4 +1.4 nil +2.3 +2.3 +0.8 +9.3 +9.3 +0.3 -0.6 -0.6 +17.9 +13.7 (levels) -3.1 -3.5 -10.7 -1.3 +8.9 +8.9 +2.7 +27.4 +17.9

Sources: Markit; Thomson Reuters. *Total return index. † Credit-default-swap spreads, basis points. §Oct 28th.

Indicators for more countries and additional series, go to: Economist.com/indicators

2005=100

Oct 21st

Dollar Index All Items Food Industrials All Nfa† Metals Sterling Index All items

Oct 28th*

% change on one one month year

154.7

157.4

170.9

173.8

+3.1 +5.0

-4.9 -4.3

137.9 129.1 141.7

140.2 130.6 144.4

+0.8 +1.7 +0.5

-5.6 -17.2 -0.2

174.4

177.1

+3.5

-5.5

153.5

+2.2

+2.8

1,229.2

+1.4

-8.7

81.6

-10.6

-16.9

Euro Index All items 151.1 Gold $ per oz 1,252.9 West Texas Intermediate $ per barrel 83.4

Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO; ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional † Non-food agriculturals.

86

Obituary Gough Whitlam

The Economist November 1st 2014 ancient Greek. This was a man who never quite managed the demotic, though he might slap constituents on the back; a man who pored over “Who’s Who”, whose speeches sagged with dry facts (“More bullshit!” his media liaison would plead), and whose late-in life books were all boastfulness, rather than colour or charm.

Caesar in Canberra Gough Whitlam, Australia’s most controversial prime minister, died on October 21st, aged 98

T

HE scene, perhaps the most dramatic in modern Australian politics, was replayed so often that it was a wonder the tape survived. Gough Whitlam, prime minister since 1972, now sensationally made ex-prime minister at a stroke by Her Majesty’s representative, Governor-General Sir John Kerr, stood facing a phalanx of microphones on the steps of Parliament House. More eager reporters, sideburned to their chins (this was1975), jostled behind him. The governor-general’s official secretary, his hands shaking, had ended his declaration: “God save the queen.” “Well may we say ‘God save the queen’,” hurled back Mr Whitlam, over rising shouts of “We want Gough!”; “because nothing will save the governor-general.”

Australia had barely had time to catch its breath during his time in office. He came in like a hurricane, a Labor man after 23 years of Liberal-and-Country Party debris, and swept it all away. In his first ten days alone, governing as a duumvirate with his deputy, he crossed off well over half of his to-do list: got Australia’s last troops out of Vietnam, ended conscription, and set up commissions to look into school funding, equal pay and aboriginal land rights. You didn’t need a Parliament to do any of that.

By the time of the Coup, as he called it, he had brought in a state-funded health sys-

tem, then called Medibank; no-fault divorce laws; electoral reform, tariff reform, votes at 18 and free university education.

He had also given Papua New Guinea independence and opened up relations with China. No wonder the general view, in his opinion, was that he was the best prime minister Australia had ever had.

He certainly played the part, sleek, imposing and commanding. His temper was legendary, sending timid staffers diving under their desks; his appetite was formidable, with steak for lunch and an eager eye for sponge cakes at any point. Whitlamite put-downs and quips were rude and long remembered. Malcolm Fraser, who replaced him after the Coup, was “Kerr’s cur”. A networking political rival was “Tiberius of the telephone”. A voter who heckled him on abortion was told that, in his case, “we should make it retrospective”.

Struggling with a microphone that kept dropping down, he remarked: “The harder you try, the floppier it gets.”

His triumphant progress, however, was hobbled by several things. Most annoying was the factionalism of the Labor Party and its reluctance to get behind him. Many members did not trust his middle-class sheen, acquired in the swankier suburbs of Melbourne and Sydney from a lawyer father and from schools where he lapped up

Alongside Mao Some suspected him of being a “silvertail”, not a true socialist, and to some degree they were right; he was neither a nationaliser nor a union man. His agenda, put simply, was to advance Australia. This meant action on every front, from a new national anthem (“Advance Australia Fair”) to standing up against America’s wars; from huge sums of money for the arts, which brought self-exiled novelists and film-makers flocking home, to world-class hospitals and schools. Mr Whitlam first campaigned for Parliament in Werriwa in western Sydney, then a suburb without proper roads or sewers and teeming with new migrants. In office he pumped money into the cities and, in every way, encouraged Australians to be proudly multicultural rather than cringing, colonial and mostly white.

He was blocked all the way, however, by the conservative opposition in Parliament, which forced an election halfway through his term and, with the help of state premiers, thwarted his attempts to get a majority in the Senate. His opponents pointed out that all his policies and giveaways couldn’t be paid for, especially at a time of oil-price shocks and runaway wage inflation; no, not even by trying to borrow $4 billion, very dodgily, from a Pakistani broker peddling petrodollars. In 1975 they refused to pass his budget. He accused them of playing funny buggers, and worse; but the fact was, for all his meticulous logging in 70 notebooks of every move he made, he did not seem to have registered that two and two did not add up to five.

And so came the great fall, on a sunny spring day: Remembrance day, as it happened. To those still puzzled by the many contradictions in Mr Whitlam, there was a clue in the way he reacted. After every crisply articulated sentence he would give a defiant toss of his head, displaying that perfect aquiline profile, as on one of Caesar’s coins. It all made sense then: the streamers, balloons and pumping music of his rallies; the ruthlessness and singlehandedness; the lack of confidants, save staffers who called him “Leader”; the crowd-pleasing policies, and the crowd abjuring ways. What Mr Whitlam really wanted was to stand among the giants of his time, alongside Mao and Nixon (why on earth not?), and prove Australia’s ruler equal to them. What the microphones did not pick up on the steps of Parliament House was the swish of a purple robe. 7

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