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Politics this week Feb 16th 2013 |

Pope Benedict XVI stunned the Catholic church by announcing that he would step down on February 28th, the first papal resignation in 600 years. In a statement read out in Latin, the 85-year-old pontiff said he had decided to leave office because of his age and because “strength of mind and body are necessary” for the job. He conducted his final public mass on Ash Wednesday. The list of favourites to succeed him includes cardinals from Austria, Brazil, Ghana, Italy and the Philippines. See article The economies of Germany and France contracted in the fourth quarter of 2012 as the euro zone moved deeper into recession. Germany’s GDP shrank by 0.6%, its worst performance since 2009. The 0.3% contraction in France makes it less likely that it will reach its budget-deficit target this year. See article A meeting of European Union leaders confounded the critics by agreeing on the first real-term cuts in spending since the EU’s founding. The deal shaves €34.4 billion ($46 billion) off the budget over the next seven years, a cut of less than 1%. See article France suggested that it wants to give new impetus to Turkey’s application to join the EU, and would not block accession talks that have been stalled for three years. Under Nicolas Sarkozy’s presidency, France was a stout opponent of Turkish entry. Turkey’s eagerness to join has waned since the start of the eurozone debt crisis.

A bill that legalises gay marriage in France easily passed the National Assembly. It now heads to the Senate.

One of the closest allies of Angela Merkel, the German chancellor, stepped down as Germany’s education secretary. Annette Schavan had been stripped of her doctoral degree following a plagiarism scandal. The ruckus was a distraction for the ruling Christian Democrats as they focus on an election later this year.

Italy’s former head of intelligence was sentenced to ten years in prison for his part in the 2003 rendition

to Egypt of a Muslim cleric, who claims he was tortured. The rendition was conducted under the auspices of the CIA. Italian courts have sentenced 22 CIA agents in absentia.

Nervous neighbours

North Korea carried out its third test of a nuclear bomb, bringing condemnation from around the world. It said the test was in response to America’s “reckless hostility”. Barack Obama warned this would only isolate North Korea further. The UN Security Council called it a clear threat to international security. See article In India a Kashmiri militant was hanged after his final plea for clemency was rejected. Afzal Guru was sentenced to death for helping to plot a deadly assault by militants on India’s Parliament in 2001. He had been on death row since 2002, but had denied plotting the attack. See article Demonstrations grew in Dhaka, the capital of Bangladesh, over a ruling by the country’s war-crimes tribunal. A leader of the Jamaat-e-Islami party was convicted of mass murder during the country’s 1971 war of independence with Pakistan and was given a life sentence. Many of the protesters want him executed. See article Thailand’s army killed 16 militants who had stormed a base near the border with Malaysia. More than 5,000 people have been killed in Thailand’s Muslim-majority south since a separatist campaign reignited in 2004.

Mohamed Nasheed, a former president of the Maldives, took refuge in the Indian high commission in Male, the capital. He was the first democratically elected president of the archipelago country but left office in February 2012 claiming the threat of a coup had forced him out.

Diplomatic moves The Syrian National Coalition announced that Qatar will hand it control of the Syrian embassy in Doha, the capital. The Syrian opposition has already appointed an ambassador. Qatar was one of the first governments to recognise the group as the official representative of the Syrian people.

The Congress for the Republic, the secular party of Tunisia’s president, Moncef Marzouki, said that it would stay in the ruling Islamist-led coalition for another week in the hope that talks aimed at defusing the country’s political crisis will succeed.

Millions of Kenyans watched their country’s first presidential debate, broadcast live on 42 local radio and television stations, as well as on YouTube. All eight candidates standing in next month’s election took part.

Much depreciated Venezuela devalued its currency by 32% against the dollar, in a bid to reduce the fiscal deficit and help exporters. The bolívar has been devalued several times since Hugo Chávez became president in 1999.

The official exchange rate still rates the dollar far lower than its price on the black market. See article The Jamaican government said it would restructure its sovereign debt. Jamaica completed one bond swap in 2010, but its debt-to-GDP ratio remains a crushing 140%. Creditors who participate are expected to receive much lower interest rates than they do now.

Among friends (and enemies)

Barack Obama gave the American president’s annual state-of-the-union message to Congress. He laid out a surprisingly full agenda that continued his recent theme of pushing progressive policies, such as proposing to raise the minimum wage to its highest level for 34 years (in real terms). See article Mr Obama also announced that the United States and the European Union would begin talks to create a transatlantic free-trade zone. The idea is not new but has gained support from senior politicians on both sides of the Atlantic in recent months. The talks are expected to last two years.

The Republicans’ official response to Mr Obama’s speech was given by Marco Rubio, a CubanAmerican senator, underlining the party’s warming to immigration reform. However, John Boehner, the Republican Speaker in the House, said a bill needn’t be rushed and he would prefer “a little foreplay” first. See article

The International Olympic Committee dropped wrestling from its list of core sports for the 2020 games.

Wrestling has been on the programme since the first modern games in 1896 and is a popular college sport in America. The IOC grappled with its decision, but says wrestling can reapply as an “additional� sport.

Business this week Feb 16th 2013 | Barclays laid out a course for its business that tries to put the LIBOR rate-rigging scandal and other fiascos behind it. Antony Jenkins, who took over as chief executive after the resignation of Bob Diamond, pledged that the bank would “help shape the new era for banking” by focusing on stable growth and ethically sound investments. His strategic review also cuts 3,700 jobs, half of them in investment banking, although Barclays remains committed to its wholesale activities. See article.

Broadcast news Comcast, one of America’s biggest providers of telecoms and cable-television services, said it was buying the 49% stake in NBC Universal it does not already own, for $16.7 billion. It is acquiring the stake from General Electric. The transaction comes amid a flurry of dealmaking in the technology, media and telecoms market, which is seeing its busiest start to a year since the dotcom boom of 2000.

The two biggest outside investors in Dell warned that they would fight its proposal to go private, arguing that it undervalues the company. The buy-out consortium offered $13.65 a share to shareholders when it presented its deal, but Dell’s share price on the stockmarket has since risen above the offer price.

Apple also faced a potential rift with shareholders when David Einhorn, an activist investor, launched a lawsuit aimed at “unlocking shareholder value”. Tim Cook, Apple’s boss, denied Mr Einhorn’s charge that Apple has a “mentality of the Depression” era about hoarding cash.

The OECD, a rich-country club, said that greater international co-ordination will be needed to stop multinational companies shifting profits among jurisdictions in order to pay the lowest possible tax rate.

In a report the OECD found that the practice is becoming more widespread. Starbucks recently found itself in hot water over its tax affairs in Britain. See article.

The G7 issued a statement intended to soothe concerns about a “currency war” but ended up causing more confusion than clarity. The statement chided government intervention in currency markets, but also appeared to support an effort by Japan to combat deflation. The yen has weakened markedly against the dollar in response to the new Japanese government’s attempt to revive the economy. See article.

Japan’s GDP shrank by 0.4% at an annual rate in the last three months of 2012, the third straight quarter of decline. The economy was weighed down by sagging exports, giving fuel to the government’s argument

that it needed to take action to tackle the high yen.

Regulators in America gave the go ahead for CNOOC, a Chinese state-owned oil company, to take over Nexen, which operates mainly in Canada’s oil sands but has assets elsewhere, including America’s Gulf coast. It was the last big regulatory hurdle for the $15.1 billion deal, the biggest-ever foreign acquisition by a Chinese firm. See article.

Rio Tinto reported an annual net loss of $3 billion, its first in two decades. This was because of a writedown of its aluminium assets and a project in Mozambique. The mining company’s underlying profit was $9.3 billion.

Ready for take-off American Airlines and US Airways announced that they were merging, the last of the big American carriers to do so. The deal creates one of the world’s biggest airlines.

Giuseppe Orsi, the boss of Finmeccanica, an Italian defence company, was arrested by police investigating whether bribery was involved in securing a government contract in India to supply helicopters. The bribes were allegedly paid when Mr Orsi headed AgustaWestland, a subsidiary of Finmeccanica.

PSA Peugeot Citroën reported a €5 billion ($6.4 billion) annual net loss, a record for the company. The French carmaker’s sales in the depressed European market slumped by 15% last year. See article.

Alternative energy supply General Electric became the world’s biggest manufacturer of wind turbines in 2012, according to BTM Consult, which researches green firms. Vestas, a Danish company, had held the top spot since 2000. It has struggled recently, partly because the European push for wind power has been curtailed by the debt crisis.

GE, on the other hand, benefited from a gust of activity in America to install turbines ahead of the expiration of a tax break (which was extended).

Amazon is the most reputable company in America, according to an annual survey conducted by Harris Interactive. The online retailer just pipped Apple to the number-one slot. Walt Disney, Google and Johnson & Johnson completed the top five. The bottom five were AIG, Goldman Sachs, Halliburton, American Airlines and Bank of America.

KAL's cartoon Feb 16th 2013 |

More KAL's cartoons

Leaders Tax havens: The missing $20 trillion The Italian election: Who can save Italy?

The global economy: Phoney currency wars Free trade across the Atlantic: Come on, TTIP Another sop for elderly Britons: Grey squirrels

Tax havens

The missing $20 trillion How to stop companies and people dodging tax, in Delaware as well as Grand Cayman Feb 16th 2013 |

CIVILISATION works only if those who enjoy its benefits are also prepared to pay their share of the costs. People and companies that avoid tax are therefore unpopular at the best of times, so it is not surprising that when governments and individuals everywhere are scrimping to pay their bills, attacks are mounting on tax havens and those that use them.

In Europe the anger has focused on big firms. Amazon and Starbucks have faced consumer boycotts for using clever accounting tricks to book profits in tax havens while reducing their bills in the countries where they do business. David Cameron has put tackling corporate tax-avoidance at the top of the G8 agenda. America has taken aim at tax-dodging individuals and the banks that help them. Congress has passed the Foreign Account Tax Compliance Act (FATCA), which forces foreign financial firms to disclose their American clients. Any whiff of offshore funds has become a political liability. During last year’s presidential campaign Mitt Romney was excoriated by Democrats for his holdings in the Cayman Islands. Now Jack Lew, Barack Obama’s nominee for treasury secretary, is under fire for once having an interest in a Cayman fund.

Getting rich people to pay their dues is an admirable ambition, but this attack is both hypocritical and misguided. It may be good populist politics, but leaders who want to make their countries work better should focus instead on cleaning up their own back yards and reforming their tax systems.

Dodgy of Delaware The archetypal tax haven may be a palm-fringed island, but as our special report this week makes clear, there is nothing small about offshore finance. If you define a tax haven as a place that tries to attract nonresident funds by offering light regulation, low (or zero) taxation and secrecy, then the world has 50-60 such havens. These serve as domiciles for more than 2m companies and thousands of banks, funds and

insurers. Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion.

Not all these havens are in sunny climes; indeed not all are technically offshore. Mr Obama likes to cite Ugland House, a building in the Cayman Islands that is officially home to 18,000 companies, as the epitome of a rigged system. But Ugland House is not a patch on Delaware (population 917,092), which is home to 945,000 companies, many of which are dodgy shells. Miami is a massive offshore banking centre, offering depositors from emerging markets the sort of protection from prying eyes that their home countries can no longer get away with. The City of London, which pioneered offshore currency trading in the 1950s, still specialises in helping non-residents get around the rules. British shell companies and limited-liability partnerships regularly crop up in criminal cases. London is no better than the Cayman Islands when it comes to controls against money laundering. Other European Union countries are global hubs for a different sort of tax avoidance: companies divert profits to brass-plate subsidiaries in low-tax Luxembourg, Ireland and the Netherlands.

Reform should thus focus on rich-world financial centres as well as Caribbean islands, and should distinguish between illegal activities (laundering and outright tax evasion) and legal ones (fancy accounting to avoid tax). The best weapon against illegal activities is transparency, which boils down to collecting more information and sharing it better. Thanks in large part to America’s FATCA, small offshore centres are handing over more data to their clients’ home countries—while America remains shamefully reluctant to share information with the Latin American countries whose citizens hold deposits in Miami. That must change. Everyone could do more to crack down on the use of nominee shareholders and directors to hide the provenance of money. And they should make sure that information about the true “beneficial” owners of companies is collected, kept up-to-date and made more readily available to investigators in cases of suspected wrongdoing. There are costs to openness, but they are outweighed by the benefits of shining light on the shady corners of finance.

Want more tax? Lower the tax rate Transparency will also help curb the more aggressive forms of corporate tax avoidance. As Starbucks’s experience has shown, companies that shift money around to minimise their tax bills endanger their reputations. The more information consumers have about such dodges, the better.

Moral pressure is not the whole answer, though: consumers get bored with campaigns, and governments should not bash companies for trying to reduce their tax bills, if they do so legally. In the end, tax systems must be reformed. Governments need to make it harder for companies to use internal (“transfer”) pricing to avoid tax. Companies should be made to book activity where it actually takes place. Several federal economies, including America, already prevent companies from exploiting the differences between states’ rules. An international agreement along those lines is needed.

Governments also need to lower corporate tax rates. Tapping companies is inefficient: firms pass the burden on to others. Better to tax directly those who ultimately pay—whether owners of capital, workers or consumers. Nor do corporate taxes raise much money: barely more than 2% of GDP (8.5% of tax revenue) in America and 2.7% in Britain. Abolishing corporate tax would create its own problems, as it would encourage rich people to turn themselves into companies. But a lower rate on a broader base, combined with vigilance by the tax authorities, would be more efficient and would probably raise more revenue: America, whose companies face one of the rich world’s highest corporate-tax rates on their worldwide income, also has some of the most energetic tax-avoiders.

These reforms would not be easy. Governments that try to lower corporate tax rates will be accused of caving in to blackmailing capitalists. Financial centres and incorporation hubs, from the City of London to Delaware, will fight any attempt to tighten their rules. But if politicians really want to tax the missing $20 trillion, that’s where they should start.

The Italian election

Who can save Italy?

Europe’s most sluggish economy needs more of Mario Monti’s reforms Feb 16th 2013 | THE danger for Europe’s single currency seems to have abated. Bond yields in peripheral countries have fallen; worries that some members might be forced out have dissipated; budget deficits have shrunk; the first signs of recovery are showing in Ireland and even Spain. Yet the euro zone’s crisis is far from over.

Rather, its acute phase has become chronic. The concern has moved from just bust budgets and broken banks, to a lack of jobs and slow growth.

Lost competitiveness, high unemployment and stagnation were always the biggest long-term risks for Europe’s single currency. These problems may be most obvious in the usual peripheral suspects— Greece, Spain and Portugal, but are not confined there. The euro zone remains in recession. The economies of Germany and France shrank in the fourth quarter of 2012. France is struggling to reform (see article). But the worst of them all is Italy (see briefing).

Italy’s failures are not as obvious as those of other countries. Despite its huge public debt—almost 130% of GDP—its public finances and its banks are in better shape than those in Greece or Portugal. It also avoided the property booms and busts that ravaged Spain and Ireland. Yet Italy’s economy is one of only two in the euro zone in which real GDP per head has fallen since the euro came into being. In the global league table of growth in GDP per head, it comes 169th out of 179 countries over the period since 2000, beating only a handful of basket-cases such as Haiti, Eritrea and Zimbabwe.

Now Italy also risks being left behind by its neighbours. Unit labour costs in most of the euro zone’s Mediterranean countries rose far above Germany’s after the creation of the euro, but in most they have fallen sharply since the crisis began. In Italian factories, by contrast, they have risen since 2008 by more than in any other euro-zone country except Finland.

Italy’s economic problems mean that its election on February 24th and 25th matters far beyond the Alps. If the euro zone’s third-biggest economy and its largest public debtor cannot reignite growth and generate new jobs, Italians will eventually lose hope or their northern neighbours will lose patience. Either way, the euro zone will fall apart.

When win-win is possible Fortunately there is a way forward for Italy: deep and comprehensive reforms to its over-regulated economy. The outgoing technocratic government led by Mario Monti, in office since the curtain came down on Silvio Berlusconi in November 2011, started down this path with pension, regulatory and labour-market changes. By some estimates, these measures have already raised Italy’s potential growth by almost half a percentage point. But much more is needed.

Italy has far too many protected economic interests, from notaries to pharmacists, and from taxis to energy suppliers. It also has too many layers of government: provincial, regional and local administrations that often duplicate rather than replace the activities of central government. A constipated judicial system makes contractual disputes impossibly long, costly and unpredictable: the average civil trial in Italy lasts

for 1,200 days, compared with 331 in France. Employment is too heavily taxed, and public spending is skewed towards transfers rather than investment.

Yet all this also provides an opportunity. A recent study by the IMF, which also looked at the evidence from other countries, concluded that product- and labour-market reforms in Italy could raise GDP per head by 5.7% in five years’ time and by 10.5% in ten. If they are done simultaneously (and it may be easier to tackle vested interests all at once rather than one at a time) and are complemented by sensible fiscal reforms, the potential jump in GDP after ten years rises to over 20%. That should set a clear target for the next government.

The best and the rest Italians have a choice between the good, the bad and the broadly acceptable. The best result would be for Mr Monti to stay on as prime minister. He is running on a pro-reform ticket backed by a coalition of centrist parties. Sadly, the professor is better at governing than campaigning: his poll ratings have seldom crept above 15%, putting him in fourth place.

The worst outcome would be a victory for Mr Berlusconi’s right-wing coalition. For a host of personal and political reasons, this newspaper continues to regard the media tycoon as unfit for office. He failed to reform the country in over eight years in power and his party, unlike its centre-right peers in other troubled European countries, is still campaigning on a programme that ignores reform too.

Explore our interactive guide to Europe's troubled economies Given Mr Berlusconi’s naked advancement of his own interests at the expense of his country’s, it is amazing that any Italians still support him. Yet, in the polls he has narrowed the gap with the centre-left coalition under Pier Luigi Bersani, giving him a chance of winning a majority in the Chamber of Deputies, though taking the Senate (and thus being able to form a government) looks beyond him. But Mr Berlusconi could paralyse the political system, probably forcing another election, alarming the markets and reviving the euro crisis: a miserable mess even by his own standards.

That leaves Mr Bersani, whose centre-left coalition has led in the polls since the election was called. His backers include former communists, and he has a coalition partner from the far left. Yet Mr Bersani also has a reasonable record as a reformer in past governments. If he won the election, but failed to secure a majority in the Senate, he would have to form an alliance with Mr Monti; and Mr Monti could use his bargaining power to demand a role as a super-minister overseeing the economy.

A government led by Mr Bersani, with Mr Monti in charge of the economy, would be a decent outcome for Italy. It would have the confidence of the markets and the international institutions whose approval is needed to keep countries afloat. More important, it might get serious about reforming an economy which, if it goes on the way it did under Mr Berlusconi, will eventually collapse and drag the euro down with it.

The global economy

Phoney currency wars The world should welcome the monetary assertiveness of Japan and America Feb 16th 2013 |

OFFICIALS from the world’s biggest economies meet on February 15th-16th in Moscow on a mission to avert war. Not one with bombs and bullets, but a “currency war”. Finance ministers and central bankers worry that their peers in the G20 will devalue their currencies to boost exports and grow their economies at their neighbours’ expense.

Emerging economies, led by Brazil, first accused America of instigating a currency war in 2010 when the Federal Reserve bought heaps of bonds with newly created money. That “quantitative easing” (QE) made investors flood into emerging markets in search of better returns, lifting their exchange rates. Now those charges are being levelled at Japan. Shinzo Abe, the new prime minister, has promised bold stimulus to restart growth and vanquish deflation. He has also called for a weaker yen to bolster exports; it has duly fallen by 16% against the dollar and 19% against the euro since the end of September (when it was clear that Mr Abe was heading for power).

The complaints, however, are overdone. Rather than condemning the actions of America and Japan, the rest of the world should praise them—and the euro zone would do well to follow their example.

Turning swords into printing presses The war rhetoric implies that America and Japan are directly suppressing their currencies to boost exports and suppress imports. That would be a zero-sum game which could degenerate into protectionism and a collapse in trade. But this is not what they are doing. When central banks have lowered their shortterm interest rate to near zero and thus exhausted their conventional monetary methods, they turn to unconventional means such as QE or convincing people that inflation will rise. Both actions should lower real (inflation-adjusted) interest rates. This may now be happening in Japan.

The principal goal of this policy is to stimulate domestic spending and investment. As a by-product, lower real rates usually weaken the currency as well, and that in turn tends to depress imports. But if the policy is successful in reviving domestic demand, it will eventually lead to higher imports.

Aggressive monetary expansion in a big economy suffering from weak demand and subdued inflation is good for the rest of the world, not bad. The International Monetary Fund concluded that America’s first rounds of monetary laxity boosted its trading partners’ output by as much as 0.3%. The dollar did weaken, but that became a motivation for Japan’s stepped-up assault on deflation. The combined monetary boost on opposite sides of the Pacific has been a powerful elixir for global investor confidence.

Track global exchange rates over time with our new interactive Big Mac index European officials, fearful that their countries’ exports are caught in the crossfire, have entertained loopy ideas such as directly managing the value of the euro. Instead, the euro zone should stop grumbling and start emulating Japan: the European Central Bank should ease monetary policy, if necessary through QE. This would both blunt the euro’s rise and combat recession in the zone’s periphery.

That option may not be available to emerging markets, such as Brazil, where inflation remains a problem.

In their case, limited capital controls may be a sensible short-term defence against destabilising inflows of hot money.

Should Japan’s attack on the yen move beyond rhetoric to actual intervention in the markets to drive its value down, then the rest of the world would be right to condemn it. Until that happens, other countries should avoid groundless fearmongering about currency wars. Finance ministers and central banks should be fighting stagnation, not each other.

Free trade across the Atlantic

Come on, TTIP A good idea in the state-of-the-union address, that business should rush to support Feb 16th 2013 |

LESS than a month after an unimpressive speech at his second inauguration, Barack Obama came to Congress on February 12th to deliver a far more solid state-of-the-union message. This time, he very properly placed control over America’s finances at the beginning of his list of objectives, offering muchneeded reforms to Medicare, the budget-busting health-insurance scheme for the elderly, while demanding that the Republicans help deliver, as they should, fundamental reform to America’s loophole-ridden tax system. He also included a list of sensible centre-left ideas: more spending on infrastructure, extending pre-school education to every American child (part of the long-term answer to growing inequality), changing some of America’s madder immigration and gun laws (see article), and even an attempt to bring climate change back into the political debate.

Many of these proposals will die in Congress. One that has a good chance of surviving—and which Republicans, business and indeed anyone who cares about the future of the West should rush to support— is Mr Obama’s plan for a “transatlantic trade and investment partnership” that would reduce trade barriers with the European Union. Trade in goods and services between the two economic giants amounts to nearly $1 trillion each year, and total bilateral investment between them to nearly $4 trillion. Getting rid of remaining tariffs could raise Europe’s GDP by around 0.4% and America’s by a percentage point.

Ditching even half of today’s non-tariff barriers could boost GDP in both places by 3%.

Nowadays few politicians (even in France or the Democratic Party) oppose free trade, per se. The excuse for failing to lower barriers is that, whereas opening up is desirable, it is simply not practical at the moment. Transatlantic tariffs are already low—less than 3% on average, though that average conceals some sharp peaks—and the easiest deals have already been struck. The lobbies are as powerful as ever: farmers will block anything. A battle over subsidies to two planemakers, Boeing and Airbus, could yet erupt into outright trade war. And in such tough times, how could an Ohio congressman give up the “Buy American” rules in government procurement, or a French MEP abandon protection for geographically

unique brands, like champagne or Roquefort? Wait a few years…

Explore our interactive map and guide to the stats of America In fact, as the cautious Mr Obama’s willingness to gamble on this shows, the best time to push is now.

Some of the most obstreperous lobbies have been giving ground. The EU recently opened its market to imports of live pigs and certain types of treated beef from America, suggesting that it may at last be possible to make progress on trade in genetically modified products. And other powerful groups should get behind the deal—especially when it comes to common rules and standards. A single TTIP test for new drugs would be a massive boon for pharmaceutical firms. Agreed standards for electric cars would create a vast market, as well as huge demand for accompanying infrastructure. Think how Amazon and Google could gain from looser rules on cross-border flows of information in Europe. And think how Europe’s austerity-blighted economies could gain from more demand from abroad.

A legacy for Obama More jobs, more investment, more growth. The only reason for business not to throw everything it has behind TTIP would be if there were a bigger global trade pact to be had. Sadly, there is not. Done properly, a US-EU deal could even create a bit of momentum for other pacts, including agreements with Asian trading partners. And that potentially might lead to a new round of global trade talks.

Another sop for elderly Britons

Grey squirrels The government is looking after the old, and younger people are bearing the brunt of cuts. That’s wrong Feb 16th 2013 | “WE’RE all in this together,” intoned George Osborne, soon to be Britain’s chancellor of the exchequer, in 2009. Fiscal austerity would be grim, he warned, but the pain would be spread evenly. The catchphrase went down so well that Mr Osborne has repeated it in other speeches. It has been turned into a T-shirt— yours for £10 ($16) in the Conservative Party’s online shop. But it is beginning to fray.

Britons below retirement age are indeed in it together. The working-age poor are being pinched by a cap on welfare payments. Wealthy parents have been stripped of child benefit. University tuition fees have rocketed. Everyone is paying more VAT. But austerity seems much less austere if you are old. Pensioners, who fared notably well in the boom years, have been coddled in the bust.

Whereas public-sector salaries and benefits for working-age people are set to rise by a miserly 1% a year over the next few years, pensions have been “triple-locked”: they increase by average earnings, inflation (currently 2.7%) or 2.5%, whichever is higher. Perks such as free bus passes, free television licences and winter fuel payments have not been touched (although Mr Osborne is daringly pondering whether to axe fuel subsidies for Britons who have retired to sunny Spain).

This week another gift arrived. At present old people who need long-term care for conditions like dementia must pay for much of it. Some have to sell their houses and run down their savings until they are left with £23,250—at which point the state steps in. Jeremy Hunt, the health secretary, finds this intolerable. On February 11th he announced that the state will take over when people have paid £75,000 towards their own care. And nobody will be forced to sell their house.

This should prove popular, and it would have been more popular if Mr Hunt had been more generous.

People hate the idea of being forced to sell their homes. The threat of being wiped out by nursing costs is rising as people live longer—the number of Britons aged 85 and over will double between 2010 and 2030—and as they become less tolerant of bog-standard care. But it is wrong both in principle and in practice.

Cash in the attic When budgets are tight, welfare needs to contract to its core function of guaranteeing a very basic

standard of living for all. It should not be used to prevent wealthy old people from having to sell their homes. People feel there is something special about the family estate. But wealth is wealth, whether it sits on a street or in a bank, and houses have been a terrific generator of it over the past few decades. Why should taxpayers help those who have done well out of the housing market to keep most of their winnings?

Far better to focus state spending on the impoverished young, who can be turned into productive members of society.

As the rich world ages, people will have to work longer and bear more of the cost of their care. Fitch, a ratings agency, has served notice to many countries (including Britain) that an ageing population threatens their credit rating. Britain has done some sensible things, creating a universal basic state pension, raising the retirement age and asking public-sector workers to contribute more. But others have been bolder. Italy and Portugal have radically trimmed pensions. Sweden pioneered a system in which pensions are linked to contributions.

The old are a powerful voter block, feared by politicians. But they have enough experience of life to know that, in the end, the books must be balanced.

Letters Letters: On the Nordic countries, private schools, immigration, Sandhurst, Ed Koch, Richard III

Letters

On the Nordic countries, private schools, immigration, Sandhurst, Ed Koch, Richard III Feb 16th 2013 | Letters are welcome via e-mail to letters@economist.com Fading supermodels

SIR – It is always problematic to treat a group of countries as homogeneous, as the differences often outweigh the similarities. For although Sweden has indeed made some of the reforms you outlined in your special report on the Nordic countries (February 2nd), Denmark, which keeps a beady comparative eye on its neighbour, has not. The growing disparity between the two is alarming.

Recent figures show that compared with Sweden, Germany, the Netherlands and Britain, Denmark is the worst at creating jobs, has the biggest share of 16-64-year-olds on transfer incomes, spends the most as a percentage of GDP on social activities, is the easiest country in which the unemployed can obtain benefits, has the highest minimum wage and is the country where moving from transfer income to employment gives the lowest financial benefit. It is better to be on the dole in Denmark than to take a lowpaid job (that involves some travel to and from work).

Although one-third of the workforce has a technical or vocational qualification, only a quarter of young people are studying for one. Mass immigration is ruled out. The implication as the workforce retires is to outsource jobs to places such as Poland and the Czech Republic, a scenario that is viewed as catastrophic by employers.

Walter Blotscher Haarby, Denmark SIR – You were too generous to Norway. Oil production has been declining for a decade. House prices have doubled and are still rising. Wages have become so high that export industries other than oil have a hard time. Labour conflicts and strikes are a seasonal occurrence. The economy is more fragile than it appears. Still, your point is well taken: it is good to be Norwegian.

Johannes Mauritzen Bergen, Norway

SIR – To this pedestrian philistine the examples you pictured of high-end Nordic restaurant cuisine were bewildering. The few sprigs of greens on the plate probably cost a small fortune and would appeal only to some ruminant.

The tiny specks served up on the flat rock appeared to be bird droppings and the abdomen of an insect. It truly strains rational belief that people pay for the privilege of putting such titbits into their mouth. It would be faster, easier and certainly less pretentious just to flush the money down the toilet.

Barry Shelton Los Angeles SIR – I dispute your assertion that a Swede pays “tax more willingly than a Californian because he gets decent schools and free health care” (“The next supermodel”, February 2nd). His taxes are paying for his health care, so it is not “free”.

William Marshall Devon, Pennsylvania

* SIR – Thanks for a very interesting special report about the Nordic countries. However, I must correct you concerning your cover photo: the Vikings never had horns on their helmets. It was Carl Doepler, working for Richard Wagner, who invented horned helmets for the Nibelungen Ring. The myth has been common since then.

Jens Baunsgaard Bornholm, Denmark SIR – The horned warrior on your cover made me expect a story on the ancient Gauls, or perhaps more on Gérard Depardieu’s flight from French tax rates.

Stig Arild Pettersen Oslo Private education

SIR – The bursaries offered by private schools to poorer pupils are not face-saving exercises designed to “salve consciences” (“Pride and prejudice”, February 2nd). Many independent schools have established programmes that are making a substantive difference in some of the most deprived parts of Britain.

At Rugby the Arnold Foundation offers full financial support to 10% of pupils, all of whom come from disadvantaged areas and would not be able to pay for their education. The National Foundation for Educational Research has acclaimed our efforts and we have joined forces with others to form a national bursary foundation that will place hundreds of children from poorer backgrounds at independent and state boarding schools by the end of the next decade.

Anyone who truly cares about breaking down social barriers in this country should welcome these sorts of efforts, not carp from the sidelines.

Patrick Derham Head master Rugby School Rugby, Warwickshire Questions on immigration

SIR – I am all for immigration reform, but why should it be a geographic lottery favouring those who can simply walk into a country (“Let them stay, let them in”, February 2nd)? Is it fair to discriminate against Africans and Asians who don’t have a convenient point of entry into the United States? Does a poor person from Mali have any less right to citizenship than a migrant from Tijuana? Is he or she less capable of hard work? Should the fact that illegal immigrants broke the law give them a leg up? Is pandering to the Hispanic vote a valid reason for legislating anything?

What about the impact on law-abiding immigrants? Unfettered immigration places downward pressure on the wages of labour. You are promoting an increase in supply. We need some way to make sure workers benefit and that immigration reform isn’t just about serving the needs of Walmart and Tyson Foods.

Mark Kraschel Muscat, Oman SIR – Yes, America does need more skilled professionals. It is unclear why this bipartisan objective should be held hostage to the notion that the government give an amnesty to people who break the law.

The status of illegal immigrants can be normalised by granting them short-term work visas.

Kevin Maxwell

Atlanta The benefits of Sandhurst

* SIR – Patrick Wade’s letter suggested that American army officers are better educated than their British counterparts (February 2nd). It is an unfair comparison because their commissioning systems are different. American officers have several accession sources: West Point, ROTC, Officer Candidate School and some through a direct commission. The system works well for the American army.

All British army officers come from one place: the Royal Military Academy at Sandhurst, which runs a gruelling 42-week programme for commissioning lieutenants. Sandhurst also has a short courses for late entry officers commissioned from the ranks as captains, as well as orientation courses for medical officers and chaplains. All serving British officers have a Sandhurst grounding.

I have had the pleasure of visiting and observing Sandhurst, and attending a sovereign's parade. It was a memorable visit. Officers chosen for the commissioning program at Sandhurst overwhelmingly hold university degrees, or else they have sufficient knowledge of impressive live experience and accomplishments to be deemed potential officer material. The system serves the British army well.

Robert Hauer Trophy Club, Texas Who saved New York?

SIR – While no one is denying the contribution Ed Koch made to New York, it is hardly fair to speak of the city being “all but broke” as if he had rescued it (“Farewell to the cheerleader”, February 9th). That credit belongs to Hugh Carey, the governor of New York state at the time, and Felix Rohatyn, a financier.

They persuaded bankers and union leaders to work together and established a board that oversaw the city’s finances. Their guidance and efforts were responsible for New York’s gradual recovery.

Koch, on the other hand, complained frequently about the way the board limited his powers. The real clean-up of the city came later under Rudy Giuliani as mayor and his new and effective police commissioner. Credit is not always given where credit is due because some are better at self-promotion.

Mildred Kuner Ithaca, New York Subtle, false and treacherous SIR – Your obituary of Richard III (February 9th) should have given “England’s most controversial king” the final word: I shall despair. There is no creature loves me; And if I die, no soul shall pity me…

Methought the souls of all that I had murder’d Came to my tent; and every one did threat Tomorrow’s vengeance on the head of Richard At last he can rest in peace.

Claude Pillet Dijon, France * Letter appears online only

Briefing Italy’s election: Long after the party Beppe Grillo: Five-star menu

Italy’s election

Long after the party How Italians are going to vote is not clear. But the result will matter both to the future of their country and to the euro Feb 16th 2013 | ROME |

A CASUAL visitor to Rome might be forgiven for failing to notice that Italy is holding a general election on February 24th and 25th. Along the streets a few scruffy, amateurish posters flap disconsolately in the wind. Many are for the local and not the national election. Most are ignored by scurrying passers-by.

It is a similar story in the rest of the country, with election rallies attended by remarkably few. There is more interest in Lombardy, the country’s most populous region, partly because it may directly affect the make-up of the next government and partly because it is also holding a tight regional race; and also in Sicily, where the polls are too close to call. But most Italians show little interest in the contest.

To an outsider their apathy seems extraordinary. Italy’s dire economic situation—14 years of near-zero growth, a deep double-dip recession since 2007 and over 12 months of painful austerity—ought surely to make the voters angry. And it ought to worry them, too, just as it worries observers elsewhere in Europe, who see in Italy’s position the threat of the euro crisis bursting back into life. Yet Italians seem disillusioned with all politicians, whether left, right or centre; and a depressing number still seem ready to be won over by Silvio Berlusconi’s snake-oil. Most analysts expect a low turnout by previous standards: below the 80% of April 2008, perhaps down to 70%.

In the most recent election, in 2008, Mr Berlusconi’s right-wing People of Liberty (PdL) movement and its coalition partners, including the Northern League, won handily, leading the centre-left by 47% to 37.5% and gaining big majorities in both chambers of parliament. But the desertion of key allies, a sharply deteriorating economy and a collapse of confidence in Italy’s sovereign bonds brought him low.

In November 2011 he resigned and was replaced by Mario Monti, a professor and former European commissioner; many detected the hands of the European Central Bank and of Germany’s chancellor, Angela Merkel, in the coup de grâce.

Mental electoral arithmetic Mr Monti’s technocratic government has done much to restore Italy’s tattered credibility. It began the task of freeing up an overregulated economy, setting about pension and labour-market reforms. But its legislative and budgetary measures have needed the parliamentary backing of the PdL and of the centreleft Democratic Party (PD), led by Pier Luigi Bersani. For most of 2012 these two parties took every opportunity to water down Mr Monti’s reforms and fiscal austerity, but stopped short of blocking them outright. Then, in early December, Mr Berlusconi abruptly withdrew his support, triggering an early election.

Mr Monti and Mr Bersani look to the future Mr Bersani’s PD has been leading in the polls ever since the election was called but, thanks in part to a proliferation of parties, with a share of the vote that is lower than when it lost to Mr Berlusconi five years ago. Mr Monti, a newcomer to electoral politics, will not win, but the new centrist block supporting him will take votes from left and right. The Five Star Movement, another newcomer which appeals to voters fed up with all political parties (see article) will also get a sizeable vote.

Things are made more uncertain by a crazily complex electoral system. Any coalition winning a plurality in the national Chamber of Deputies is guaranteed a premium that gives it a 55% majority. A similar premium is applied in the Senate, which has equal legislative power. But there the top-up is awarded by region, not nationally; so to win the Senate a party needs to win most of the largest regions.

The centre-left could win both chambers, but it is not certain of either. In recent weeks Mr Berlusconi has climbed back from the dead. A winter campaign has put more emphasis on television, a medium in which Mr Bersani is a weak performer and Mr Berlusconi a powerful proprietor; his Mediaset group still has a near-monopoly on private TV. He promises cuts in some taxes, cash refunds for others. He has also railed against euro-induced austerity.

In January Mr Bersani enjoyed an 11-point lead over Mr Berlusconi. The latest opinion polls (which were the last to be published before a pre-election blackout) show that has fallen by half, to less than six points. Mr Grillo’s Five Star Movement is on 15%, Mr Monti’s centrists at 14%. A new far-left party led by a former magistrate, Antonio Ingroia, is on 5%.

Investors who hoped they had seen the back of il Cavaliere in 2011 are spooked by his political resurrection. Italian bond yields have risen and the euro has fallen. Roberto d’Alimonte, a political scientist at Rome’s LUISS University, speaks for many when he says: “Two months ago I would have said it was impossible for Mr Berlusconi to win. Now I say only that it is extremely unlikely.”

Disturbing though the no-longer-impossible thought of a Berlusconi victory is, the risk should not be exaggerated. The right has lost a lot of support because of its economic failings and scandals in both the PdL and the Northern League. Mr Berlusconi’s poll ratings are far short of 2008’s. The real damage he does lies not in the slim chance of his re-entering government but in the opportunity cost his presence imposes. As James Walston of the American University of Rome says, “for most of the period since the war, Italy needed a respectable centre-left party. Now it needs a respectable centre-right party.”

The world is used to seeing Japan’s “lost decades” of stagnation in the 1990s and 2000s as a cautionary tale. But the case of Italy, Europe’s fourth-biggest economy, is in some ways even worse. In real terms, GDP per head in 2013 will be lower than in 1999, the year the euro was launched. Portugal is the only other euro-zone economy in such a predicament.

Dismal inheritance Italy’s economic ills are not those of other euro-zone laggards like Greece, Ireland or Spain. Although it has the euro zone’s biggest stock of public debt, at almost 130% of GDP, its budget deficit is quite small.

It has not experienced a property or asset-price bubble. Its conservative banks have been mostly wellregulated; none had to be bailed out in the financial crisis (though revelations about derivatives trading at the world’s oldest bank, Monte dei Paschi di Siena, have damaged the PD, the dominant force in its region).

Italy’s problem is its loss of competitiveness. Since the euro’s birth in 1999, labour costs have risen much faster than in Germany, and productivity has actually fallen. The rise in unit labour costs (see chart) has been a key cause of Italy’s chronic lack of growth. And it is continuing. Unit labour costs have recently fallen sharply in other Mediterranean countries, but not in Italy. In Italy’s manufacturing sector they have actually been rising since 2008.

The ways in which Italy used to come by growth are no longer available. A former central banker recalls the Italy of the 1960s and 1970s, then one of the fastest-growing countries in Europe, basing its dynamism in part on alternating bursts of high inflation and frequent currency devaluations. When growth slowed in

the 1980s, the system came to rely more on increasing public spending and public debt. But with its entry into the euro Italy lost its previous safety valves of devaluation and ever-rising public debt. Result: nearzero growth. Living standards are slipping; infrastructure is getting shabbier; social problems are multiplying. Unemployment has risen to over 11% and youth unemployment to more than 36%. Neither figure is as bad as in Greece or Spain, but both are still horrendous for a rich European country.

Even after Mr Monti’s reforms, Italy’s labour market remains divided between protected insiders (usually white, male and middle-aged) on permanent contracts and unprotected outsiders (often immigrants, women or young people) on temporary ones. Italy has the lowest employment rate for women in Europe.

Explore our interactive guide to Europe's troubled economies Italy also lags behind in other international comparisons. It lies a dismal 42nd on the World Economic Forum’s latest competitiveness table, far below other big European economies. In the World Bank’s rankings for ease of doing business it comes 73rd, below Romania, Bulgaria and Kyrgyzstan. Greece is the only EU country to do worse. Foreign investment is paltry for an economy of its size, and R&D spending is low. An uncompetitive energy market keeps Italian electricity prices 50% higher than the European average. And Italy comes 72nd in the corruption league table produced by Transparency International, a watchdog that looks at graft. In the EU only Bulgaria and Greece come lower.

The Italian economy still has strengths that could help restore its health. Its myriad small and mediumsized firms, especially in the north, are sometimes ill managed by family owners and always overregulated. They have suffered more than their German rivals from global competition, especially from China. But they still provide exports, and a manufacturing base that is stronger than those of Britain and France. Private debt is low and savings are high. The Monti government’s pension reforms are now looked to as a model by other countries in similar demographic straits.

It would thus be wrong to conclude, as some pessimists do, that it is impossible to change Italy. Indeed, a report by the OECD in September noted that the Monti government’s product-market, regulatory and labour-market reforms “could add up to four percentage points to GDP over a decade.” In a country with such a dense thicket of regulations and protected special interests, the potential for greater gains is huge.

The authors of an IMF report published in January run through various previously proposed reforms in energy, transport, professional services, the judicial system and public services. They also suggest further labour-market reforms. If all these reforms were done at the same time, which magnifies their effect, the IMF reckons they could add some 5.7% to GDP in five years’ time and as much as 10.5% in ten years’.

Throw fiscal reforms into the mix—a shift in taxation from direct taxes on labour to indirect taxes, and a switch of some public spending from unproductive transfers towards investment—and this number rises to as high as 21.9%. In a country used to no growth, an expansion of GDP by over a fifth would have a colossal effect.

This raises two questions. Why has nobody made these reforms? And can the next government do better?

One answer to the first is that Mr Berlusconi, who bestrode the dreadful decades, did not particularly want to. He was never interested in reform and focused instead on self-aggrandisement and legal imbroglios (his “Rubygate” trial for sexual offences will resume after the election). Governments with some taste for reform, such as that of Romano Prodi from 2006 to 2008, were too fragile and short-lived to make much progress in the face of a culture that is prone to entrenching privileges.

The answer to the second depends on the election. The priority for Italian business is clear. Marcella Panucci, director-general of the big employers’ federation, Confindustria, wants a stable government. She hopes it will then pursue “shock therapy” to restore growth and employment.

A reform agenda ahead The nightmare would be for Mr Berlusconi to overtake Mr Bersani and win a majority in the Chamber of Deputies. The Senate’s regional make-up precludes him getting a majority there, so he would probably be unable to form a government; instead such a result would usher in months of uncertainty and a fresh election, all accompanied by conniptions in the markets.

The second-worst outcome would be for Mr Bersani’s coalition to win a majority in both houses. For that, the centre-left must win the Senate races in Lombardy, Campania and Sicily as well as a plurality in the chamber. Even with a double majority, Mr Bersani might try to form a coalition with Mr Monti to bolster his international standing. But he would be beholden to his own party’s left-wingers and to his farleft coalition partner, Nichi Vendola’s Left, Ecology and Freedom (SEL) party.

Mr Bersani himself has a decent record of reform as a minister under Mr Prodi. He tackled pharmacists to some effect, though he failed when it came to taxi drivers. Yet many of his supporters, including the big trade unions and his main economic adviser, Stefano Fassina, oppose further labour-market reform— indeed, they want to reverse some changes made by Mr Monti. As for Mr Vendola, he prefers to talk of splitting investment from retail banking and taxing the rich than of competitiveness and reducing unit labour costs.

A better result would thus be one in which Mr Bersani and his more left-leaning colleagues ally with Mr Monti out of necessity, not merely for show, giving the former European commissioner greater influence.

For this, the right must win the Senate in Lombardy, Sicily or both, forcing Mr Bersani to lure Mr Monti into a coalition as his only route to a Senate majority. Mr d’Alimonte at LUISS university sees a dilemma: Lombards who want Mr Monti in the next government must vote for the Berlusconi coalition.

Pessimists recall that the Prodi government, which also stretched from centre-right to far left, collapsed after only two years. Yet the precedent need not be so troubling. A more united PD has replaced fissiparous left-wing parties of 2006. Mr Monti commands respect even among his leftist critics. The need for reform is more pressing now. And, although he hails from the far left, Mr Vendola was a sensible governor of Puglia, helping it to become the mainland south’s best-performing region.

It will still be a huge challenge for Mr Bersani. For the sake of Italy, and ultimately also for the sake of the euro, he must succeed. A lot is riding on the voters of Italy on February 24th and 25th. Unfortunately, they don’t seem to care much.

Beppe Grillo

Five-star menu A comedian and populist whose result may be underestimated Feb 16th 2013 | VENETO |

A man, a plan, a van THE Five Star Movement (M5S) did not exist four years ago. Its candidates have no experience of parliament. But they may yet fill about 10% of the seats in both the Chamber of Deputies and the Senate.

Beppe Grillo, the comedian who co-founded the M5S (he denies leading it) is not standing. He was convicted for manslaughter after a 1980 traffic accident, and his party’s rules ban someone with such a record from running. Instead, 64-year-old Mr Grillo is making a 10,000km (6,200-mile) journey through 77 cities in a camper van with three assistants to get out the vote.

Most politicians focus on television, but Mr Grillo campaigns in a way that is traditional yet contemporary: rallies in packed piazzas live-streamed on YouTube. The M5S has its “feet on the ground, but its head on the web”, he says on his way to the town of Belluno. Pollsters fear they may underestimate his support. In October’s regional election in Sicily, an unpredicted surge gave the M5S more votes than any other party.

Not that Mr Grillo, non-leader, would call his party a party. With their public funding and networks of patronage, Italian parties are his primary target. On the dashboard of his camper van is a Guy Fawkes mask. Just as Fawkes wanted to blow up the British parliament, so Mr Grillo seeks to sweep away Italy’s old politicians, “those who have destroyed the country”. In their place, he wants web-based direct democracy.

The five stars cover its members’ main interests: water, transport, development, internet availability and the environment. Other than on health and energy, the movement’s policies are vague. The section on economics in its 15-page programme is strong on corporate governance and market transparency, but short on macroeconomic policy. It blithely says the M5S would shrink the budget deficit by “cutting waste and introducing new technologies to allow…the public access to information and services without the need for intermediaries”.

A recent study by Demos, a British think-tank, found that Mr Grillo’s followers were more educated than the Italian average—and more likely to be male, unemployed and pessimistic. That volatile mixture raises the question whether the M5S might detonate a more violent response to Italy’s ills. “No,” says Mr Grillo.

“It’s the anti-detonator. My movement regulates the fear.”

United States The state of the union: A House divided Raising the minimum wage: Trickle-up economics The defence secretary’s nomination: Hagelian dialectic The milder side of drones: Here’s looking at you Fracking in the West: Big reserves, big reservations Football in New York: The Cosmos come back North Carolina: Farewell to purple Making guns at home: Ready, print, fire Lexington: The politics of purity

The state of the union

A House divided The president delivers a meaty speech to Congress that will not find much favour with the Republicans Feb 16th 2013 | WASHINGTON, DC |

AMERICANS, opined Barack Obama near the beginning of his state-of-the-union address, do not expect their politicians “to agree on every issue”. Nonetheless, he continued, “they do expect us to forge reasonable compromise where we can.” That is not just a fine sentiment: with Republicans in control of the House of Representatives, Mr Obama will have to do some haggling to get any of the elaborate agenda laid out in his speech adopted. Most urgently, a compromise will be needed if America is to escape the “sequester”, a big package of spending cuts due to take effect on March 1st, but designed to be so extreme that Congress would never actually allow them to occur. Yet finding that compromise looks harder than ever.

Mr Obama proposed much the same formula to reduce the deficit and avert the sequester as he has previously, though never in so elevated a forum. He offered to allow substantial cuts to Medicare, the government’s health-insurance scheme for the old—something most Democrats resist. In exchange, he said, Congress should raise revenue by eliminating loopholes and deductions in the tax code. Tax reform is something that Republicans have generally been in favour of.

This is the deal that the two parties were groping towards at the end of last year, in an effort to avoid not just the sequester but also big tax increases for all Americans that were scheduled to take effect on January 2nd as George W. Bush’s tax cuts expired. In the end, however, with no agreement reached by the end of the year, Republicans reluctantly agreed to around $620 billion in tax increases on the rich over 10 years without any accompanying cuts—something the president made only a passing acknowledgment of when calling for further revenue. Instead, he couched his proposal in the language of his re-election campaign, again casting himself as the defender of the middle class and Republicans as handmaidens of the rich. His opponents, he implied, wanted to force “senior citizens and working families to shoulder the entire burden of deficit reduction while asking nothing more from the wealthiest and the most powerful.”

The Republicans have repeatedly ruled out further tax increases, possibly because they feel aggrieved that they have appeared to be the big losers in the year’s end deal. In fact, though, in earlier rounds of negotiation, they had secured ten-year spending cuts worth almost three times as much as the $620 billion in tax increases, so overall, the balance of spending cut to extra tax revenues is strongly in their favour.

Huff and puff though they will, a solution to the problem of the sequester based on what the administration is still proposing is not a bad deal for them. Whether they will take it is quite a different matter.

The budget aside, there were a few proposals that should appeal to Republicans, most notably the launch of talks on a free-trade agreement with the European Union and a renewed push to reach a deal on the transpacific Partnership, a proposed free-trade area involving ten other countries on the Pacific Rim. On the one subject where bipartisan talks do seem to be making progress, immigration reform, Mr Obama was careful not to offend anyone, although his outline of a potential deal omitted a guest-worker programme, something Republicans are keen on. He also offered stern words for North Korea and Iran, and promised to “stand steadfast with Israel”—although that will not be enough to quell Republican complaints that he is hard on America’s allies and soft on its enemies.

Explore our interactive map and guide to the stats of America However for the most part Mr Obama packed his speech with ideas Republicans hate. He urged Congress to forswear threats to shut the federal government down or stop paying America’s bills, both cherished Republican negotiating tactics in fiscal disputes. He made an impassioned plea for stricter gun laws, invoking a series of recent massacres and pointing to the parents of a recent shooting victim, who were sitting in the gallery next to his wife. He talked about making it easier to vote, not a popular cause on the right. He demanded that Congress pass a cap-and-trade bill to curb global warming—absolute anathema to most Republican lawmakers—and then threatened to pursue the same goal by regulatory fiat if it did not.

On top of all this came various proposals which, while desirable in themselves, all cost money. The president said he wants to ensure universal access to pre-school teaching, to expand vocational training in high school, to set up a network of institutes promoting manufacturing and to create a tax credit for hiring the long-term unemployed, among other new schemes. All of this, he promised, would not add a dime to the deficit, although he provided no details of how it would be paid for other than by reallocating existing spending.

Marco Rubio, first responder Republicans immediately pointed out that the public debt has grown by 58.6 trillion dimes on Mr Obama’s watch. Marco Rubio, a senator from Florida who gave the Republican rebuttal to the president’s speech, complained that “his solution to virtually every problem we face is for Washington to tax more, borrow more and spend more.” Referring to his own, working-class parents, Mr Rubio rejected the idea that the Republicans were the party of the rich and accused the president of being obsessed with raising taxes.

Mr Rubio had a point, but Mr Obama has a much bigger bullhorn. No sooner had he finished his speech than he joined an online call with supporters. He is due to hold a series of rallies over the coming days to press his case. The president appears emboldened by his re-election, and by his success in enacting tax increases in January in spite of Republican objections. He seems to have concluded that the way to get what he wants out of his political adversaries is by rallying public opinion to his side, and that accusing them of coddling the rich is the easiest way to do it. So he is spending much less time courting the Republicans in Congress, and much more in the bully pulpit, attempting to bully them into submission.

Democrats like to think that Mr Obama has nothing to lose in the ongoing stand-off over the budget. Either the Republicans back down, and he gets the concessions he wants on policy, or they stand firm, and live up to his portrait of a party willing to bring the country to its knees to get its way. But that strategy ignores the alarming economic consequences of allowing the sequester to proceed. Worse, it more or less guarantees that recrimination and hostility will dominate Mr Obama’s second term, as they did his first, while Congress does the bare minimum to avoid opprobrium and defer disaster.

Raising the minimum wage

Trickle-up economics The president proposes a hefty increase in the minimum wage Feb 16th 2013 | WASHINGTON, DC |

BARACK OBAMA has long made income inequality a central theme of his second-term agenda. He has already tackled inequality from the top by preserving tax cuts for everyone but the rich. In his address to Congress on February 12th, he dealt with it from below, proposing to raise the federal minimum wage by 24%, benefiting, so the White House claimed, 15m low-wage workers.

America’s minimum wage has long been low by international standards, equalling just 38% of the median wage in 2011, close to the lowest in the OECD (see chart). Congress changes it only occasionally, and in the interim inflation eats away its value. The wage was last raised, to $7.25 per hour, in 2009. Since then its real value has slipped back to where it was in 1998. Twenty states now have minimum wages above the federal rate, compared to 15 in 2010, according to the Economic Policy Institute, a liberal research group.

Mr Obama’s proposal would boost the nominal wage to $9 per hour by 2015, restoring it, in real terms, to its 1979 level, though relative to median wages it would still be lower than in many other rich countries.

Thereafter, it would be indexed to inflation. He would also raise the minimum wage for workers who receive tips for the first time in over 20 years.

The proposal drew the predicted response: labour and liberal groups said it would reduce poverty and raise the spending power of the poorest workers, while businesses and Republicans (whose co-operation is needed if the proposal is to become law) said it would cost low-skilled workers jobs.

The economic consequences are hard to predict. Economists historically frowned on minimum wages as distortionary price fixing that reduced demand for workers affected by the wage. But that assumption has come under fire from a growing body of research. The introduction of Britain’s minimum wage in 1999 had no notable impact on jobs, for example. In America, the White House approvingly cites research by Arindrajit Dube, William Lester and Michael Reich that compared counties where the minimum wage rate rose to neighbouring counties in states where it didn’t and found no negative effect on employment. The theory is that higher wages reduce costly turnover, reducing the incentive to lay workers off.

Some minimum-wage proponents go even further, arguing that a higher minimum boosts jobs by shifting income towards people who consume more of what they earn. The EPI, for example, last year claimed a minimum wage of $9.80 per hour would create 100,000 jobs.

But David Neumark and William Wascher, who have long studied, and been critical, of the minimum wage, maintain the evidence bears out basic economic intuition: a higher minimum wage costs some lowskilled workers their jobs while helping those who keep them. Mr Neumark is particularly dismissive of the notion that a higher minimum wage can boost the economy, and indeed that is not a claim the White House makes.

For Mr Obama, that may not matter. His speech contained many more effective means to boost growth and incomes of the poor, from increased infrastructure to early childhood education. Unlike the minimum wage, though, they cost the government money that it doesn’t have.

The defence secretary’s nomination

Hagelian dialectic A far from scholarly process Feb 16th 2013 | WASHINGTON, DC | AT A perilous moment of transition for America’s armed services, involving departure from Afghanistan, looming budget cuts and significant worldwide tension, the Pentagon is set to receive a civilian leader weakened by partisan attacks and doubts about his willingness to see military power used. As The Economist went to press, Barack Obama’s nominee for secretary of defence, Chuck Hagel, seemed likely, though not certain, to earn the Senate’s grudging endorsement.

Many attacks on Mr Hagel—a former Republican senator treated as an apostate after he turned against the Iraq war, opposed unilateral sanctions on Iran and criticised the influence of pro-Israel groups in Washington—have been over the top. On February 12th the Senate Armed Services Committee divided along party lines, with Democrats outvoting Republicans by 14 votes to 11 to send Mr Hagel’s nomination to the full Senate. Normally defence secretaries are given bipartisan support.

A Texas Republican, Ted Cruz, speculated at that meeting—without evidence—that if Mr Hagel could not provide the ultimate source of speaking fees received in recent years, it was “relevant” to wonder if the cash came from anti-Israel extremists, or “directly from North Korea”. The top Republican on the committee, James Inhofe of Oklahoma, endorsed critics who have called Mr Hagel “cosy” with terrorist states, citing reports that Iranian officials had voiced support for his appointment.

However, even defenders agree that Mr Hagel damaged himself with a stumbling performance at his confirmation hearing, as he was pressed over past statements and votes on Israel, Iran and nuclear weapons. Republicans call Mr Hagel weak in his support for Israel and soft on Iran. Allies call him a thoughtful sceptic about America’s ability to control the new world order.

With Democrats wielding a 55-45 Senate majority, Republicans were left pondering delaying tactics to slow a final vote. Two Republicans, Lindsey Graham of South Carolina and John McCain, of Arizona linked Mr Hagel’s nomination to their quest for information about Mr Obama’s response to last September’s terrorist attack in Benghazi, which killed officials including America’s ambassador to Libya.

Mr Graham threatened to hold up Mr Hagel’s confirmation and that of John Brennan, named by Mr Obama to head the CIA, until he has been given answers.

On February 13th the Democratic majority leader of the Senate, Harry Reid, accused Republicans of effectively mounting a filibuster against a presidential nominee for defence secretary, calling that unprecedented and “a shame”. He proposed a motion to force a vote, set for February 15th, needing a supermajority of 60 to pass.

Even if Mr Hagel squeaks through, the row points to broader conservative angst about foreign policy.

Republicans suspect that Mr Obama does not believe in American exceptionalism, and chose Mr Hagel to help him shrink the Pentagon. Yet they also understand that Americans are war-weary. Republican defence and budget hawks are divided over automatic spending cuts that may hit the Pentagon next month.

At Mr Brennan’s confirmation hearing, senators seemed unsure whether to cheer or to deplore Mr

Obama’s expanded drone strikes against suspected terrorists, including American citizens. Mr Brennan insisted that drones are used with care, but Rand Paul, a Republican from the libertarian right, later said he was willing to block Mr Brennan unless he clarified whether the president claims a right to kill Americans with drones inside America. Mr Brennan is likely to get his job, but via a painful lesson in the new politics of national security.

The milder side of drones

Here’s looking at you Civil libertarians are still worried Feb 16th 2013 |

WHENEVER a hiker gets lost in Mesa County, a rugged area in western Colorado, Benjamin Miller of the local police force does not bother to join the search on foot. His department is a trailblazer in the use of unmanned aircraft, and he launches a drone equipped with an infrared camera to search from the skies.

No wayward ramblers have been rescued in this way yet, but he hopes to find one soon.

Drones are best known for their role in the Afghan war, where they both monitor and strike at enemy forces. Now the Federal Aviation Administration has been ordered to find a way to integrate them into American airspace by 2015. The attraction of drones for domestic users is their ability to carry sensors, such as cameras and spectrometers, rather than weapons. This suggests they could be useful in commerce and research, as well as policing. Already scores of organisations have received special approval from the FAA to fly drones. Although there is no regularly updated master list in the public domain, organisations that have received permission range from universities in North Dakota and Michigan to the Departments of Agriculture and Energy. A number are police departments, and it is this development that is stirring up concerns about privacy and protests from local residents.

Their fears are centred on the prospect of surveillance. Since drones can be far cheaper to buy than helicopters—tens of thousands of dollars, as against a few million—the worry is that cameras will be sent up into the sky far more frequently. Even if they are not on a deliberate spy mission, they may capture incidental footage that leads to an investigation, such as evidence of marijuana plantations. Still, at least in Mesa County, the drones have been used for search and rescue efforts and photographing crime scenes.

“We’re not spying on everybody,” says Mr Miller. “We haven’t done a single surveillance mission.”

In any case, it may not be so easy for a police department to perform round-the-clock surveillance. Their drones are much less sophisticated than military types like Predators, which can remain aloft for 40 hours

at a height of 25,000 feet or 8,000 metres (although the Department of Homeland Security has purchased ten Reapers, a new version of the Predator, for border patrols.) The FAA specifies that drones used by public-safety agencies must weigh 4.4lb (2 kilograms) or less, which can be increased to 25lb if the operator is judged proficient. And they are governed by strict rules in the air. They cannot fly higher than 400 feet and must remain within the line of sight of the operator.

Some police forces, however, face obstacles. Florida lawmakers have proposed limiting their use in the state. And in Seattle, two drones that were bought in 2010 for police use have never gone into service.

After a hullabaloo, the mayor announced that the programme was to be scrapped. It will soon be easier for police forces to have more eyes in the sky, but first they will have to win over a hostile public.

Fracking in the West

Big reserves, big reservations California tries to decide if it wants to join the shale revolution Feb 16th 2013 | SANTA MARIA, CALIFORNIA | SHALE exploitation in North Dakota has lifted incomes and brought unemployment down to 3.2% of the workforce, the lowest level in the country. Californians are rarely found looking longingly towards the Midwest. But the revelation that their state, with unemployment at 9.8% and America’s highest poverty rate, may be sitting on the largest deposit of shale oil in the continental United States has led some to wonder if their salvation lies 10,000 feet (3,000 metres) beneath them.

California has been an oil state since 1865. Thanks largely to reserves that can still be tapped by conventional means, it remains the third-largest producer in the country. Output has lately been declining by 2-3% a year, according to the state’s Energy Commission. But in 2011 the federal Energy Information Administration declared that the Monterey shale formation, which spans 1,750 square miles (450,000 hectares) in southern and central California, held 15.42 billion barrels of recoverable oil, 64% of the total estimated to be in the 48 contiguous states.

That should be an attractive prospect for a state with a history of unemployment and fiscal woe. But environmental scruples have long been as characteristic of California as budgetary mismanagement, and a battle is brewing. Opponents of the hydraulic fracturing (“fracking”) technique often used to extract oil and gas from shale rock in “unconventional” drilling say regulations proposed by the state in December do not adequately protect against groundwater contamination or air pollution. Some mutter about earthquakes. Such concerns find receptive ears in a seismically active state with a large farm sector.

The oilmen reply that fracking has been conducted in California for years without trouble. Moreover, they add, surely the environmentally concerned should want as much Californian oil as possible produced under the state’s tight regulations, rather than imported from places with looser regimes. Some see an emerging split between inland counties, which tend to have higher unemployment and more conservative politics, and the conservationists along the coast. The row will rumble on, with revised rules expected later this year.

For some, the complex geology of the Monterey shale opens up alternative means of extraction. Santa Maria Energy, a small producer in Santa Barbara County, about 150 miles (240 km) north-west of Los Angeles, extracts 200 barrels of crude a day from the shale at depths of around 2,500 feet by exploiting natural fractures in the rock. Although the firm has no plans to begin fracking, David Pratt, its president, likes to say that the Monterey is California’s way out of the “fiscal toilet”.

Some of the “Saudi America” talk is overdone. And even if California does begin exploiting the Monterey aggressively, an economic miracle is unlikely. California’s population is over 50 times bigger than North Dakota’s, and, as Kevin Klowden of the Milken Institute, a think-tank, points out, the opportunity costs of giving over land to drilling may be far higher in California than in some other states.

No producer has yet found a way to begin large-scale extraction from the Monterey. But despite the geological and regulatory uncertainties, several firms have placed large bets on its future. And other states in the region sitting on shale reserves are forging merrily ahead. At a Senate hearing on February 12th John Hickenlooper, Colorado’s Democratic governor, staked out his position by announcing that he had once drunk a glass of fracking fluid.

Meanwhile, the technology that kick-started the revolution marches on. Some speak excitedly of fracking that uses saline rather than fresh water, or no water at all. The industry has moved so quickly in recent years, says Dan Kirschner of the Northwest Gas Association, a trade body, that it is starting to seem odd to call shale resources “unconventional”.

Football in New York

The Cosmos come back The team, once synonymous with American soccer, is reborn Feb 16th 2013 | NEW YORK | “YOU can say now to the world that soccer has finally arrived in the United States,” said Pelé, as he signed a contract said to be worth $4.7m with the New York Cosmos in 1975. It made the great Brazilian the highest-paid athlete in the world, and the Cosmos the hottest ticket in town. The squad was packed with international greats, such as Franz Beckenbauer, who had led West Germany to World Cup victory in 1974. Its glamour attracted 77,000 fans to the Giants Stadium, where the Cosmos played for a time.

Attendance suffered when Pelé left in 1977, and eight years later the team disbanded. Three decades on, the Cosmos are returning.

Football in America is in a very different state now. More high-schoolers play soccer than baseball. One ESPN poll showed that Americans between the ages of 12 and 24 ranked professional soccer as their second favourite sport, behind only football of the helmeted and padded sort. Attendance at Major League Soccer matches is higher than at National Hockey League and National Basketball Association games.

The MLS, America’s premier league, has a mixture of home-grown players and international ones, like Thierry Henry and Robbie Keane. David Beckham has just completed a five-year stint playing for LA Galaxy.

The Cosmos will have plenty of local competition, as a professional team already exists in New Jersey.

MLS also has plans to set up in Queens by 2016. Seamus O’Brien, chairman and chief executive of the NY Cosmos, thinks New York has room for three teams, noting that “there are seven or eight teams in London”. He reckons he has the advantage, as the Cosmos are still well known and retain a loyal base of fans. But he realises “you can’t build a business on history, you need a good business model.” As part of that, a new 25,000-seat stadium is in the works on Long Island, near the border with Queens.

Addie Mattei-Iaia of the Long Island Junior Soccer league, which has 60,000 young players, is excited about the return of the Cosmos. Their success did much to spur the growth of youth soccer in the 1970s, she says. Now she hopes for the same again, even without Pelé.

North Carolina

Farewell to purple A state turns solidly Republican Feb 16th 2013 | RALEIGH, NORTH CAROLINA | IN NOVEMBER Mitt Romney edged out Barack Obama in North Carolina by 92,004 of the roughly 4.5m votes cast. Four years earlier, Mr Obama defeated John McCain by 14,177 of the roughly 4.3m votes cast.

Of North Carolina’s six most recent governors, three were Democrats and three Republicans. For years, the state has had one United States senator from each party. It has been a quintessentially purple state, a mix of Republican red and Democratic blue.

But now, for the first time in more than a century, North Carolina has a Republican governor, a conservative majority on the state Supreme Court and Republicans controlling both legislative chambers.

For the latter, credit is due in large part to redistricting done by statehouse Republicans. Democrats, however, can hardly complain; they did the same thing when they had the chance ten years earlier.

Democrats enjoy a voter-registration advantage statewide and in ten of the state’s 13 House districts, yet they won just four of them. At the state legislature level, the Republicans picked up ten House seats and one in the Senate. On February 5th the Senate voted along party lines to approve a bill that would bar the state from expanding Medicaid and implementing health-insurance exchanges—both key planks of Barack Obama’s health-care reforms. Senate Republicans also want to abolish the state’s personal and corporate income taxes. To close the revenue gap they would raise the sales tax from 6.75% to 8.05%, quadruple the currently-lower tax on groceries from 2% to 8.05% and quintuple the tax on property transactions.

They also plan to address North Carolina’s $2.5 billion unemployment-insurance debt to the federal government. A House bill would trim unemployment benefits—the maximum amount available would fall from $535 a week to $350—and reduce the amount of time the unemployed could receive state benefits, from the current peak of 26 weeks to a range of between 12 and 20, depending on the state’s unemployment rate.

Whether they will find themselves helped or hindered by Pat McCrory, the newly-elected governor, remains unclear. North Carolina’s liberals may fear the worst, but Mr McCrory did not win three elections to the city council and seven to the mayoralty of Charlotte—North Carolina’s biggest city and a heavily Democratic one—by being an ideologue. Mr McCrory boasts that, as mayor, he “stepped on the toes of both the right and the left” in championing Charlotte’s ambitious light-rail line. He chaired the environment committee of the US Conference of Mayors. The Republican-controlled state Senate passed its anti-Medicaid-expansion bill over his objections.

But Mr McCrory has more recently been dipping his toes in more partisan waters. During his campaign he joined North Carolina Republicans in bashing “Agenda 21”, an anodyne United Nations document on sustainable development that some on the American far right see as a stalking horse for world government. Since becoming governor he has derided “the educational elite”, and seemed to suggest that North Carolina’s excellent public universities should teach only courses directly related to “what business and commerce needs [sic]”. It seems that Mr McCrory, like his state, is turning right.

Making guns at home

Ready, print, fire The regulatory and legal challenges posed by 3D printing of gun parts Feb 16th 2013 | ATLANTA |

Be very afraid LAST autumn Cody Wilson, a law student at the University of Texas, leased a Stratasys 3D printer. He wanted to print a gun, and more—he and the group he founded, Defense Distributed, wanted to develop blueprints for 3D printing of guns and gun parts, and distribute those blueprints online. Mr Wilson’s motives are overtly political; he wants to “[expand] a free sphere of action…in contradistinction to a planned regulatory scheme…The file is the message. Anyone can have it, anyone can print it, anyone can use it.” Stratasys was not amused. Mr Wilson says they reclaimed their printer before he had even set it up.

Undeterred, Defense Distributed raised enough money first to lease time on 3D printers around Austin, and then to buy two of their own. Earlier this month they successfully tested a printed, plastic 30-round magazine for an AR-15, one of the most popular rifles in America. They called their magazine “Cuomo”, after New York’s governor, who championed legislation banning magazines that hold more than seven rounds. Others have successfully printed stocks, grips and triggers, though not the chamber or the barrel of a weapon. That is much harder; but all this tinkering makes many people nervous.

Some of that fear may be overblown. Making a gun for personal use is usually not illegal, and home-made guns are nothing new. Ginger Colburn, a spokeswoman for the Bureau of Alcohol, Tobacco and Firearms (ATF), says her agency has seen guns made from “pens, books, belts, clubs. You name it, people have turned it into firearms.” And it may lead to bad law. Michael Weinberg, a staff lawyer at Public Knowledge, an open-source advocacy group, fears clumsy regulation of 3D printing, rather than of the weapons themselves.

To that end, Steve Israel, a Democratic congressman from Long Island, plans to introduce legislation renewing and expanding the Undetectable Firearms Act. That bill outlaws guns undetectable to common X-ray machines. Mr Israel wants to make plastic magazines illegal too. Easier said than done. Banning

plastic gun parts when none existed was one thing. Enforcing a ban when anyone with an internet connection and a 3D printer can make them is entirely another.

Lexington

The politics of purity As Republicans argue about 2012’s primaries, they are really debating their future Feb 16th 2013 |

A FIGHT has broken out within the Republican Party. On the face of it, rival camps—broadly, the establishment versus the insurgent right—are arguing about why they lost the last election, and how to stop losing. The loudest name-calling involves a new political fund backed by Karl Rove, election guru to the Bush dynasty and a man with access to deep-pocketed donors. It is one of several establishment wheezes aimed at asserting more control over party primaries that pick candidates for big races.

For his pains, Mr Rove has been called a bully and a fake conservative by the right of his party, which once he happily exploited. At the same time, for the bigwigs, Haley Barbour, a former governor of Mississippi and past chairman of the Republican National Committee, has urged donors to stop giving to the Club for Growth, an anti-tax group that weighs in on primaries from the right, savaging Republicans it deems insufficiently flinty.

There is breathless talk of civil war as each side blames the other for losing races that were in the party’s grasp. Actually, it is worse than that. The warring factions (mostly) agree that losing is bad. Their big dispute is over the Republicans who win elections.

Start with the losers. Grandees blame a rainbow array of zealots—whether from the tea party or from anti-government or socially conservative groups—for picking unelectable candidates in half a dozen winnable Senate races in 2010 and 2012. A prize exhibit is Todd Akin, whose Senate bid in Missouri imploded after he claimed that women subjected to rape rarely become pregnant, because their bodies “shut that whole thing down”. Grandees wistfully cite the 1967 advice of William F. Buckley, a swashbuckling conservative, that wise primary voters back the most right-wing “viable” candidate.

Outside groups such as the Club for Growth and FreedomWorks, as well as tea-party outfits, have rebuttals ready. They note that establishment-backed Senate candidates, from North Dakota to Montana or

Virginia, also lost winnable races in 2012. And they can point to rising stars elected with their help, upsetting party heavyweights in the process: above all Senator Marco Rubio of Florida, elected in 2010 and hailed by colleagues for his ability to talk about limited government without seeming a heartless scold, and to do it in Spanish, too.

As for Mr Akin, it is argued, it was religious conservatives who powered his primary win, not tea partiers (a diverse bunch united in an angry distrust of government). The Akin case is not interesting, says Chris Chocola, the Club for Growth’s boss: he lost because he made “really stupid comments”.

If insurgents wanted to be (even more) awkward, they could note that Mr Rove and his like once embraced the same religious forces that empowered Mr Akin, using gay-marriage ballots and other gimmicks to drive up Republican turnout at the 2004 election, blurring divisions between social and economic conservatives in ways that still harm the party among centrist voters.

Yet beyond the finger-pointing, establishment Republicans and insurgents broadly share the goal of avoiding Akin-style losers. Their really poisonous disagreement involves Akin-style winners. Before he was undone by the scrutiny that comes with a statewide Senate race, Mr Akin was a six-term member of the House of Representatives, maintaining a posture of insurgency via hardline votes and clashes with party leaders. He won his last House election with 68% of the vote. It is the collective power wielded by Republicans from such safe districts and their distaste for compromise (strongly reinforced by fears of primary challenges if their purity wavers), that really divides establishment Republicans from the insurgent right.

Steven Law, head of the new Rove-backed fighting fund, the Conservative Victory Project, has vowed to “institutionalise the Buckley rule” by vetting primary candidates, notably in Senate races. He stands ready to blast unelectable primary contenders with TV attack ads, if need be. Mr Law named Steve King—an anti-immigration hardliner from the House of Representatives who is pondering a Senate run in Iowa—as someone with a “Todd Akin problem”. Mr King’s antics include building a model border fence in the House chamber (electrified, he noted: as we do “with livestock”), and calling immigration a “slowmotion terrorist attack”. After being denounced, Mr King e-mailed supporters for donations to fight “Karl Rove and his hefty war-chest”. Another fighting fund, run by the centrist Republican Main Street Partnership, will intervene in primaries to defend moderates—or what its boss Steve LaTourette, a former congressman from Ohio, calls the “governing wing of the Republican Party”.

Who are you calling electable?

Insurgents of the right indignantly reject “electability” as a test in primaries, thinking it a cover for Republicans willing to trim and compromise. They prefer “principled” as a label, insisting that when Republicans argue for smaller government clearly and bravely, they can win general elections “anywhere”. As for Republican primary voters, beams Mr Chocola, they will choose principle over the party establishment every time.

He may be right if the establishment’s main weapon is television advertising, funded from afar. Money in politics is like the wind in sailing, says Mark Weaver, an Ohio campaign consultant. Nothing moves without it, but someone still has to steer: primaries are won when money and the grassroots combine.

The Republicans have a problem with primaries. Most visibly, the contests have saddled the party with high-profile losers. But they also promote extremism among those who go on to win many races, harming

the Republican national brand. Fixing that may enrage the party’s different insurgent tribes. But grandees know the Republicans’ future depends on it.

Economist.com/blogs/lexington

The Americas Mexico’s new president: Tearing up the script Brazil’s zombie politicians: Unstoppable?

Housing in Brazil: If you build it Pensions in Argentina: Now or never

Mexico’s new president

Tearing up the script Three months after taking office, Enrique Peña Nieto is rewriting his reform agenda Feb 16th 2013 | MEXICO CITY |

LAST summer Enrique Peña Nieto’s determined face stared down from election posters, promising Mexicans: “You know I will deliver.” Just over 38% of voters were convinced, enough to hand him the presidency. Since his inauguration on December 1st he has indeed delivered several new policies and reforms—just not the ones voters and pundits expected.

During the campaign Mr Peña’s aides in the Institutional Revolutionary Party (PRI) said that before Christmas of 2012 there would be a fiscal reform to increase the government’s meagre tax revenues. That would be swiftly followed by a shake-up of the energy industry to give a competitive nudge to Pemex, the state-run oil and gas monopoly, at whose headquarters a suspected gas explosion killed 38 people on January 31st. Mr Peña’s critics retorted that he was a puppet of special interests, such as the teachers’ union and powerful broadcasters.

Today the situation seems to have reversed. The promised tax and energy reforms have been pushed back to the second half of this year, with assurances that Pemex will not be privatised (though joint ventures with private firms are likely). Meanwhile Mr Peña’s legislators have turned their guns on those they were expected to protect. In January Mexico’s states ratified a constitutional reform that paves the way for better training and stricter evaluation of teachers, which should undermine the power of the union. An enabling law is due before the summer.

Now the government has set its sights on telecoms. According to Aurelio Nuño, the president’s chief of staff, within two months the PRI will present a bill to attack the “great problem of concentration” in telephony, internet and television. It promises to chip away at the business empire of Carlos Slim, the world’s richest man, and that of Televisa, a broadcasting giant with mediocre soap operas but outstanding lawyers who have helped it to hold on to a 70% share of free-to-air viewers, as well as about half the pay-TV market.

Mr Peña’s change was partly prompted by the circumstances of his election. His 6.6% margin of victory fell short of the predicted landslide. Nor did the PRI manage to win a majority in either chamber of Congress. Andrés Manuel López Obrador, a left-wing candidate who came second, made unsubstantiated claims of fraud, which he later levelled against the electoral institutions when they dismissed his claims.

Mr Peña’s strike against Televisa is partly designed to undermine the claim that he is too cosy with them.

Similarly, a reform in December to beef up freedom-of-information laws, by allowing appeals at the federal level if states refuse requests, is geared towards countering the PRI’s secretive image.

The other reason for the change of tack is an unexpected alliance struck in December between the PRI and the two main opposition parties. The “Pact for Mexico”, which contains 95 policy proposals on subjects from health to human rights, is the government’s biggest achievement so far, Mr Nuño says. The three parties that have signed up hold nearly every seat in Congress. Only a few leftists are holding out.

Through the pact, the government has gained cross-party support for its raids on teachers and telecoms, which are not vital to the opposition’s electoral base. The agreement will come under strain when the time comes to attack a group tied to a specific party. The fiscal reform will mean raising sales taxes by some combination of higher rates, the inclusion of food and medicine or the abolition of a low-tax zone near the United States border. The centre-left Party of the Democratic Revolution (PRD) fears that its supporters may defect to Mr López Obrador, who quit the party in September, if it goes along. Reforming Pemex could prove still more controversial—not least with the rank and file of the PRI, which overlap heavily with the oil workers’ union.

Mr Peña must make the most of the pact before July 7th, when elections in 14 states will pit the three parties against each other. In Baja California the PRI hopes to unseat the conservative National Action Party (PAN) for the first time in 24 years. A bad showing could mean curtains for the PAN’s embattled president, Gustavo Madero. The left faces a bigger split, as Mr López Obrador goes about founding a party of his own. Co-operation will be harder if both opposition parties fall into disarray.

Mr Peña’s agenda could also be knocked off course by security, as happened to the previous president, Felipe Calderón. José Antonio Meade, an economist appointed to be foreign secretary, has begun to steer the conversation about Mexico onto happier subjects, such as the roaring export sector. The murder rate is at its lowest in three years. But new fronts of violence have opened on the edge of the capital and in Acapulco, where six Spanish women were raped by gunmen in a beach house on February 4th. Mr Peña is wise to have ditched Mr Calderón’s drug-war rhetoric, says Juan Pardinas, the head of IMCO, a thinktank, but he has gone “from the wrong narrative to no narrative at all”. On February 12th the government unveiled its second anti-crime plan in as many months, focused on the country’s 100 most violent towns.

A promised “gendarmerie” of 10,000 former soldiers will not be created until the end of the year.

Less than 100 days into his presidency, Mr Peña’s unexpected course is bringing some dividends. His political ad-libbing in response to changing conditions has so far been deft. But many of the government’s boldest promises have not yet been achieved, and need to be.

Brazil’s zombie politicians

Unstoppable?

Despite serial corruption allegations, the old guard just keeps coming back Feb 16th 2013 | SÃO PAULO | “BRAZILIANS! You’ve just been taken for fools!” So wrote the organisers of an online petition calling for the impeachment of Renan Calheiros, who was elected president of Brazil’s Senate on February 1st.

And on February 11th, though Carnival was in full swing, the petition notched up more than 1.36m signatures, 1% of the electorate. That gives its backers the right to present their demand to Congress, though they will have to wait until after February 19th to do so: whereas other Brazilians get three days off for Carnival, lawmakers enjoy two full weeks.

Mr Calheiros, a wheeler-dealer of the sort who excels in Brazil’s fragmented coalition politics, was president of the Senate from 2005 to 2007. But he resigned after allegations that a lobbyist had paid maintenance on his behalf to a lover with whom he had had a child, and that he then faked receipts for the sale of cattle to try to prove that he could have afforded to pay her himself. He denies all wrongdoing and has since stayed active in politics, but only behind the scenes. His allies in the Party of the Brazilian Democratic Movement (PMDB), Brazil’s largest, evidently judged it was time for him to return to centrestage.

The president of Brazil’s Senate has the power to sideline his enemies’ projects and deny them opportunities for patronage. That is why 56 senators voted for Mr Calheiros and only 18 against—even though Aécio Neves and Eduardo Campos, two probable opposition presidential candidates in 2014, had urged their parties to vote for a hastily chosen alternative. Dilma Rousseff, the president, has taken a hard line in the past by sacking ministers facing allegations of corruption. And her Workers’ Party is angry about what it sees as bias: last year’s trial of the mensalão (big monthly stipend) vote-buying scandal saw many of its members handed unexpectedly harsh sentences. But realpolitik prevailed. With the PMDB behind Mr Calheiros, Ms Rousseff accepted his candidacy and telephoned to congratulate him when he won.

Mr Calheiros is the latest example of a well-established Brazilian phenomenon: the politician who can survive any number of seemingly killer blows. Paulo Maluf, found guilty of overbilling and taking kickbacks in the 1990s as São Paulo’s mayor, is so notorious that malufar has entered the Portuguese language, meaning “to steal from public funds”. He was elected to Congress in 2006 and is still there.

José Genoino and Francisco Tenório, respectively found guilty of bribery (in the mensalão) and under investigation for murder, have just replaced congressmen who stepped down to become mayors. In total, a third of Brazil’s lawmakers have either been convicted or are being investigated for crimes ranging from vote-buying to theft to slave-holding.

Many Brazilians are perfectly happy to vote for such people. Their compatriots had pinned their hopes on the result of the most recent petition presented to Congress: the ficha limpa (clean record) law of 2010.

That shamed lawmakers into barring for eight years the candidacy of anyone found guilty of a crime or electoral wrongdoing—or anyone who had stepped down to avoid investigation. But legal manoeuvring meant the new rules were not implemented until after that year’s elections.

The next round of elections in 2014 should see some of the corruptos kicked out of Congress. But the delay has bred cynicism about political institutions. A recent survey found that, for the first time since the return of democracy in 1988, only a minority of Brazilians now support any specific party.

Instead, more are putting their hope in the courts—and public opinion. Many attribute the stiff mensalão verdicts, in part, to the fact that the trial was broadcast live on television. And it made a hero of the supreme court’s president, Joaquim Barbosa, who rallied his fellow judges to his hard line. While some Carnival revellers took the time to support the “Out with Renan” campaign, others went to street parties wearing Barbosa masks and judges’ gowns. Brazilians still have hope that the political zombies can be laid to rest.

Housing in Brazil

If you build it A scheme to promote working-class home ownership is off to a good start Feb 16th 2013 | BALNEÁRIO CAMBORIÚ |

UNTIL 2011 Adriana Palugan, a mother of two, rented a home in Balneário Camboriú, a seaside town in southern Brazil. Now she is buying her own house, one of 166 in Colina do Cedro (Cedar Hill), a new development on a hill overlooking the town. She extols its wonders: bright and spacious with a pool, gym and multi-games court, 24-hour security—and altitude. Her old place was flooded in 2008, and she lost much of what she owned.

Without Minha Casa Minha Vida (MCMV; My House My Life), a federal programme started in 2009 to fund housing for Brazil’s poor and middle classes, Ms Palugan, who works for a car dealership, would have struggled to buy such a home. The price was keen: 100,000 reais ($51,000). Caixa Econômica Federal, a state-owned bank, gave her a subsidised mortgage; the repayments are less than her rent used to be. Caixa has also granted the developers, Abramar, cheap financing for the project’s second phase, two apartment blocks. The funding comes from a workers’ compensation scheme and the federal budget.

Buyers cannot already own homes or make over 5,000 reais a month. The lowest earners get the biggest subsidies.

MCMV is shifting homebuilders’ interest away from the rich minority to the middle market. Until recently, mortgages barely existed, since interest rates were too high and evicting defaulters was almost impossible. Old properties would be traded in for new, topped up with cash, a car or even a boat. The poor built on their own without title, often in precarious spots on riverbanks or steep hills. A 2010 census found 11.4m Brazilians living in favelas (slums). Millions more squeeze in with relatives or live in formal but substandard housing.

A change to mortgage rules in 2005 made repossession easier. That made financing housing more

attractive, along with falling interest rates, and Brazil’s new middle class looked ready to buy. In 2007 17 housebuilders went public. Many went on a land-buying spree—only to run short of cash as construction costs soared.

At first, MCMV looked like a lifeline. But it started slowly, taking until last December to put 1m families in new homes. Bureaucracy was a big part of the problem: between local government, planning rules and Caixa it took Abramar 18 months to get Colina do Cedro’s second phrase approved. (The paper chase continued: each sale generated a 280-page mortgage contract. Each page had to be signed or initialled.) It only survived by taking out short-term loans at eye-watering rates.

Worse than the paperwork, says Yannick Rault, a Frenchman and one of Abramar’s partners, was “managing budgets and schedules in a country where everybody’s an optimist.” In the past, most Brazilian construction contracts were “cost-plus”, meaning builders never learnt to plan. The firm wrote its own project-management software for construction and plans to make money by selling the program to other homebuilders.

Not every MCMV buyer has been as lucky as Ms Palugan. YouTube has plenty of videos of shoddy finishes, dodgy electrics and leaky roofs. Rising land prices mean some developments are miles from anywhere. The worst risk degenerating into the slums they were meant to replace.

But the government’s canny decision to set minimum standards and maximum prices and turn the job over to the private sector means MCMV is easy to tweak. Quality is being raised by tightening standards and certifying builders, says Alexandre Cordeiro of the ministry for cities, which runs MCMV. Since October, big projects can only go ahead if it agrees there are suitable local amenities. And the paperwork has been trimmed, he insists. (Perhaps not enough: approval for Abramar’s most recent project took six months.)

The government still needs to work out how to get more homes built for the truly poor. Of the 2.3m past MCMV’s approval stage, only 45% are for families earning less than 1,600 reais a month. The target was 60%. Increasing that share would mean persuading states and cities to chip in with land, roads and other services, instead of demanding these from developers. Abramar ended up having to pave roads, build a surface-water drainage system for the area around Colina do Cedro and more, which took a big chunk of already tight margins.

Caixa will also have to encourage less labour-intensive building methods. Abramar says its costs have gone up by 50% in four years. The government is proud of the scheme—the president, Dilma Rousseff (pictured on previous page), often turns up at completed projects—and the 1.4m jobs it has created. But it must choose between jobs and houses: local labour is now too dear for hand-built mass-market homes.

Pensions in Argentina

Now or never The government drags its feet over compensating pensioners for inflation Feb 16th 2013 | BUENOS AIRES |

CRISTINA FERNÁNDEZ presumably hoped that old people in Argentina would be delighted by her announcement on January 28th that public-pension payments would rise in March by 15.8%. But at the weekly meeting in Buenos Aires of the national retirees’ association, where elderly folk get together to gripe about how the government is cheating them, attendees overwhelmingly dismissed the president’s decision as too little, too late.

The government’s row with pensioners dates back to the country’s 2001-02 economic crash, when a currency devaluation was followed by a surge of inflation. Néstor Kirchner, Ms Fernández’s late husband and predecessor, spent most of the pension agency’s scarce funds to increase payments for poor recipients. The rest got smaller raises and lost purchasing power.

That may have been good policy, but its legality was dubious. In 2007 the Supreme Court ruled that ANSES, the public social-security agency, had to index to inflation the benefits of Adolfo Badaro, a pensioner who had sued the government. A year later ANSES signed an agreement not to appeal against decisions in cases similar to Mr Badaro’s.

Congress did pass a benefit-adjustments law in 2009. However, it applied to pensions only from that point on. And despite the legal precedents, Ms Fernández and Diego Bossio, the head of ANSES, have refused to bring in universal indexation for pre-2009 inflation. Instead, they have required every pensioner seeking such compensation to file suit. More than 450,000 cases now clog the courts.

Meanwhile, ANSES has been granting only around 1,500 new claims for higher benefits each month. In contrast, it rejected an average of 6,000 last October and November.

The judiciary—already in conflict with Ms Fernández over the constitutionality of a law regulating the media—has contested the government’s strategy of delay. Last June the Supreme Court ordered ANSES to prepare a written report explaining how it allocates its budget and why it would not automatically approve all cases resembling Mr Badaro’s. In November Mr Bossio responded that the agency had used

the “majority” of its funds to provide pensions to people who lacked them altogether, and that it could not afford to help the neediest Argentines if it paid all retroactive claims.

Mr Bossio concedes that workers who paid into the system are entitled to the real value of the pensions they were promised. However, he notes that payroll contributions only finance 55% of ANSES’s benefits.

The rest comes from general revenues, such as value-added tax. “Anyone who buys a soda at a kiosk is contributing,” he says. “If they need help, why should they not receive it as well?”

Yet to critics Mr Bossio’s plea of poverty rings hollow. For the past five years Argentina has not issued debt to the public, because investors have demanded prohibitive interest payments. Facing a financing crunch, in 2008 Ms Fernández nationalised the country’s private pensions.

She has since turned ANSES into something of a public slush fund. In the past four years the treasury has sold the agency over $10 billion of bonds at paltry interest rates. The president has used the proceeds to fund popular projects, such as low-income housing, infrastructure and transfers to poor families with children. Meanwhile, in recent years the returns on ANSES’s investment portfolio have lagged behind Argentina’s estimated inflation rate of 25% (the official rate is lower, but is widely known to be doctored).

As the courts process the claims, more pensioners will eventually get what they are owed. But the wheels of justice move slowly, and Ms Fernández has less than three years left in office. Moreover, with every day that passes fewer people remain who were receiving benefits before 2009. “It’s their sick little game,” says Juan Alberto Suárez, a 79 year-old whose lawsuit has not yet been resolved eight years after it was filed. “They want us to die before they have to give us what’s ours.”

Asia North Korea’s nuclear test: Fallout Bangladesh: Mass dissatisfaction Indian politics: An illiberal turn Kabuki theatre in Japan: In a pickle Thailand’s capital city: Power failure Banyan: Before the gold rush

North Korea’s nuclear test

Fallout To the chagrin of his neighbours, a young despot appears determined to continue his family’s atomic blackmail Feb 16th 2013 | BEIJING AND TOKYO |

THE nuclear explosion that North Korea set off on February 12th deep in a hillside in the country’s northeast would, the regime immediately assured, pose no “negative impact on the surrounding ecological environment.” The negative impact on North-East Asia’s security environment, on the other hand, was instant. The nuclear test came in defiance even of China, North Korea’s supposed ally. It took place just hours before Barack Obama gave his state-of-the-union address at the start of his second term as president. It was, North Korea insisted, a “self-defensive measure” against “continued hostility” by America. “Even stronger” measures were threatened. North Koreans, at least in front of the cameras, appeared jubilant.

It will take a while to know what exactly went on at the Punggye-ri test site. The official news agency, KCNA, said the bomb was smaller, lighter and more powerful than the previous two tested in October 2006 and May 2009. Whether that is true or not, the regime’s goal is surely to make a warhead compact enough to sit atop its Unha-3 rocket, one of which put a satellite into space in December. With the right re-entry and weapons-guiding technologies, North Korea would then have an intercontinental ballistic missile with the ability to strike America.

South Korea’s defence ministry says the seismic impact of the blast indicated a power equivalent to 6-7 kilotons of TNT, compared with 2-6 kilotons in 2009. KCNA avoided mention of what fissile material was used—plutonium (as in the previous tests) or highly enriched uranium. If uranium, it would make the North’s nuclear programme more threatening. The country has plentiful deposits of uranium ore, whereas its supply of plutonium is limited. The uranium enrichment process is also easy to conceal, devices can be made more quickly, and the risk of proliferation with nuclear allies such as Iran is higher.

Condemnation of the blast was swift. The United Nations Security Council, which had warned North Korea against conducting a test, threatened further action. Diplomats expect existing UN sanctions to be strengthened. Yet the best way to put real pressure on the regime would be to hit it financially, freezing the accounts to which regime members have access.

In his address, Mr Obama promised action. He said America would stand by its allies in the region and strengthen its missile defences. Yet the means for disciplining North Korea are limited. For a start, no matter how isolated the regime, Kim Jong Un, the young dictator, in the job for just over a year, seems to have inherited from his father and grandfather the conviction that a nuclear capability is a non-negotiable survival strategy. That makes the goal of denuclearisation, a premise for any renewed American engagement with North Korea, seem a pipe dream, at least for as long as the regime survives. If North Korea sets any store by the stalled six-party talks convened by China and including Russia, South Korea, Japan and America, it will be as a forum not for bargaining away its capability but for acknowledging the North as a nuclear power.

The North Korean challenge comes at a time when relationships among North-East Asian neighbours are unsettled. In addition, the neighbours have internal differences over how to deal with North Korea.

Take China, where some want more toughness than the government has so far shown against North Korea —something that would go down well with America and its allies, too. Many Chinese are furious that, by ignoring urgings not to conduct a test, North Korea has poked big brother in the eye. China swiftly backed the UN rebuke, and its foreign minister summoned North Korea’s ambassador in Beijing for a dressingdown. The timing of the test cannot have helped, coinciding with China’s lunar-new-year festivities.

Some Chinese bloggers are splenetic.

All the same, Xi Jinping, who took over as Communist Party chief in November, is unlikely to change China’s policy towards the North by cutting off border trade (see article) or energy supplies. Nor will he constrict the regime’s access to cash. That might risk precipitating collapse, or goading the Pyongyang leadership into starting a war on the Korean peninsula.

Divisions may widen inside South Korea, too. The president-elect, Park Geun-hye, takes office on February 25th. Though of the same conservative party as the outgoing leader, Lee Myung-bak (loathed by the Kim regime for his hard line), Ms Park had promised a more “trust-based” relationship. Many voters will still hope she is more conciliatory towards the North. But she warned after the test that the North’s

pursuit of nuclear weapons would bring it “self-destruction”. And on February 14th the South unveiled a new cruise missile that it said could “strike the window of the office of North Korea’s leadership”.

Regional tensions will make a unified response more difficult. Relations between China and Japan have sunk to a nadir in a dispute over islands in the East China Sea. Michael Green of the Centre for Strategic and International Studies in Washington, DC, says America could encourage more trilateral co-operation with its two closest allies, Japan and South Korea, including on missile defence. But this would rankle China, where many think the American aim is to “contain” them.

Meanwhile, relations between Japan and South Korea are also troubled by disputed rocks, though less dangerously than in the Sino-Japanese case.

Japan, under its new prime minister, Shinzo Abe, is putting forward ideas that might please America but irk China and South Korea. Mr Abe, who will meet Mr Obama in Washington next week, is keen to reinterpret Japan’s constitution, in which the country renounces war, in ways that give Japan the right to engage in collective self-defence in the face of security threats. He wants Japan to be able to help an ally when it is in trouble—by, for instance, shooting down North Korean missiles that are heading for the United States.

American policymakers have generally favoured such a shift. However, some Chinese and South Koreans view Mr Abe as a hawk with revisionist views about Japan’s past imperialist brutalities. So some members of the Obama administration are nervous that Mr Abe’s ambitions may increase regional tensions. Mr Green believes such fears to be overblown. In its essence, he says, collective self-defence is not a threatening aspiration.

Uncertainty also comes with John Kerry’s replacement of Hillary Clinton as America’s secretary of state.

Mrs Clinton was robust in the face of Chinese assertiveness over claims in the East and South China Seas.

Mr Kerry may prove milder. But with a nuclear-charged North Korea, and China’s and Japan’s relations so bad, the neighbours urgently need to get to know each other better.

Bangladesh

Mass dissatisfaction A huge protest in the capital against an Islamist party and its leaders Feb 16th 2013 | DHAKA |

Broad change, or a tight noose?

THEY are the biggest rallies in Bangladesh for at least two decades. Hundreds of thousands of protesters gather peacefully each day in Dhaka, the capital, demanding vengeance against a bearded political figure, Abdul Quader Mollah. Their numbers swell daily: ordinary people furious that, despite his conviction for dreadful crimes during Bangladesh’s war of independence in 1971, Mr Mollah faces only a life sentence.

The rallies began on February 5th after online activists called for protests at Shahbag, a busy intersection in central Dhaka. They want Mr Mollah and others on trial to face the death penalty. He was convicted by the International Crimes Tribunal, a local court set up by the government of Sheikh Hasina to prosecute men, largely from an Islamic opposition party, accused of murder, torture, rape and other wartime atrocities. When, somewhat unexpectedly, Mr Mollah was spared a death sentence, he was seen flicking supporters a V-for-victory sign. That smug gesture may have helped to provoke the outrage.

Shahbag has given its name to the protests, though some now dub it “new generation roundabout�, hinting at broad aspirations for political change. Families attend, with toddlers sporting bandannas bearing

slogans that call for the death penalty. Television coverage helps to draw the crowds. By February 15th, and Friday prayers, 500,000 people may gather. The sight of young, otherwise progressive Bangladeshis seeking capital punishment, through music, street theatre, chants and recitals, is both moving and unsettling. Almost no one pays heed to known flaws in the trial.

Both the ruling Awami League and, belatedly, the chief opposition, the Bangladesh Nationalist Party (BNP), have fallen in with the protests. Senior politicians from the ruling party have attempted to co-opt the demonstrations, but their efforts to speak to the crowd were firmly rebuffed. Still, the League could get a boost. Sheikh Hasina honoured her promise to hold war-crimes trials. In parliament this week she also spoke up for the death penalty, saying that even impartial judges must listen to public opinion. Next, the parliament is expected, on February 17th, to amend the act behind the war-crimes court so that the government can appeal against verdicts. Mr Mollah’s reprieve may be short-lived.

Matters are trickier for the BNP, which dallied for eight days before joining the protesters. It had more to lose, in particular a useful electoral alliance with the biggest Islamist party, the Jamaat-e-Islami, whose leaders comprise most of those on trial. In the end, so many BNP supporters went off to join the Shahbag protests that the party had no choice.

Protesters say that their movement is a narrow one against political Islam: in favour of secular government, they want Jamaat banned. A rampage by Jamaat’s violent youth wing has done nothing to damp down such calls. The government, which has already brought back an explicitly secular constitution from 1972, may soon feel ready to move.

Yet, as with any big protests, further political demands may emerge. The protests could become a plea for broad change. Few like a political system dominated by a long, bitter fight between a pair of self-serving dynasties, those of Sheikh Hasina and the BNP’s Khaleda Zia, and their stave-wielding followers. If that duopoly were broken up, many at Shahbag would celebrate.

Indian politics

An illiberal turn Hangings, limits on speech and intolerant politicians mark a troubling moment for liberalism in India Feb 16th 2013 | DELHI |

Something for traditionalists to celebrate AFTER two years of wary peace, Kashmir is under siege again. This week the authorities banned newspapers, blocked television and the internet, and imposed a curfew in Srinagar, the summer capital of Jammu and Kashmir, and beyond. Police battled with protesting youths, three of whom died.

It was all sadly predictable after the hanging on February 9th of a Kashmiri, Afzal Guru, in Delhi. His family was officially told by post fully two days later, and so far has been refused his body. Convicted for his part in a terrorist attack in 2001 on India’s parliament, Mr Guru had been on death row for years.

Recently, politicians grew anxious to see him hanged.

Once Pranab Mukherjee became India’s president last year, it was assumed that an unofficial moratorium on the death penalty would end. November brought the first execution in eight years, of Ajmal Kasab, a Pakistani convicted for his role in a dreadful terrorist attack on Mumbai in 2008. India’s public and press cheered.

Almost immediately Narendra Modi, a hardline figure who is fast rising on the right of Indian politics, suggested that Mr Guru should hang too. Mr Modi, of the Bharatiya Janata Party (BJP), is seen by many as a likely leader of India after the next general election, due in 2014. More hangings are possible. Omar Abdullah, Kashmir’s embattled chief minister and an ally of the ruling Congress Party, says authorities must show executions are not political, targeting only Muslims. Why now delay executions of three Tamils or a Punjabi, all convicted for assassinations of high-profile politicians?

Politics are at play. Last month the home minister, Sushil Kumar Shinde, clumsily accused the BJP of promoting “saffron”, ie, Hindu, terrorism in India. Furious, the opposition said it would boycott meetings with him and accused the government of being friendly to Islamist terrorists. Soon after, Mr Shinde

suddenly announced that Mr Guru had swung. It was, says Pratap Bhanu Mehta, a liberal columnist, an appallingly opportunistic move.

To some, it fits a troubling pattern. Politics are today more moderate than in the 1990s, when communal violence flared, or than under Indira Gandhi’s state of emergency in the 1970s. Yet a host of incidents suggests a newly intolerant trend.

Authorities readily limit expression. Tamil Nadu’s government banned a film unless it was re-edited to placate Muslim critics. Also hoping to please Muslim voters, regional politicians routinely bar Salman Rushdie, whose “The Satanic Verses” prompted a fatwa by Ayatollah Ruhollah Khomeini, from public appearances: West Bengal’s chief minister, Mamata Banerjee, is the latest culprit. And politicians ban books they dislike, as Mr Modi did in Gujarat with a biography of Mahatma Gandhi, the state’s bestknown son. Religious leaders are often intolerant. A teenage girl band in Kashmir this month hung up its guitars after the Grand Mufti, the highest-ranking clergyman, called its members “unislamic”, and vitriolic abuse spread online.

In November police arrested a woman in Maharashtra state for grumbling, on Facebook, that Mumbai had been shut for the funeral of Bal Thackery, a thuggish, hard-right Hindu politician. Police then arrested a young friend who “liked” her comment. Supposedly, they had hurt religious feelings. In recent weeks prudish Hindu protesters marched on a gallery in Delhi and threatened one in Bangalore, demanding the removal of paintings of nudes.

Intolerance is not new (though depicting sex in religious art has a proud history, see picture). But politicians pandering to interest groups are perfectly happy to limit speech. Last year over 8,400 protesters against a nuclear-power plant in Tamil Nadu were charged with sedition. Cartoonists critical of politicians have also been charged with the same offence. Last month a sociologist at the Jaipur Literature Festival said corruption was rampant among the lower castes, who qualify for certain privileges in government and education. Egged on by a politician, police prepared charges.

Public figures rarely defend individuals’ “right to offend”, as Manish Tewari, the information minister, said on February 9th. The reason is that politicians compete for blocks of votes defined by religion or caste. Block solidarity grows when leaders declaim against even a mild, or imagined, offence.

Mr Mehta says that mobilisation around hurt feelings is as old as Indian democracy. Yet three new factors may now be at play. Increasingly lively media, especially cable-news shows, thrive on shallow, angry debate. They help stoke controversy by seeking out extreme voices and those ready to be offended.

Second, regional leaders are growing more influential, and readier to stir up their main supporters.

Whereas a national party may see virtue in compromise or in such values as free speech, a regional figure usually gains by stoking indignation. Mayawati, a former chief minister of Uttar Pradesh and a leader of dalits (untouchables), is a case in point.

Last comes the role of a growing, urban middle class. Mostly young and less likely to define themselves by religion or caste, in theory such voters might favour a more liberal politics. In practice, the evidence is mixed. Many who decried the gang rape and murder of a young woman in Delhi in December called for public hangings, and even torture of the perpetrators. Others want vigilante squads to roam the cities.

Such voters may not reliably prove to be liberal. A rising middle class, convinced of Indian might, may

become just as nationalistic, for instance, towards Pakistan as voters were in the past. Along with India’s press, the middle class was notably bellicose over a spat on the border last month in which two Indian soldiers and three Pakistanis died.

Kabuki theatre in Japan

In a pickle Two acting greats die, throwing their great tradition into question Feb 16th 2013 | TOKYO |

Danjuro in his prime THE Kabukiza in Tokyo in Ginza is Japan’s most famous theatre. It will reopen in April after being razed and rebuilt to withstand earthquakes. The new concrete façade, preserving the low-slung swagger of the original, is an incongruous medieval pastiche squatting in the middle of Tokyo’s glitziest shopping district. But even with a new theatre, the question is whether kabuki, Japan’s best-known traditional dance-drama, can survive the passing of two of its greatest performers.

The death of Danjuro Ichikawa XII this month robs kabuki of its most revered figure. Danjuro was as recognisable to generations of Japanese as Laurence Olivier was to British audiences. With Kanzaburo Nakamura XVIII, who died in December, Danjuro shepherded kabuki through a period of modern revival that saw the form on television and in foreign theatres.

Shouldering the kabuki tradition is as much a burden as an honour, however. The great kabuki actors inherit their title, and if one of them has no suitable heir, he adopts one. Danjuro was descended from a family that pioneered kabuki’s larger-than-life style 300 years ago. He endured a gruelling, even violent, apprenticeship under his father. “What I hated most,” he later said, “was when my father threw things at me.”

Performing requires concentration and great physical strength. Stomping around the stage swinging a sword in costumes that weighed 60kg (130lb), Danjuro came off every night sweating and exhausted. A climax of his performances was a cross-eyed nirami (glare), said to drive off evil, that he had to project right to the back of the theatre.

Kabuki fans are convinced the intensity of acting and carrying around centuries of tradition shortens the lives of the greatest performers. Kanzaburo, who first performed at just three, was 57 when he died of complications from cancer. (Danjuro died from pneumonia, aged 66.) Kanzaburo’s sons, Kankuro VI and Shichinosuke II, inherit the custodianship of a lineage that stretches back 18 generations.

Unsurprisingly, perhaps, some buckle under the weight of these great acting clans. In 2010 Danjuro’s son, Ebizo Ichikawa XI, was beaten up in a Tokyo nightclub brawl. The incident led to his suspension from kabuki and the blackening of the family name. For weeks afterwards, Ebizo had to endure the sort of media circus that accompanies Hollywood scandals, and repeated questions about whether his nirami would survive the assault. His career has yet to recover completely.

Kabuki means to act eccentrically or erratically. Some—though by no means all—consider the form to be light relief compared with Japan’s more austere noh tradition. It was once far less respectable than now, beginning as all-female casts before moving to the capital’s brothel district. The first in the Danjuro line was murdered by a rival on stage, in 1704. Now, its rebellious, earthy origins have long been pickled in artistic tradition, as Donald Richie, a scholar of Japanese culture, has put it. Only the Kabukiza’s reopening will tell if the new generation can preserve this tradition, while modernising it enough to entice younger audiences back.

Thailand’s capital city

Power failure An election is all about winning power back from the central government Feb 16th 2013 | BANGKOK | IN A city with all the problems of Bangkok—from floods to creaky infrastructure—politicians prefer to grab voters with sweeping generalities rather than detailed promises. With an election for Bangkok’s governor on March 3rd, Pongsapat Pongcharoen of the ruling Pheu Thai party says he will bring back “happiness and smiles”. Other candidates promise to turn Bangkok into the Hollywood of the region, or a “24-hour city”.

Voters would settle for less flooding, fewer cars and greater safety. Yet such demands are a difficult target for even the most diligent governor (equivalent to a mayor). The job comes with little authority or money: the annual budget for a city of 10m is a mere $2 billion. Only one-sixth of that is set aside for capital investment. The rest just about covers running costs.

The governor has no power over the city’s police or public bus services. For all the hoopla of the election campaign, the central government keeps the governor on a short leash. The Thai state is highly centralised. Bangkok’s citizens know that they are lucky to have elections at all. The interior ministry appoints the governor of all of Thailand’s 76 provinces, with which the capital region is on a par.

The incumbent in Bangkok, Sukhumbhand Paribatra, wants to change the power relationship. At the heart of his re-election campaign is an argument for further decentralisation of authority from central government to Bangkok, and, he hopes, to other big cities as well. He is a member of the main national opposition, the Democrat Party (DP), and as such has a strong interest in stripping power from the Pheu Thai-led central government. But Mr Sukhumbhand insists that he gets on perfectly well with the prime minister, Yingluck Shinawatra; his concern, rather, is to address the “structural problem” of how Bangkok and other cities are run.

Bangkok’s budget is tiny not only in absolute terms, but also relative to the tax revenues the city contributes to the national coffers. Until more of its own wealth can be spent fixing its roads, sewers and the like, the problems will continue. National politicians rarely care enough, especially if it means doling out money to a political opponent.

Bangkok is DP territory (Pheu Thai has never won the governorship), and Mr Sukhumbhand, a patrician former academic, is the favourite to win again. Campaigning on the back of a pickup through the streets of Din Daeng, a poor neighbourhood, he stoops to collect garlands from his well-organised supporters; more raucous party workers supply the megaphone populism.

Some polls show Mr Pongsapat closing on Mr Sukhumbhand. The result is likely to be close. If Mr Sukhumbhand loses, it would be calamitous for the DP and might even endanger the position of the party’s leader, Abhisit Vejjajiva, who lost the last general election by a big margin but hung on as party leader. It would also be a setback to the cause of decentralisation, which a country with an overstrong central government desperately needs. Many argue, for example, that a degree of political devolution would help to defuse the bloody Muslim insurgency in the four southernmost provinces of the country. On February 12th the army killed 16 heavily armed militants in an ambush there. It is a harsh reminder of how bad the

situation remains—and of how decentralisation matters not only to Bangkok.

Banyan

Before the gold rush Mongolia’s road to riches is paved with shareholders’ tiffs Feb 16th 2013 |

ONE of the world’s fastest-growing economies, Mongolia finds itself at odds with the sources of its newfound wealth: the foreign miners and financiers dazzled by the unfathomable bounty under its vast terrain.

Some foreigners fear that populist politicians, pandering to a belief that the nation is selling its birthright too cheaply, may kill the goose before it has laid any golden eggs. Almost certainly not; but “resource nationalism” will surely make life uncomfortable for geese.

Because of falling commodity prices and a slowdown in China, which takes over 85% of its exports, Mongolia’s roaring economy slowed drastically last year—to a mere 12% or so GDP growth, from over 17% in 2011. But the benefits produced by these giddy numbers remain elusive for many Mongolians. The frozen main streets of Ulaanbaatar, the capital, are gridlocked. In the glitzy mall in Central Tower, it is warm enough to browse the posh shops in a T-shirt. Yet more than half of Ulaanbaatar’s 1.3m people live in “ger districts” on its fringes, shanty towns of felt tents often with no running water or electricity.

According to the IMF, the number of Mongolians living in poverty fell by about ten percentage points in 2011, thanks to government handouts. But that still left some 30% below the poverty line. For them, the most obvious effects of the inflow of foreign money are sharply rising prices, unplanned urbanisation and the presence of rich-looking foreign visitors and residents.

In a vibrant young democracy, plenty of politicians tell Mongolia’s 2.8m people that they should be faring better as the country hurtles towards rich-world average incomes. In parliamentary elections last June, about a quarter of the seats went to “resource nationalists”, advocating local control of the mines. Such nationalists make up about a third of the cabinet of the coalition government led by the Democratic Party.

During the campaign, a scandal blew up when the foreign-controlled owner of Ovoot Tolgoi, a Mongolian coal mine, wanted to sell it to a Chinese state-owned enterprise. Acutely conscious of their commercial dependence on China, Mongolians are sensitive to any hint of its gaining control over them. A “strategic

entities foreign-investment law” was pushed through, tightening approval procedures. Mongolia is far from unique in having such a law, but it was taken as a sign of an incipient backlash.

A presidential election is due in May. The incumbent, Tsakhia Elbegdorj, of the Democratic Party, is the favourite, and is closely identified with the opening to foreign investment. But new draft mining legislation from his office has provoked howls of protest from the industry, which claims its restrictions would deter all new investment in mining. And this month the president weighed into the foreigners behind much the biggest project in Mongolia to date, the Oyu Tolgoi (“Turquoise Hill”) or “OT” copperand-gold mine. OT is expected to contribute one-third of GDP by 2020, and is the basis of the strategy of rapid growth fuelled by foreign investment in mining. Some 34% of OT is owned by the Mongolian government and 66% by Turquoise Hill Resources (which also controls the firm that owns Ovoot Tolgoi), a subsidiary of Rio Tinto, a British-Australian mining behemoth.

The mine has just produced its first copper concentrate. It is expected to begin commercial production by the end of June. In the Gobi desert, just 80km (50 miles) from the border with China, which will buy its product, it seems well on track to meet the ambitious hopes vested in it. Yet the president accused the company of having spent more than had been scheduled when the investment agreement was signed in 2009 (nearly $7 billion so far); of being slow in explaining why; of paying its management too much; and of employing more foreigners than it was supposed to. In rebutting these slights, OT pointed out that Rio is shouldering most of the project’s risks. It is lending the government the money for its share of the investment, and the loan will never be repaid if the mine does not make enough money.

Cynics suggest Mr Elbegdorj’s tirade may have owed something to two related factors other than genuine concerns about the project and posturing ahead of the election. One is the government’s gaping budget deficit. OT is already a big taxpayer. By piling on pressure, the government may hope to extract more revenue from it. The second is a fiasco at a potentially even more lucrative project—the nearby coal mine at Tavan Tolgoi (TT). To meet the government’s cash-handout promises, coal from TT was presold to China at prices below what it now costs to mine and transport it. Plans for a global share offering for TT are on hold.

So a row with OT is not all bad for the government. And at least it is not threatening, as it did last year, to renegotiate the investment agreement or expropriate part of Turquoise Hill’s stake. The smug consensus among foreign businessmen is that the government needs Rio more than Rio needs it. That may well be true; but it is all the more reason to expect the government to be suspicious of its foreign partner. By refusing to support OT’s efforts to raise bank finance for the expensive second, underground, phase of the mine, it has found a powerful lever. At a time of stress in global mining, when projects elsewhere are facing the axe, this is a dangerous game.

My name is Chinggis Mongolia knows its own appeal to global investors. In November it raised $1.5 billion in international markets. Its bond, inevitably called “Chinggis” after the national hero, Genghis Khan, was heavily oversubscribed, and traded initially on terms better than those available to, for example, Spain. But the price of the Chinggis has proved as volatile as its namesake and much more vulnerable to shareholder disputes. Some investors hope the government will moderate its behaviour. But is the land of Genghis, conqueror of China and most of the Eurasian land mass, really going to quail before the scribblers in the bond markets?

Economist.com/blogs/bany an

China Government reform: Super-size me Trade with North Korea: Crystal meth and Tesco Trade with North Korea: Trade with the world

Government reform

Super-size me Officials say fewer, bigger ministries can mean smaller government. Not everyone agrees Feb 16th 2013 | BEIJING |

IT HAS been a busy few days for employees of the Ministry of Railways. One of the largest movements of people ever in the world by train has been achieved, so far, without a major hitch. But any kudos for its management of the lunar-new-year rush will not spare the ministry from its widely expected fate: a merger with the Ministry of Transport. The government believes that fewer and bigger ministries will boost bureaucratic efficiency. It could also, officials say, help the country change in more fundamental ways.

The numbers handled by China’s state-owned rail service during the new-year holiday (February 9th-15th this year) are staggering: a by-product of a huge recent migration into urban areas of rural residents, most of whom have left behind relatives whom they rejoin in the countryside for the festivities. On February 6th there were more than 6.3m trips taken by rail around the country. Chinese media predict travellers will make a total of some 220m train journeys during the 40 days around the new-year-holiday period.

But few will miss the Ministry of Railways. Among advocates of super-sized ministries, the railway bureaucracy, with its lingering Maoist attitudes to service and its notoriety for corruption, is held up as a prime example of a structure that needs stripping of its stubborn independence.

In recent weeks speculation has been growing that a new round of ministry mergers will soon unfold. The 370-odd members of the Communist Party’s central committee are expected to meet later this month to finalise arrangements for the annual session of the National People’s Congress, China’s legislature, which begins on March 5th. Further steps to create what officials call a “big-ministry system” are likely to be discussed. The last push to achieve this was in 2008, when six central-government agencies were abolished and five super-ministries created. Of the 27 ministries left after this restructuring, officials suggest that several more are likely to be merged. China’s aim is to rid itself of a Soviet-style bureaucracy with a tendency to micromanage and an extensive overlap of interests among central departments. Bigger ministries, it is argued, should mean smaller government.

It is far from clear how rapidly these reforms will happen. For much of the 1980s and 1990s there were more than 40 ministries and commissions. In 1998 the number was cut to 29. Progress since then has been slow. The restructuring five years ago created a new transport super-ministry with the Civil Aviation Administration of China and the State Post Bureau folded into it. But the Ministry of Railways was left out. With its own courts and police, it continued to operate as a hugely powerful fief. Its swagger has grown even greater with the rapid building in the past few years of a high-speed rail network costing hundreds of billions of dollars.

The ministry’s star could now be waning. The collision in July 2011 of two high-speed trains that killed at least 40 people near the eastern city of Wenzhou prompted widespread accusations that railway bureaucrats had been paying too little heed to safety in their building spree. Earlier that year the then railway minister, Liu Zhijun, was detained on suspicion of corruption. He will probably be tried in the next few months. In January some Chinese media published sketchy reports that plans for a merger with the transport ministry were beginning to take shape, although some said these were likely to be complicated by the ministry’s huge debts and its vast business interests.

Streamline that censorship Another leading candidate for super-sizing is the Ministry of Culture. This (deeply conservative) bureaucracy could take over the General Administration of Press and Publication (GAPP) as well as the State Administration of Radio, Film and Television (SARFT). Many lower-level administrations around the country have already begun to take such steps. Hainan, an island off the southern coast, has merged not only culture, publications and broadcasting but also sport into a super-department at the provincial level.

A similar move in the central government could help avoid the kind of open bickering between GAPP and the Ministry of Culture that erupted in 2009 over which was responsible for supervision of online games.

Some worry that creating bigger ministries with more responsibilities could backfire. Instead of making government more efficient, it could create even more powerful bureaucratic interest groups that could thwart efforts to make government nimbler and more responsive to public needs. In recent months discussion has burgeoned online in China about the possibility of creating a new commission to oversee economic and political reforms and ensure that ministries co-operate in carrying them out. The lack of cooperation has been evident recently in behind-the-scenes feuding over a blueprint for reducing the wealth gap. It was eventually published on February 5th, with a telling lack of detail.

Officials say that the “big-ministry system” is not just about redefining bureaucratic boundaries, but is an important part of more thoroughgoing political reform. Alongside small government, they sometimes stress a need for “big society”, with much greater non-governmental involvement in the provision of basic services. Guangdong province, next to Hainan, has been a leader in both efforts. But sceptics abound.

Although registering as an NGO is somewhat easier in Guangdong than in many other parts of the country, NGO workers are still routinely harassed. One district of the province, Shunde, has won much acclaim for cutting its departments from 41 to 16. But trimming officials has proved more difficult. In a nearby district, one super-sized department ended up with 19 deputy heads. Many Chinese internet users are accusing the government of fake reform.

Trade with North Korea

Crystal meth and Tesco North Korea’s nuclear test fails to disrupt flourishing trade along its border Feb 16th 2013 | DANDONG |

A bridge into the darkness AS NEW year fireworks crackle and boom amid the neon beside the Yalu river, a small boat inches silently across the stretch of water that forms the border with North Korea. A low block of flats is just visible on the other side, pitch-black save for a single prick of electricity. Clever timing by the smugglers, smiles a watching Chinese resident: “All the police are eating their new year meal.”

When North Korea tested a third nuclear weapon on February 12th, it was not security that was troubling the residents of towns along China’s 1,420km (880-mile) border with North Korea (see map). “Trade [with North Korea] is a large part of Dandong’s economy,” says Wu Yang, owner of an ornament company that uses semi-precious stones from the North. “I’m worried it will be affected,” she says.

Fuel, rice, wheat and basic consumer goods all flow legally, usually by lorry over bridges on the Yalu, into North Korea. Imports from the North include minerals, coal, scrap metal and seafood. There is also a thriving black-market trade both ways, usually by boat. This feeds the growing demand for other nonstaple products among the new North Korean nouveaux riches. Border police, especially in the North, are known to take bribes to allow illicit trade to pass. One illegal North Korean export causing social problems is crystal meth, a drug known in China as bingdu, or “ice”.

If China’s government clamps down on official trade with the North to express its displeasure at the nuclear test, the result will only be more smuggling, says a local who has invested in North Korean minerals. Illicit trade brings its own problems. North Korean border guards shot dead three Chinese smugglers in 2010, and tensions remain.

Meanwhile, as goods flow into North Korea, people continue to flow out. Some come legally to work in North Korean restaurants in Dandong and will return home. Outwardly they are unswervingly loyal —“China is all right, but North Korea is better,” says one—but local Chinese say they are more confident and chatty than before. Many more flee illegally across the river and live in secret in China or try to make it to South Korea, often through a third country. Tesco, a British supermarket chain, has a store in Dandong with a special section offering “Korean food”—mainly imported from South Korea—that an employee says specifically caters to North Koreans.

Wealthy tourists from elsewhere in China pay for boat rides on the river or can even book a trip into North Korea itself, perhaps to remind themselves how far China has come. Others buy cigarettes and trinkets labelled as North Korean but, according to locals, actually made in China. There is sympathy for North Koreans, but no-one wants to miss a good business opportunity.

Trade with the world Feb 16th 2013 |

China's economy was once a world unto itself. We possess all things, the Qianlong emperor boasted to British visitors in 1793, and set no value on objects strange or ingenious. It is, therefore, remarkable that China last year eclipsed America as the world's biggest trader. New figures show that America's imports and exports of goods amounted to $3.82 trillion in 2012, compared with China's $3.87 trillion (see chart).

These figures count only trade in objects (ingenious or mundane). If services are added, America retains its lead for the moment. Tax dodges may also inflate China's numbers, but its trade networks are spreading. The Associated Press says 124 countries count China as their leading trade partner. The Qianlong emperor claimed, somewhat optimistically, that his dynasty's majestic virtue had penetrated every country under heaven. China's exporters and importers have now accomplished exactly that.

Middle East and Africa Nigeria: Clubbing together Transport in Africa: Get a move on Ruling Ethiopia: Long live the king Divided Jerusalem: An Arab haven dissected Afghan refugees in Iran: Go back home

Nigeria

Clubbing together A newly united opposition presents the first credible threat to Nigeria’s ruling party Feb 16th 2013 |

THANKS to inspired team play, the Nigerian national football squad on February 10th won for the first time since 1994 the biennial African Cup of Nations held in South Africa (see picture above). Opposition politicians at home, along with millions of countrymen, celebrated wildly. But can they follow the footballers’ example and work as a team?

Days earlier, opposition leaders announced the merger of four sizeable parties with the aim of defeating the ruling People’s Democratic Party (PDP) of President Goodluck Jonathan, who may be planning to seek another term in office two years from now. The PDP has held power since the end of military rule 14 years ago yet repeatedly failed to honour its promises of curbing corruption and spreading the nation’s oil wealth.

The merger is the most committed effort to date by the opposition to form a united front. In theory, power is within reach. The PDP frequently loses state elections, but has been able to hold on to the presidency because it alone has a nationwide network of candidates and activists. Other parties operate from strongholds but have so far failed to field a candidate with broad national appeal. Mr Jonathan won the last election in 2011 almost by default. He inspired little enthusiasm and yet his divided opponents failed to get enough votes in the first round to force a run-off.

Previous attempts by opposition parties to work together have been undone by the competing ambitions of their leaders. Countless talks have been held over the years but until now they always broke down. Yet after the most recent election even the most selfish oppositionists came to realise they cannot win power without making compromises.

The party merger was endorsed by several political heavyweights, including General Muhammadu Buhari, representing the Congress for Progressive Change (CPC), who ran for president in 2003, 2007

and 2011 and led Nigeria under military rule between 1983 and 1985. Another supporter is Bola Tinubu, the legendary former governor of Lagos state, who represents the Action Congress of Nigeria (ACN).

Several more governors, many of whom are able to sway supporters in their states, are backing the combination.

Together they will be known as the All Progressive Congress (APC). “It is a credible threat. If you can get two of the largest opposition parties together, it could be a meaningful challenge to power,” says Clement Nwankwo, an analyst at the Policy and Legal Advocacy Centre in Abuja, the capital.

Egos will make or break the umbrella party. It has yet to agree on a candidate for the presidency. So far neither General Buhari nor Mr Tinubu has declared an interest, possibly paving the way for a new, younger contender. Losing opposition candidates could still defect and split the vote. But if the merged party stays intact and manages to combine the ACN’s southern base and the CPC’s northern base, it could present the ruling party with its biggest ever challenge.

Meanwhile, President Jonathan is struggling to push through much-touted reforms. Millions of Nigerians still live without electricity or proper health care and education. Poverty in parts of the country is worse than ever, despite record oil revenues.

The president has also failed to stem a growing insurgency in the north—and has arguably made it worse by cracking down hard. A much-revered former president and PDP stalwart, Olusegun Obasanjo, has spoken out against Mr Jonathan.

Many Nigerians say they are yearning for change. “We are tired of the PDP. They are trash,” says Job Soloman, a market-stall owner in Abuja. “If the APC get their act together and give us a good candidate, people will vote to kick PDP out.”

The ruling party is trying hard not to appear rattled. Bamanga Tukur, the national chairman, says, “The more the merrier.” But his colleagues have set up a high-level committee to plot a response. They have access to plenty of money to get out supporters on voting day. Two out of three federal states are still run by the PDP and many wealthy businessmen keep close links to the party.

A new joke making the rounds in the capital says that, since the main opposition groups are merging, the PDP will form an alliance with the police and the army. Security services are operating in all but one of the country’s 36 states. Intimidation has been on the rise in recent elections, and in several cases, the men in uniform have menaced voters rather than protected them.

Transport in Africa

Get a move on Africa’s booming economy needs modern trade routes Feb 16th 2013 | WADI HALFA | UNLESS you take to the air or the high seas, the only reasonably safe passage from north Africa to the rest of the continent is a weekly ferry on a lake on the eastern edge of the Sahara. The few roads that cross the vast desert are either broken or infested with kidnappers. So every Monday morning a horde of turbaned migrants lines up at a concrete pier in the southern Egyptian city of Aswan on Lake Nasser, a dammed-up bit of the Nile, for the overnight journey of 500km (300-odd miles) to Wadi Halfa in northern Sudan. They bring carpets from Cairo, bubble-wrapped fridges from Tripoli and bicycles bought with wages earned in Algiers. All are stowed in the white steel hull of the 30-metre-long good ship Sinai—and around her engine and in the stairways and under the lifeboats and in the lifeboats; every surface is covered with bags, parcels and boxes.

When Sudan approaches, after a cold night under the stars on deck, the men roll up blankets and their wives braid the hair of young daughters. Squinting into jewelled sunlight bouncing off the water, more and more of the shore comes into view on both sides: craggy hills that once formed the top of the Nile valley where early human civilisations erected tombs and temples. Some were moved to higher ground when the dam in Aswan created the lake half a century ago. The rest slide by, below the keel. Coming off the ferry, the migrants will take a flyblown bus to Khartoum, the Sudanese capital, from where some plan to carry on to Cameroon, on the Atlantic side of the continent, a journey of several more weeks.

Transport is a perpetual problem in Africa. Potholed roads and missing rail links get in the way of economic growth. Intra-regional trade accounts for just 13% of total commerce, compared with 53% in emerging Asia. Landlocked countries suffer the most. Transport costs can make up 50-75% of the retail price of goods in Malawi, Rwanda and Uganda. Shipping a car from China to Tanzania on the Indian Ocean coast costs $4,000, but getting it from there to nearby Uganda can cost another $5,000.

Some trade paths are improving. Governments are slowly making good on long-standing promises to create free-trade zones. Officials from countries in the East African Community and the Common Market for Eastern and Southern Africa have removed some border restrictions and lowered tariffs. Roads are being built. Aswan and Wadi Halfa will soon be connected by a double-lane tarmac highway with its own border terminal, the first dependable road across the Sahara. It will link to a brand new 1,000km-long desert road going south to Khartoum along the green banks of the Nile.

Africa needs much more of this. The continent could easily end hunger if only farmers were able to get produce across borders, according to a new World Bank report, “Africa Can Help Feed Africa”. Paul Brenton, the author, says obstacles such as export and import bans, variable import tariffs and quotas, restrictive rules of origin and price controls all prevent consumers in one place from benefiting from staple foods and other resources (such as fertiliser) in nearby areas. Subsistence farmers who sell surplus crops typically receive less than 20% of the market price. The rest is eaten up by transport and transaction costs, limiting the incentive for farmers to grow more food. One of the most stubbornly persistent problems is roadside checkpoints, which cause delays and attract policemen demanding bribes.

Citadel Capital, a Cairo-based private-equity firm, has an ambitious plan to create transport links away from Africa’s roads. It is putting together a privately run corridor across the Sahara and into east Africa, connecting the Mediterranean and the Indian Ocean, to move cargo more than 6,000km by rail and river, by far the cheapest way. According to the firm’s calculations, five litres of fuel can carry a tonne of cargo 100km by road but 333km by rail and 550km by boat.

Parts of the corridor already exist. Citadel Capital is running 42 barges along the length of the Nile in Egypt and has built or refurbished seven river-ports between Alexandria and Aswan, mostly to ship grain, coal, slag and clay. Two years ago it carried the first-ever shipping container on the Nile, long neglected as a transport route. Even though 95% of Egyptians live by the river, less than 1% of the goods they need are moved on it. In Sudan Citadel Capital has struck a deal with the government to use the state-owned rail network, and in South Sudan it operates 12 barges on the Nile to move supplies for oil companies and

the World Food Programme. Further south in Uganda and Kenya, it has invested in the Rift Valley Railway, a British colonial-era line that runs 2,300km from the coast to the interior, as depicted in “Out of Africa”, a Hollywood epic.

These investments were made possible by privatisations and the opening of markets once dominated by state-owned enterprises. But governments can still be an unwelcome presence. Egypt’s barge business loses money because the state subsidises fuel, giving road transport a competitive advantage. Egyptians pay only $0.15 for a litre of diesel, at great expense to their exchequer. Similar distortions exist in other countries, such as Nigeria.

Rolling home And yet new railway lines are planned across Africa. Some will carry passengers, though most are for freight, especially minerals, a booming sector. A 1,000km line is to bring iron ore from Guinea’s interior to the coast. Some are designed from scratch whereas others, such as the colonial-era Benguela line in Angola, are revivals. Most track-builders as well as much of the rolling stock come from Asia. In 2011 Ghana signed a contract, apparently worth $6 billion, with a Chinese firm to build a line across the country. According to Africa-Asia Confidential, a newsletter published in London, at least 25 current African railway projects have Asian backers.

New rail lines also feature in the plans of Citadel Capital. The northernmost spur of its Rift Valley Railway investment in Uganda stops 300km short of its barge port on the Nile in Juba, the capital of South Sudan. The firm says World Bank funding is needed to complete the line. Further gaps in the crossSaharan corridor need closing. Nile barges cannot pass the dam in Aswan because it has no locks or ship lifts. The licence to use rail tracks in northern Sudan exists so far only on paper.

Like many investors in Africa, the firm also faces political problems. The revolution in Egypt has messed up management of the Nile: new officials are withholding navigational charts from barge captains and allowing water levels to sink as low as 60cm. In Sudan, the border between north and south was closed for much of this year while the two nations were on the brink of war. In Uganda and Kenya politicians refuse to clear away traders squatting on railway lines who use them as retail space, causing havoc for the already decrepit line that today carries a fifth of the load it didtwo decades ago.

Still, demand for more and better transport undoubtedly exists, and the dream of a continuous link between north Africa and the rest of the continent is a powerful one. “In the long term it will happen,” insists Ahmed Heikal, the founder of Citadel Capital, waving his hands as if holding a magic wand.

Ruling Ethiopia

Long live the king Ethiopia’s new leadership is practising hero-worship Feb 16th 2013 | ADDIS ABABA |

Which way to the mausoleum?

DURING his two decades running Ethiopia, Meles Zenawi almost single-handedly engineered its rise from lost cause to model pupil. Even his enemies admit he was both popular and competent. Often working around the clock, he could make complex policy choices and then explain them to ordinary people. He planned meticulously for everything—from road building to oppressing the opposition— except, that is, for his own demise.

It came six months ago on August 20th, following illness at the age of 57, and left the state reeling. Meles, as he is known, had grabbed so much power that many feared his death would spark political chaos and an economic downturn. He alone had the trust of the soldiers, the financiers, the Ethiopian people and the West.

But the transition to a new prime minister, Hailemariam Desalegn, has gone smoothly. The streets of Addis Ababa, the capital, have seen no unrest and the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF) suffered no defections. A few audible grumbles were swiftly silenced.

Rioting Muslims were beaten back. A minister was fired as were four regional officials in events that may or may not be related to the leadership change. Jockeying among the elite has been kept behind firmly closed doors. In public it espouses business as usual.

Instead of chaos, an eerie calm now hangs over the country. The old guard that once surrounded Meles, who hailed from the northern region of Tigray, remains in power. Winners of a 1980s civil war that toppled the dictator Mengistu Haile Mariam, the Tigrayans have held on to top security jobs. Meles’s widow, Azeb Mesfin, who for a few months refused to move out of the prime ministerial palace, still controls a state-affiliated conglomerate, EFFORT. The number of Tigrayans in the cabinet has shrunk but

key posts remain in the hands of ageing loyalists, many of whom fought alongside Meles. Talk of “generational change” over the past few years was seemingly a charade.

One of the few exceptions is the relatively young prime minister, Mr Desalegn. The 47-year-old is an articulate and experienced administrator as well as a former water engineer who studied in Finland. But he lacks his predecessor’s charisma and shrewd policy instincts. Though a former deputy prime minister (and former foreign minister) he is not an insider. He is a Protestant in a predominantly Orthodox Christian nation (his first name means “the power of Mary”). He is also an ethnic Wolaytan in a government dominated by Tigrayans. Meles, his mentor, may have chosen him for that reason, either to weaken ethnic divisions or perhaps to guarantee that ultimate power remains with his northern brothersin-arms.

As the new chairman of the EPRDF, Mr Desalegn may eventually attain sufficient control to reshape the ruling party, but only if he survives long enough. For the moment he seems to have little room to manoeuvre, lacking his own power base in the security forces. He has publicly pledged to continue his predecessor’s work “without any changes”.

Those who know him say he is more comfortable with capitalism than many of the leftists around him. He was never a Marxist, but nor does he have an alternative vision for the country. Few Ethiopians know his name, though he does well internationally; he was recently elected chairman of the African Union. “We want him to be a leader not a follower,” says a progressive Ethiopian who occasionally meets him, but doubts his authority.

In his first six months in power, the prime minister has announced few new policies. Reform efforts are frozen. Economic liberalisation has been postponed at least until after elections in 2015. Party leaders seem unsure how to survive without Meles. They govern on autopilot, following the blueprints he left behind. Conformity of thought is common and new ideas are seemingly unwelcome.

Meles was so central to the Ethiopian state that his followers are trying to keep him alive with a Maostyle cult of personality. Even months after his death, Addis Ababa is still plastered with bereavement posters. They cover entire sides of buildings and run for hundreds of metres along fences. Banners declare “we will continue your work” and “we will never forget you”. The body of the former prime minister is buried under a tall granite arch next to Holy Trinity Cathedral where Haile Selassie, the last Ethiopian emperor, is entombed. New propaganda tracts depict Meles as a selfless leader who sacrificed his life for his country. His party is trying to wring as much legitimacy as possible from his legacy. It may be too early to speak of a post-Meles era—even in death he is the country’s most visible politician.

The future could yet be difficult. Without the former prime minister’s zeal, authority and attention to detail, the system he created could founder. Vested interests once kept at bay may reassert themselves.

Reform projects could not just stall but break down irreparably. The fight against corruption and for economic progress will slow. Officialdom is already adrift, unsure of which way to turn. Only when the grizzled Tigrayan bosses at last step down might a new generation of leaders return to the ambitious experimentation that was an essential ingredient in Meles’s success. A move to genuine democracy, which he talked about but never dared to try, remains far off.

Ethiopia’s leaders are confused. They hail Meles as their country’s uniquely brilliant leader but act as if they can govern just as he did.

Divided Jerusalem

An Arab haven dissected An Arab village is asked to bow to the wishes of Jewish settlers Feb 16th 2013 | EAST JERUSALEM |

BEIT SAFAFA, Arabic for “summertime home”, was the only one of some 40 Arab villages in the district of West Jerusalem to survive the war of 1948 that created Israel; the others were more or less emptied of their inhabitants, who mostly fled the killing and found their return barred by the victorious Israelis. As a result, the people of Beit Safafa have generally been loyal to the state of Israel. Many of its townsfolk welcomed the 1967 war, when Israel captured what was left of Palestine, because it reunited the town which for 20 years had been divided by the armistice line running down the middle of it. When other Palestinians rose up in protest against Israel’s occupation of the entire city, Beit Safafa remained a picture of harmony.

No longer. To speed up their travel from dwellings in the West Bank south of Jerusalem, Israel’s settlers have persuaded the government to plough a six-lane motorway (in some places it has ten lanes) through the Arab-populated town. Once the road is complete, the settlers will be able to drive from the West Bank to central Jerusalem or Tel Aviv, Israel’s commercial capital on the coast, without having to go through a traffic light. To make way for the motorway, which will slice through a community 9,000-strong, bulldozers demolish olive groves, terraces and caves hugging Bethlehem’s foothills.

For the Palestinian townsfolk who once championed integration with their Jewish fellow citizens, the motorway is a bitter blow. Israel has already built one highway through the town, naming it after Dov Yosef, the first Israeli military governor of Jerusalem, and has also built a large Jewish settlement called Gilo and an industrial zone on the slopes above. As part of his recent election campaign, Binyamin Netanyahu, Israel’s prime minister, promised to build thousands more housing units and a string of hotels

on what Arabs call Tabaliya and Jews Givat Matos, the last unsettled hilltop overlooking Beit Safafa.

“They just want us out,” says an architect, who has spent his career working with Jerusalem’s municipal authorities. The town’s muezzin calls for strikes and protests as well as prayers. Worshippers leaving the main mosque tell glum tales of confiscated land.

Before the municipality approves such big building projects in the Jewish-inhabited districts of Jerusalem, it has to submit a detailed plan, routinely holding public consultations to hear objections. But the residents of Beit Safafa awoke in November to find bulldozers digging outside their homes. Belatedly they headed to court, but the judge allowed work to continue while she pondered her ruling and then rejected the petition. Police have broken up demonstrations and handcuffed protesters for what the municipality calls vandalism.

Walls as high as first-floor windows are to be built to shield residents. The municipality says it will cover 180 metres of the road, but has rejected pleas for a tunnel. “They could never dissect a Jewish neighbourhood the same way,” says Meir Margalit, one of the few Jewish councillors to have rallied to the residents’ cause.

Afghan refugees in Iran

Go back home As Iran’s economy slides, Afghan refugees are being penalised Feb 16th 2013 | TEHRAN | IN A wealthy neighbourhood in Tehran, Iran’s capital, a 12-year-old boy in a tatty red shell-suit patrols neat cul-de-sacs in search of bins. Like thousands of illegal Afghan refugees in Iran, he rummages daily from dusk till dawn for plastic to sell. “If Iran didn’t exist, neither would I,” says Zalmai, dropping a big sack. “I don’t want to go back.” He left his parents in Herat, in west Afghanistan, three years ago and has never been to school. He makes 150,000 rials a day ($4.20) from selling plastic.

Thirty years of war in Afghanistan have left Iran with perhaps the largest urban refugee population in the world. More than 1m Afghans are registered as refugees in the Islamic Republic, which is also home to another 1.5m-plus illegal Afghan migrants. But a mixture of Iran’s worsening economic malaise and its government’s policies has prompted an exodus of Afghans back home or westward to Turkey and Greece.

Some 200,000 of them are reckoned to have gone back in the past seven months; 5.7m—15% of Afghanistan’s population—have returned in the past ten years, most of them during the presidency of Mahmoud Ahmadinejad that began in 2005.

Afghan migration to Iran is as old as the Islamic Republic. During the Soviet invasion of 1979, hundreds of thousands of Afghans fled to Iran, though it was itself in the throes of revolution. For a decade they were ignored by the government, denied dignified work and often derided in the press as violent criminals and drug dealers. During the “construction period” of the 1990s under Akbar Hashemi Rafsanjani’s presidency, the government sought to naturalise them. Most were working in construction.

But under Mr Ahmadinejad things have got harder. As the economy falters under foreign sanctions, the government is now encouraging both illegal and legal refugees to go home. The Bureau for Aliens and Foreign Immigrants’ Affairs has stepped up random inspections of building firms and factories, threatening to shut down those that employ undocumented workers. It also announced that marriages between illegal migrants and Iranians would go unrecognised and that illegal immigrants could not now qualify for refugee status. Children of an illegal immigrant have no legal status, barring them from education and health care.

Tehran’s popular technocrat mayor, Muhammad Qalibaf, a presidential hopeful, has introduced a municipal service to compete with illegal workers such as Zalmai in the lucrative recycling market. And some jobs in pest-control and sewer-clearance have been automated, filling the gap created by leaving Afghans. Hamid, a 43-year-old legal refugee, has been living in Iran for over a decade. “They treat us very badly,” he says, visibly upset. “We don’t have the advantages of Iranians. We can’t have mobile phones or cars and they make the paperwork more complicated and expensive every year.” Referring to illegal refugees, he says “everything is about money. The police look for their houses, steal savings and then deport them.”

Europe French economic policy: Which way for Mr Hollande?

Russia and America: The dread of the other EU migration to Germany: Sprechen Sie job?

Turkey and Islam: Dress tests Charlemagne: No to EUsterity

French economic policy

Which way for Mr Hollande?

Elected on the left, France’s president seems to be veering towards the centre Feb 16th 2013 | PARIS |

THE longer François Hollande spends in office, the more it takes sharp eyesight and a clear head to follow his economic policy. Since his election last May, the Socialist president has mixed tax-and-spend measures with efforts to improve competitiveness. The rich feel squeezed; firms are annoyed by antibusiness talk. Yet,with GDP shrinking in the fourth quarter of 2012 and job losses mounting, the man elected on a leftist programme is accused of a swerve to the reformist centre. What is Mr Hollande up to?

In his first few months he ticked off items on his manifesto. He lowered the pension age for certain workers. He raised a family benefit. He capped petrol prices. He vowed to stop companies closing factories. He prepared a budget for 2013 that tried to keep the budget deficit to 3% of GDP, but chiefly through tax increases: it soaked the rich with a 75% income-tax rate, and hit companies and individuals with other higher taxes. Returning from his summer break, Mr Hollande seemed like a man with the luxury of time on his side.

What followed in October was, therefore, sprung on an unsuspecting public. After a damning report on French competitiveness by Louis Gallois, a left-leaning industrialist, Mr Hollande announced €20 billion of tax breaks for companies employing low-wage labour, to compensate for high social charges. A sense of urgency and realism began to creep in. Mr Gallois talked of an “emergency situation”. For the first time, the government acknowledged labour cost as a factor behind France’s loss of competitiveness to Germany over the past ten years. Mr Hollande even started talking of cutting public spending, which accounts for over 56% of GDP. This was followed in January by an unexpected agreement with the unions to soften labour-market rules, making it easier for companies to reduce hours and wages in a downturn.

In some ways, all this was just an inevitable encounter with economic reality. Mr Hollande had based his manifesto on growth in 2013 of 1.7%; in office, he revised this to 0.8%. Now the fantasy is over: this

week Mr Hollande conceded, like most economists, that growth would be much lower. As a result, said the Cour des Comptes, the national auditor, in its annual report on February 12th, France has “little chance” of meeting its 3% target.

Across the country, factories have been closing. Industrial production has stalled. Entrepreneurs feel penalised. Investment plans are on hold. Anecdotes abound of rich families leaving the country. Faced with this, and with poor poll ratings, Mr Hollande has begun to recognise the limits of state power, and of a tax-and-spend policy in a country that breaks records for both. Now Jean-Marc Ayrault, his prime minister, wants “to reinvent the French model”. Pierre Moscovici, the finance minister, even claims there has been a “Copernican revolution” on the left. By conceding the need for supply-side measures to reduce labour costs, he says, the French left has made a big shift. Indeed. Some say that those around Mr Hollande in charge of economic policy, including Mr Moscovici, Michel Sapin, the labour minister, and Emmanuel Macron, the economic adviser in the Elysée, have long understood what is really needed to solve France’s competitiveness problem.

The trouble is that the rest of the Socialist Party, particularly in parliament, does not agree. Manuel Valls, the popular straight-talking interior minister, says that “The challenge for the French left is that we should have done this ideological metamorphosis during the past ten years of opposition.” Instead, “We are adapting our software while in office.” With its deputies supplied largely by the public sector, this is awkward. Already, the left accuses Mr Hollande of giving in to “neo-liberal principles”. Thierry Lepaon, the new leader of the Confédération Générale du Travail, France’s biggest and communist-linked union, complains that he is doing “the opposite of his campaign commitments”.

In reality, it is hard to detect a linear evolution, let alone a revolution. For one thing, Mr Hollande is a political animal who plays by the rule that it is better not to say too clearly what you are doing. He refuses to acknowledge a U-turn. He let Arnaud Montebourg, his industry minister, talk of the compulsory nationalisation of a steelworks, before ruling it out. He has pinned himself into a corner over the 75% tax rate, which was ruled unconstitutional in December, but which he cannot entirely bury without losing face.

It is also far from clear that Mr Hollande, even if he sees the need to curb public spending, is ready to do it. In its damning report, the Cour des Comptes deplores the fact that tax rises make up three-quarters of 2013 budget savings, and urges a greater effort to cut spending. But this will require an overhaul of pensions and welfare spending, as well as civil-service staffing, none of which is on the table.

Mr Hollande could yet turn out to be a Gerhard Schröder à la française, willing to bring in deep reforms, as the former centre-left German chancellor did, to shake up the French welfare state and restore competitiveness. But a more likely outcome is that he will do just enough to keep the markets and the ratings agencies at bay, without ever fully confronting vested interests. “Whenever he can avoid hard choices, he will,” says somebody who knows him well. This may keep France from disaster. Whether it will reverse the slow decline of the past decade is far less certain.

Russia and America

The dread of the other The leading role played by anti-Americanism in today’s Russia Feb 16th 2013 | MOSCOW |

Vlad the anti-American IF AMERICA did not exist, Russia would have to invent it. In a sense it already has: first as a dream, then as a nightmare. No other country looms so large in the Russian psyche. To Kremlin ideologists, the very concept of Russia’s sovereignty depends on being free of America’s influence.

Anti-Americanism has long been a staple of Vladimir Putin, but it has undergone an important shift. Gone are the days when the Kremlin craved recognition and lashed out at the West for not recognising Russia as one of its own. Now it neither pretends nor aspires to be like the West. Instead, it wants to exorcise all traces of American influence.

Four years after the American “reset”, the relationship is being “reformatted” to rid dependence on America, says Alexei Pushkov, the pugnacious chairman of the Russian parliament’s foreign-relations committee. The Russians have shut off all co-operation that uses American money, including on health care, civil society, fighting human trafficking and drugs, and dismantling unconventional weapons.

All this, according to Mr Pushkov, ends an era when Russia looked to the West as a model. Some Russian deputies have even suggested fining cinemas that show too many foreign films, or banning foreign words.

A new law makes it treasonable to provide consultancy or “other assistance” to a foreign state directed against Russia’s national security. “The government’s policies are driving Russia into isolation,” says a Western diplomat. Anti-Americanism used to be a postmodernist game played by an elite that had made itself comfortable in the West. Now the game seems to have become real.

For instance, the Kremlin has banned American couples from adopting Russian orphans, depriving many children with severe disabilities of the chance of a decent life. This was Russia’s first response to America’s Magnitsky act, named after Sergei Magnitsky, a lawyer driven to an early death in a Russian prison by the people whom he accused of fraud. The act threatens sanctions against Russian officials directly involved in human-rights abuses. Russia’s second response was a law introduced by Mr Putin prohibiting Russian officials or their immediate family members from holding foreign bank accounts or foreign assets, because such things pose a threat to national security.

These moves are less a response to American actions than to Russia’s domestic situation. Dmitry Trenin, head of the Moscow Carnegie Centre, says that, almost for the first time, bilateral relations have been hijacked by Russian politics. The trigger for the new anti-Americanism was the street protests against the Duma election in December 2011, which the Kremlin blamed on America. Falling popular trust in the Kremlin, worries about capital flight and the economy, and an antagonistic urban middle class have led Mr Putin to resort to nationalism, traditionalism and selective repression. Unable to stoke ethnic nationalism for fear of igniting the north Caucasus again, he has instead taken aim at the West and Western values.

His traditionalist rhetoric conveniently eliminates the need for new ideas or modernisation—a word that has vanished from the official vocabulary (along with Dmitry Medvedev, now the low-profile prime minister). It appeals to Russian history, particularly the second world war, and to the Orthodox Church.

Recently the Kremlin used the 70th anniversary of the victory at Stalingrad to justify Russia’s isolationism. As Mr Pushkov tweeted, “Stalingrad was not only a breaking point in the war, but also in the centuries-long battle between the West and Russia. Hitler was the last conqueror who came from the West.” A few years ago, such comments came only from right-wing nationalists. Now they belong to the mainstream. Russia used to argue that its competition with America was driven by interests. Now it says its confrontation with America is about values.

Monkey business Maksim Shevchenko, a TV journalist and a Kremlin-approved crusader against liberalism, wrote recently that “Russia and the West are at war…There is a growing feeling that most Western people belong to a different humanoid group from us; that we are only superficially similar, but fundamentally different.”

Kirill Rogov, a political analyst, says the Kremlin has imposed its traditionalist agenda on Russian society by prosecuting Pussy Riot, the punk singers who performed obscenely on the altar of Russia’s main cathedral, by banning the promotion of homosexuality and by blocking the American adoptions. This has allowed the Kremlin to present protesters against Mr Putin not only as foreign agents, but as a bunch of homosexual, blasphemous mercenaries ready to sell their children to the evil empire.

Yet it has not boosted Mr Putin’s popularity or restored trust in his presidency. Indeed, the numbers seeing America as a friend, not a foe, have risen in the past year, according to a Levada opinion poll. One explanation for this might be growing mistrust of the Kremlin. That is what made Soviet propaganda ineffective 20 years ago. Russian society also seems to have limited enthusiasm for the growing political role of the church.

Russia’s obsession with America is countered with a broad indifference on the American side. The “reset” policy, which has helped bring about some American wishes, including a transport corridor to

Afghanistan and co-operation on Iran, has now been exhausted. “There are no big deals to be had with Putin,” Fiona Hill and Clifford Gaddy of the Brookings Institution in Washington, DC, argued recently in the New York Times . Mr Pushkov retorts that America has not understood how important Russia is for its security.

The irony is that the Kremlin’s anti-Americanism reveals not its independence but its reliance on America as an enemy. The real casualty may be Russia itself.

EU migration to Germany

Sprechen Sie job?

More southern Europeans are going where the jobs are. But not enough Feb 16th 2013 | BERLIN | DANIEL GÓMEZ GARCIA, aged 23, is the sort of person Europe’s leaders may have had in mind when, on paper at least, they turned the European Union into a single labour market like America’s. Mr Gómez, from Andalusia in Spain, learned a smattering of German in school and passable English while studying in America. But when he came back to Spain he saw that hardly anybody in his class of 80 had a job.

“Nothing to do, so let me go to Germany and get the language,” he recalls thinking. In autumn 2012 he took an unpaid four-month internship at his embassy in Berlin and paid for his tiny flat-share by helping a local holiday-rental firm with its Excel spreadsheets. Last month that turned into a low-paying but permanent job as an accountant.

That is how the single market is supposed to work. Spain has a youth unemployment rate of 56%. In Greece it is 58% (see chart). By contrast, Germany has negligible youth unemployment (8%) and a shortage of qualified workers. Theoretically, people should be willing to move from the “crisis countries” to the boom towns, just as the Okies once flocked to California.

To some extent this migration is indeed happening. New arrivals in Germany in the first half of 2012 grew by 15% over the same period in 2011, and by 35% net of departures. And the numbers of newcomers from the euro crisis countries increased the most—Greek arrivals were up by 78%, Spanish by 53%, for example. But the absolute numbers (6,900 Greeks and 3,900 Spaniards during those six months) are still modest.

It is “astonishing how astonishing it still is that they are coming”, says Holger Kolb, at the Expert Council of German Foundations on Integration and Migration. Some things are beginning to work as intended, such as the elimination of bureaucratic hassles for moving within the EU. Yet it seems that the EU can never become a truly integrated market. That is mainly because of language. Mr Gómez finds Germans challenging—“always nagging you about recycling or noise or whatever”—but the language is “the hardest part”.

Thus language has replaced work visas as the main barrier to mobility. When the euro crisis began, the branches in southern Europe of the Goethe Institute, the German equivalent of the British Council, were overwhelmed by demand for German courses, says Heike Uhlig, the institute’s director of language programmes. That demand was also different, she adds: less about yearning to read Goethe’s “Faust” than about finding work. So the institute retooled, offering courses geared to the technical German used by engineers, nurses or doctors.

Language, besides proximity, of explains a lot of today’s movements in the EU, says Klaus Bade, another migration expert. For example, the largest group of new arrivals in Germany is still from Poland, which is poorer though not a crisis country. But its schools often teach German alongside English.

Meanwhile Britain, thanks to English, has an advantage in the competition for foreign talent, which big German firms try to minimise by accepting English as their working language. But many of the job openings in Germany are to be found in medium-sized and private Mittelstand firms, often in remote places, where speaking German is still a must. That’s why Mr Gómez is advising his friends back home in Spain to bone up on the language and then “leave, get out”.

Turkey and Islam

Dress tests New frontiers in Turkey’s culture wars Feb 16th 2013 | ISTANBUL |

They hide you “STAR TREK”, said one commentator. “They may as well wear a burqa,” huffed another. Supposedly chaste new uniforms for Turkish Airlines (THY) cabin attendants have triggered mirth and horror in the cyberworld. They have also sharpened debate about creeping conservatism under the mildly Islamist Justice and Development (AK) government. With its embrace of overt piety and family values, AK is more like America’s religious right than Iran’s mullahs. But secularists feel beleaguered.

THY’s ankle-length caftans for women and silver-brocade coats for men seem impractical. Dilek Hanif, who designed them, insisted they were “just several among many other proposed models”. THY backed her claims with photos of more sensible gear. The carrier, which now flies to 219 destinations, was last year voted “Best Airline Europe” by Skytrax, an airline quality-ranking programme, for a second time.

Fresh controversy erupted when it emerged that THY has scrapped booze on all domestic flights save six (including Ankara and Istanbul). Eight foreign destinations in Africa and the Middle East have also gone dry. “We are globally sober,” tweeted Bulent Mumay, a journalist for Hurriyet, in a dig at THY’s advertisement, “Globally Yours”. The airline justifies its move on the ground that there is insufficient demand by Anatolian and other Muslim passengers.

More likely, some say, it wants to please Turkey’s prime minister, Recep Tayyip Erdogan, a militant teetotaller, who while mayor of Istanbul led a campaign to scrap drink in municipally run restaurants. Yet like the similarly pious president, Abdullah Gul, Mr Erdogan tolerates drinking on his official jet. Even

so, many Turks pander to his piety. At a fashion fair in December organisers removed naked mannequins before his arrival. Producers of “The Magnificent Century”, a popular mini-series about Suleiman the Magnificent, shrank his beloved wife Roxelana’s cleavage after Mr Erdogan complained that “our Ottoman forebears are being misrepresented”. After ten years of AK rule Turkey is richer, more powerful —and less fun.

Charlemagne

No to EUsterity The European Parliament threatens to veto a hard-won budget Feb 16th 2013 |

THE bitterest family rows are often over money. So it is with the European Union’s leaders. For three years they have argued over who should pay what to save the euro. Earlier this month presidents and prime ministers battled through a sleepless night and a day over the EU budget. Back home, some of the disputed sums might have been approved on the nod.

It is an absurd way to run the world’s biggest economy. The comedy of interminable haggling is compounded by the farce of each leader twisting the numbers to claim victory. Such is the misery that the EU now draws up budgets for seven-year periods. But this is too rigid—even the Soviet Union limited itself to five-year plans. And it magnifies the sums at stake: nearly a trillion euros for 2014-20. Looked at another way, though, the budget is only about one-fiftieth of public spending in the EU. For rich countries, net contributions amount to about 0.3% of GDP. One reason for the budget mess is that the money comes from national treasuries, creating a zero-sum game. Another is that the budget must be agreed unanimously. A third is the economic crisis. Most net contributors cannot see why the EU should be exempted from the austerity it preaches to others. And for those running deficits every pound, crown or euro sent to Brussels is an extra pound, crown or euro that must be borrowed.

As if steering a budget past 27 national vetoes were not hard enough, there is now the threat of a 28th, from the European Parliament. A rejection would be its most confrontational act since it forced the resignation of Jacques Santer’s European Commission in 1999 over allegations of corruption. Would MEPs really dare be so bold, not to say insolent?

Voting in the European Parliament is unpredictable. Without such notions as a government or an opposition, party discipline is weak. One Eurocrat quips that “the whole parliament is the opposition”.

The single idea that unites most MEPs is a desire for “more Europe”, which usually means more euros.

Power derives from the ability to spend. Because the EU does not raise taxes directly or borrow, there are no votes in calls for spending cuts.

MEPs were outraged when EU leaders decided, for the first time, to trim the budget for 2014-20 by 3% from the previous period. This was a triumph for Britain’s prime minister, David Cameron, who also preserved his country’s much-hated rebate. How, critics asked, could he dictate a budget for the whole EU, running to 2020, when Britain might not even belong after 2017, when Mr Cameron wants to hold a referendum on membership? In truth, the budget was dictated by Angela Merkel. The German chancellor lined up with Mr Cameron against France’s François Hollande, who clumsily allied himself with the parliament. The budget ended up where she wanted it: at 1% of gross national income.

Even before the summit ended, the leaders of the four parliamentary “families” had issued a joint statement declaring the deal to be unacceptable. Their leverage is enhanced by the 2009 Lisbon treaty, which stipulates that the budget must be approved by an absolute majority of the whole assembly (ie, absences and abstentions count as No votes). Fringe parties of left and right will probably vote against, as could several in opposition at home. French Socialists are being urged by some in Paris to “improve” the terms secured by Mr Hollande.

A stalemate would suit a few. It would push the EU to annual budgets based on 2013 levels, producing higher spending than agreed on by the summit. Yet it would antagonise two groups: recipients of cohesion funds, who would struggle to plan multi-year projects, and net contributors with temporary rebates that will lapse without a new budget (Austria, Germany, the Netherlands and Sweden).

Many MEPs will come under strong pressure from national capitals. The threat of removal from party lists for next year’s European election explains why some want a secret ballot, strange as that may seem.

Behind the posturing lies a readiness to compromise. Governments hint they would accept some of the parliament’s demands, such as a commitment to review the budget in two or three years’ time or greater flexibility to move money between headings and from one year to the next. Catherine Trautmann, leader of the French Socialists, says: “We seek a negotiation, not the politics of the empty chair.”

Time to cut the CAP Euro-federalists say it would all be much easier if the EU could raise taxes directly. “The Americans said no taxation without representation. But in the EU we have representation without taxation,” complains Sylvie Goulard, a French liberal MEP. Yet most governments treat the EU as an international organisation and want to retain control over its money.

The argument boils down to the question of where democratic legitimacy really lies. Little-known MEPs can scarcely claim to command greater popular allegiance than national political leaders, unloved as some may be. And the European Parliament is unlikely to make itself more appealing by overruling national treasuries and parliaments, let alone seeking to exact European taxes on top of already high national ones.

Rather than moan about marginal cuts to a small budget and pursuing the chimera of “own resources” (eg, EU taxes on carbon or financial transactions), the parliament would do better to focus on the real outrage —that EU leaders did so little to change outdated spending priorities. They have left close to 40% of the budget going to agriculture, an industry that generates less than 2% of GDP. Slashing the CAP could

release resources for areas where the EU can genuinely enhance growth, like research, education and cross-border infrastructure. The EU could have the best of both worlds: less spending and more European value.

Economist.com/blogs/charlemagne

Britain Redeveloping London: What’s the plan?

Elderly care: Old times Selecting candidates: Supply-side politics Scottish independence: Battle of the profs The future of shopping: Malleable malls New banks: Telling Local television: Coming soon Bagehot: Ties that no longer bind

Redeveloping London

What’s the plan?

How foreigners, the green belt and hostility to planning have shaped the biggest redevelopment in central London since the Great Fire Feb 16th 2013 |

NINE ELMS is a triangular wasteland bounded by the Thames, a railway line and London’s nastiest traffic interchange, encompassing a disused power station, a wholesale fruit and vegetable market, a sewage-pumping station and a waste dump. It is also, according to the city’s mayor, Boris Johnson, “possibly the most important regeneration story in London and in the UK over the next 20 years”. For, after many years of Dickensian decay, the earth-movers are chewing up the soil, the cushions have been plumped in the show-flats, and the last unkempt riparian stretch of central London is acquiring the rows of glassy apartment blocks that line urban waterfronts all over the world.

Unusually, Mr Johnson is not guilty of hyperbole. The last time so large and so central an area of London was redeveloped was after the Great Fire in 1666. At 195 hectares, the site is bigger than Hyde Park, and spans a mile and a half of riverbank. The World Trade Centre site, in New York, is barely seven hectares. Across the river to the west is Chelsea, one of London’s most expensive areas; to the north is the Palace of Westminster.

The development will not just transform central London. It will also illustrate some of the flaws in the way the city is run.

Several elements came together to make the development happen. One is the inflow of foreign money, which has pushed up residential property prices—London is now the second-most expensive city in the world—and is financing most of Nine Elms. In 2008 the American government announced that it would move its embassy to the site. Ballymore, an Irish company, also has a large site there. Last year two companies part-owned by Malaysia’s state-backed investment fund bought the power station and the land surrounding it from NAMA, the Irish “bad bank”, which had taken it over from a bankrupt Irish company, Treasury Holdings. (Ballymore also owes £692m—$1.07 billion—to NAMA.) A second element was a change in the local-government financing rules. In the past, local authorities had little interest in encouraging development, and a lot in pandering to the nimbyism of residents. Now they get more of the increase in the tax take. Wandsworth and Lambeth, the two councils involved, have been pushing the development enthusiastically.

A third is the Tube. The area is poorly served by public transport, and for years the government refused to pay to improve it. But last year a deal was done along lines novel in Britain but common in America. The government will lend £1 billion to help finance an extension of the Northern Line, which will then link the area to both the West End and the City. The money will in time be paid back through a slice of the business rates.

Tony Travers, head of the Greater London Group at the London School of Economics, calls Nine Elms a symptom of the “Hong Kongification” of the city. London has a fast-growing population but also a tight “green belt” which stops it from sprawling. If it cannot go out, it must go up. Nine Elms is therefore going to be three times as dense as London as a whole—jam-packed with tall apartment blocks, with a cluster of towers at its eastern end.

In the past, towers have mostly been confined to the City and Canary Wharf, London’s business districts.

Wealthy residential areas have resisted them. But the combination of high demand for property, a hunger for development in poor areas and a series of ministers and mayors more interested in promoting growth than in the city’s skyline have led to much tower-building along the south bank of the Thames. “There will be a wall of glass from Bermondsey to Battersea,” says Sir Simon Jenkins, chairman of the National Trust, a conservation outfit. “If you go to Rome or Paris you don’t see this. It’s the only major city where the tall buildings policy is anarchic and corrupt”—meaning not that individuals steal money, but that these days the planning authorities have an incentive to approve tower-building irrespective of its impact on the city.

London’s development has always been anarchic. Whereas most great cities are based on grand plans, London has grown incrementally and chaotically. Even after the Great Fire, landowners ignored Christopher Wren’s elegant, orderly Versailles-inspired scheme for rebuilding the city and did their own thing.

Over time, the city’s organic growth has given it an informal charm. But when a lot of new buildings are going up in one place at once, there is something to be said for a more formal plan. That can happen more easily where there is a single landowner, as at Canary Wharf, than where ownership is fragmented, as at Nine Elms.

When the aliens arrive Helen Fisher, Nine Elms’s programme director, describes the planning framework as “tight-loose”. It is, she says, very prescriptive about some things, such as height and sight-lines to the river, while enabling a “creative mix” of designs.

There is certainly a mix. St George Wharf—nominated by Building Design magazine for its Carbuncle Cup, awarded to the country’s ugliest buildings—has a skyline with what has been described as a “splitprawn motif”. Riverlight, a series of lozenge-shaped blocks by Rogers Stirk Harbour and Partners, has much in common with their architects’ monumentally expensive but otherwise unremarkable One Hyde Park in Mayfair, but not with its neighbours in Embassy Gardens (top-heavy rectangular buildings) or Battersea Power Station (curved blocks with irregular layers). The American Embassy, with its spiny outer shell, looks like a hedgehog crossed with a fortress and surrounded by a moat. A linear park snaking through the area makes a valiant attempt to unify it; but getting these disparate buildings to hang together is a lot to ask of a strip of greenery.

Nine Elms will probably work better financially than aesthetically. A part of town that has not entirely shed its industrial heritage (the sewage works and the waste dump will remain, snuggled up beside the swanky new flats) is always a risky investment, but Nine Elms’s location is in its favour, as is the continued growth in emerging markets that is driving the London property market. Last month the developers of the power station site put on the market 800 flats that are due to be completed in three years’ time. They say 600 sold within a week. Nearly all of the flats in Phase 1 of Embassy Gardens have sold, according to Paul Keogh of Ballymore. That company, which lost £248m in 2011-12, is having its

best trading year in three decades. And even if London’s property market trembles, as it did in 2008, Nine Elms’s new owners have deep pockets.

Most of the purchasers are likely to be foreigners. They prefer newly built blocks to the Victorian terraces that the locals go for; according to Knight Frank, an estate agent, they snapped up two-thirds of the new flats in central London in 2012. If too many of them keep their properties as second homes, visiting only a few times a year, the area may struggle to come to life.

Much will depend on Battersea Power Station. Ruined, vast—its core could fit the whole of St Paul’s Cathedral—and protected from demolition by an English Heritage listing, it has been a millstone around the area’s neck for four decades. But if, as is promised, it is reborn by 2018 with shops, restaurants and offices as well as flats, it could become a dramatic and stylish focus for an area that will sorely need one.

Elderly care

Old times The government has a crack at social care for the old Feb 16th 2013 | ENGLAND’S system of care for the elderly has long awaited an overhaul. The cost of it can demolish people’s estates: one in ten will run up expenses of at least £100,000 ($155,000). The overall care bill is growing as people live longer. Andrew Dilnot, an economist called in to review the funding of elderly care in 2010, estimated that the cost of the current system would increase from 1.2% of GDP in 2009-10 to 1.7% by 2029-30. At some point, many believe, the health system and the care system will have to be brought together. This week the government tackled some of these problems, by outlining changes to the way in which care is paid for.

From 2017-18 those not eligible for means-tested support will be asked to pay £75,000 before the state steps in, excluding food and accommodation costs. The threshold for the new means test will be £123,000, a big rise on the present level, a lowly £23,250.

Politically, the main prize of reform is to lift the threat that people will have to sell their homes to pay for their dotage. By setting a limit on personal spending on care—albeit a higher one than Mr Dilnot suggested—Jeremy Hunt, the health secretary, is protecting homeowners and those with modest savings.

He also wants to ensure that the cost of care can be deducted after death from the value of the remaining estate, so old folk can remain in their homes during their lifetimes. This, he hopes, will offset anger among Tory voters over the party’s failure to make good on a 2007 pledge to exempt all estates worth less than £1m from inheritance tax.

The government presents the reforms as a measure to protect humble homeowners, who, in theory, stand to lose the largest proportion of their assets under the current system. The overall effect however is to raise the cost to the state and make the funding of elderly care less progressive (see chart). Few will benefit greatly. Care homes in areas popular with pensioners cost around £30,000 a year, but the average stay is around two years, so not many will spend enough to reach the limit at which the state steps in. And cash-strapped local councils are becoming stingier, sometimes judging people not to need care who would have received it a few years ago.

As so often, England is trying to split the difference between other countries’ approaches to welfare. In Scandinavia, the state pays for all long-term care. Elsewhere in Europe means-testing is dominant.

America resembles the English approach, but without a cap, so that the elderly are expected to use up their savings before the state will help. But a closer example is available. Over the border in Scotland, to the chagrin of many English pensioners, basic social care is provided for nothing.

Selecting candidates

Supply-side politics How the parties pick would-be MPs Feb 16th 2013 | FOR the next two weeks all political eyes will be on Eastleigh, a suburban seat on the outskirts of Southampton abruptly vacated on February 5th by Chris Huhne, a scandal-plagued MP. The by-election deliciously pits the Conservative Party against the Liberal Democrats; opportunities for coalitionstraining rows abound. But Eastleigh gives a false impression of British politics. More than two-thirds of seats in the House of Commons are safe. Landing the right party ticket in one is to become an MP-inwaiting. Around the country, the 2015 parliament is quietly taking shape.

Selecting a candidate used to be an informal business, involving a tap on the shoulder and a friendly word or two. Today voters are more apolitical and cynical than they used to be—and party members a rarer and more ideological breed. Left to their own devices, activists might pick unelectable zealots. So party bosses try to strike a balance between giving members a choice and ensuring that selectees have electoral and parliamentary potential. Each party prioritises a distinct—and revealing—bundle of characteristics.

Would-be Conservative MPs attend a Parliamentary Assessment Board (PAB) where they complete five exercises: public speaking, an interview, an in-tray test (in which candidates must speedily prioritise and complete a series of desk-based tasks), a group exercise and a written exam. The process is designed to uncover brainy, personable Stakhanovites with steely resilience and the gift of the gab. Peter Botting, a consultant who trains prospective candidates, describes one pupil who is used to working long hours but was “shattered” after the six-hour assessment.

Critics say the process disadvantages outsiders who lack relevant political or professional experience.

But Jo Silvester, an organisational psychologist who helped the party draw up the tests, counters that it weeds out substandard candidates, including ones with desirable backgrounds. Only once a hopeful has proven his abilities is he free to apply for seats, schmooze local members and bid for their votes at selection hustings.

The Lib Dems also screen applicants before letting local activists pass judgment. But whereas the Tories are looking for future Commons stars, their coalition partners are interested in campaigning grit. Although the Lib Dem assessment is based on the PAB, it tests for two other skills: “representing people” and “values in action”. These, says a senior party figure, reflect an expectation that candidates should make a “huge personal commitment” to their constituencies. The party has few safe seats, so a strong local following is essential. Mike Thornton, the party’s new candidate in Eastleigh, epitomises the type. A veteran of 20 years of leafleting and a councillor of five years’ standing, he admits that running for election “has been an ambition for some time”.

Once singularly control-freakish, in 2011 the Labour Party dropped its multi-stage pre-screening process and allowed aspirants to apply directly to stand for individual seats. Labour’s general secretary, Iain McNicol, is watching the new batch of selectees cautiously, but declares himself satisfied with the quality of candidates. “All power to the members”, he proclaims, noting that the process favours a certain type of candidate, one who can organise neighbours to battle library closures, high street loan sharks, antisocial

behaviour and the like. Such activities, says Mr McNicol, underpin “everything we will do” in the run-up to the 2015 election.

But there is a limit to how much party machines can control their intake. Before the last election the Conservatives gave priority to an “A-list” of prospective candidates deemed politically desirable for their glamour, youth, professional success, sex or ethnicity. Sure enough, the independent-minded 2010 intake contains few grey party drones. It has also proved head-bangingly unruly and virtually unleadable.

Party leaders should be careful what they wish for.

Scottish independence

Battle of the profs The Scottish independence campaigns take a detour into economic and constitutional theory Feb 16th 2013 | EDINBURGH |

POLITICAL campaigns are usually won or lost on the basis of easy-to-understand ideas and slogans. But on February 11th campaigners for and against Scottish independence assailed each other with learned, weighty documents. Judging by heft alone, Alex Salmond, Scotland’s nationalist first minister, won the bout. His report was 222 pages long, compared with the British government’s 111 pages.

Mr Salmond’s campaign had got off to a bad start. Earlier this month he announced that Scottish independence day celebrations would be held in March 2016. Opponents derisively noted that he is still to name the day for the referendum—which, at any rate, he currently looks likely to lose. An opinion poll published on February 13th using the actual question (“Should Scotland be an independent country?”) approved by the Electoral Commission, a non-aligned monitoring body, found 34% support independence but 55% oppose it.

The publication this week of a report by a fiscal commission set up by Mr Salmond to design a framework for how the Scottish economy could be managed after independence is intended to close the gap. The commission comprises four heavyweight economics professors, including Joseph Stiglitz, a Nobel prize winner. It is chaired by Crawford Beveridge, a former Sun Microsystems executive who was also chief executive of Scottish Enterprise, the country’s main development agency.

The commission recommends that an independent Scotland should continue using sterling as its currency.

This idea has been heavily criticised by unionists as entailing a currency union. As the euro zone’s unhappy experience has shown, that requires centralised control of banking supervision and fiscal management—something that would severely constrain, if not extinguish, the economic freedoms Mr Salmond is seeking.

Not at all, says the commission. Scotland, with GDP per head at 99% of the British level (115% if a

Scottish geographical share of North Sea oil is included) and similar employment, productivity and prices to the rest of Britain, has none of the Greek-style imbalances that have undermined the euro. The parallel it prefers is with the Belgium-Luxembourg currency union between 1922 and 1999. This arrangement, it points out, not only avoided major mishap but also accommodated significant tax differentials. In the 1990s, for example, corporate tax rates averaged 40% in Belgium and 33% in Luxembourg.

Although only Belgium had a central bank, Luxembourg participated in monetary management through joint governance arrangements which could be a model for Scotland after independence. The commission says that if Scotland has to share British liabilities such as the national debt, it should also share British assets such as the Bank of England, perhaps through a minority shareholding.

David Cameron, Britain’s prime minister, scoffs but does not rule it out. The document his government produced this week says such arrangements would have to be negotiated and would also be subject to EU approval. Moreover, it argues that Scotland would face a tough time getting its EU membership confirmed.

Publishing the opinions of James Crawford and Alan Boyle, professors of international law at Cambridge and Edinburgh universities, Mr Cameron averred that Scotland would be a new state outside the EU having to negotiate its way in. The terms it would seek, such as a sterling currency union, are at odds with the usual conditions signed by entrants. Mr Salmond disagrees, citing other professorial opinion which says that because Scotland is already in the EU by virtue of being part of a member state, the process ought to be fairly straightforward.

Disentangling a developed state, with connections woven over centuries, into two distinct countries is complex. The British government reckons Scotland would need another 200 bodies to replicate work currently done for it by British civil servants, regulators and assorted other agencies. All this may be mind-numbing for voters. But it should keep a few professors happily employed.

The future of shopping

Malleable malls Shopping centres are proving well-suited to the digital age Feb 16th 2013 |

Vaulted ambition in Leeds YORKSHIREMEN are meant to boast about privation, not luxury. But in Leeds, they still like to point out that in 1996 the city got the first branch of Harvey Nichols, a posh department store, to be built outside London. Nearly two decades later it is repeating the feat. Victoria’s Secret, an American lingerie firm, is to unveil its first shop outside London in the Trinity Leeds shopping centre, which will open next month. It is a flash of silk amid austerity.

Retailers are squeezed on two fronts, notes Neil Saunders, the managing director of Conlumino, a consultancy. Total consumer spending collapsed when the economy fell into recession in 2008 and has barely recovered. Meanwhile internet sales are squeezing traditional stores—spending online increased by 16% last year. In January HMV, an iconic chain of record stores, became the latest of several famous firms to enter administration. Around one in seven British shops are unoccupied, according to the Local Data Company.

And yet beneath the gloom, retailers are rethinking how they build their businesses, to the benefit of shopping centres. Weak spending and higher rates (property taxes levied on businesses) are leading many firms to give up their high-street shops. But they are opening bigger, jazzier outlets. “Before you needed 250 or so stores to reach most of the population,” says Andrew Shepherd of BNP Paribas, a bank. “Now big retailers want perhaps 75.” Shops must become “brand ambassadors”, complementing websites. That means keeping the whole range in stock, having good customer service and being sufficiently appealing that people will travel a long way to visit them.

According to Jonathan De Mello of CBRE, a real estate firm, this process is leading British retail to coalesce around a few large shopping centres, mostly in big city centres. Trinity Leeds will serve north Yorkshire, just as the revamped Bullring in Birmingham serves the West Midlands and the two large Westfield centres serve the east and west of London. Last month another huge development was

announced for Croydon, a southern suburb of the capital. Rents at these prime locations are increasing at a rate of 5-6% per year, estimates Mr De Mello. Empty shops are almost unheard of.

Unlike the high street, shopping centres offer the plentiful floor space, cheap or free car-parking and easy access for delivery lorries that retailers want. They also attract customers. These days, malls have to be “destinations” to compete with the internet, says Michael Gutman, the managing director for Westfield in Europe. Florid architecture, high-end brands and lots of things to do other than shop are all vital to the modern shopping centre. Trinity Leeds will be covered by a striking glass dome. A quarter of the space is to be used by restaurants and various other leisure facilities—far more than in older malls. “You can’t eat out online,” notes Gerald Jennings, an executive at Land Securities, the site’s developer and operator.

Will this boom last? In the 1960s grey, boxy Arndale Centres sprung up in provincial towns across the country, promising convenience, cheap parking and warmth in winter. Some of them now look tired. The new malls are more ambitious, promising a big day out, not just a new pair of jeans. But the problem with selling experience is that people get used to it. And there is always somewhere newer to go.

New banks

Telling Helped by technology and discontent, new banks are growing Feb 16th 2013 | IN 1770 James Weatherby, a lawyer, was entrusted with holding the stakes waged on horse races. Over time his family’s firm became central to racing, maintaining the general stud book—a registry of thoroughbred horses—and acting as a central administrator and bank to the industry. Weatherby’s has now branched out from the turf to tellers.

Weatherby’s first step into the world of regulated banking was partly prompted by bank supervisors, who wondered whether it was, in fact, taking deposits and ought to be regulated as a bank. It wasn’t sure but got a banking licence anyway, says Roger Weatherby, the bank’s boss, figuring clients might find it useful to write cheques to their farriers and trainers from the account holding their prize money. Just before the financial crisis it opened a private bank. Customers and deposits poured in, partly because Weatherby’s was thought to be safer than some rivals such as Coutts, which were part of larger banking groups that had to be bailed out.

Weatherby’s is just one of the more colourful entrants to Britain’s banking market. Metro Bank has been busily setting up airy branches (it insists on calling them stores) offering long opening hours and smiling staff. Aldermore, in contrast, has decided to do without branches altogether. It gathers deposits online by offering attractive interest rates; its bankers travel to visit the small businesses that it lends to.

Opportunities ought to abound. Executives of the big British banks admit their private data show that only a tiny fraction of their customers are happy with the service they receive. Yet the new banks command just a sliver of the market. George Osborne, the chancellor, frets that Britain’s retail-banking industry has grown more concentrated since the financial crisis and wants to do more to break the dominance of the four biggest banks, which handle 75% of personal accounts. He proposes giving new entrants better access to the payment system—the plumbing that connects banks to one another.

Yet competition regulators reckon this is far from the biggest barrier to entry. The Office of Fair Trading has pointed to a deeper problem: customers are unlikely to switch to a new bank unless it has a large branch network, but new banks are unlikely to build many branches until they are sure they will attract customers. “You can’t be small and perfectly formed in this business,” says Benny Higgins, who runs the banking arm of Tesco, the country’s largest supermarket.

Another barrier to new entrants is regulation. Rules on how much capital banks should hold give an advantage to large, established institutions. They are able to operate with capital cushions much thinner than new banks because the models they use to calculate the riskiness of their lending can draw on many years’ worth of data on defaults.

Even so, technology is helping the new entrants. Metro avoided much of the upfront cost of building expensive computer systems by getting an off-the-shelf system from Temenos, a software firm, and agreeing to pay a per-customer usage fee. Branches may also become less important to customers as they switch to banking on their phones. Innovative users of data are gaining a foothold too. Wonga, an online lender, uses sophisticated computer algorithms that analyse data ranging from borrowers’ Facebook

accounts to how often they use its website. It wants to expand into a wider range of financial services.

Tipsters should be wary of calling the winners of the race for Britain’s banking market too quickly.

Local television

Coming soon It is going to have a lot of adverts and reality shows Feb 16th 2013 |

How it’s done in San Diego WHY does Birmingham, Alabama have eight local television stations while the larger Birmingham in the West Midlands has none? The question so irked Jeremy Hunt, the culture secretary until last year, that he decided to do something about it. Now his vision is taking shape. Local TV licences have been awarded in 16 of 19 pioneer areas. By the end of the year the currently defunct Freeview channel eight will start to glow with local fare.

In America, local stations are affiliated with national broadcasters; they rely on huge shows like “American Idol” to drive viewers to their news programmes. Britain’s local outfits will have to survive without such support. Andrew Mullins, managing director of the Evening Standard, which won London’s franchise, expects to start turning a profit only in the fourth year. And the capital has the advantage of reliable viewing figures. Most of the new stations will lack them, making it hard to sell advertising.

Businesses may treat local TV more as a target for sponsorship, says Sean McGuire of Oliver & Ohlbaum Associates, a consultancy. There may be a lot: local TV licences are not bound by an EU cap on commercials. With several bid-winners promising less than two hours of original programming each day, repeats and teleshopping will also abound.

Where local television flourishes, in Canada and America, news is at its core. Many local newspapers have disappeared in the past few years. But Simon Terrington, another consultant, reckons demand for neighbourhood news is high. The eight or so bid-winners that are subsidiaries of local media groups should find this easiest to provide. Mr Mullins says the Evening Standard will offer screen tests to all its journalists.

Bill Smith of Latest TV in Brighton and Hove thinks local television will unlock creativity. “If you make

it we’ll show it,” he says. Localism may be defined rather loosely. Latest TV has “International Chef Exchange”, a reality show in which Dutch and English cooks swap lives for a few days. City TV Birmingham will offer “Reach for the Top”, a secondary-school quiz show resembling “University Challenge”. Such formats could migrate to bigger channels if they work. The BBC has pledged to spend £15m on local content over the next three years.

Despite their local roots, the stations are drawing together. Their representatives meet monthly. Debra Davis, who heads City TV, argues that they will attract national advertisers only if they act collectively.

Mr Smith is pushing for the local stations to pool successful shows. Expect a miscellany of little Britain, punctuated by cheap ads.

Bagehot

Ties that no longer bind David Cameron returns to Delhi more as a supplicant than a benefactor Feb 16th 2013 |

WHILE living in Delhi, in a former identity, Bagehot had a friend who threw the best parties in India’s relentless, cut-throat capital. An ebullient Punjabi, he had a genius for bringing together politicians and tycoons with artists, an occasional ascetic and just the right sprinkling of Bollywood eye candy to lift the spirits without lowering the tone. They were colourful, free-spirited affairs; save once, when George Osborne showed up.

The chancellor of the exchequer was accompanying David Cameron on one of his first foreign trips as prime minister. So were five of their cabinet colleagues, a caravan intended to express the Tory leader’s desire to forge a new “special relationship” with India. And the scene in that Delhi sitting room must have looked encouraging. Some of India’s biggest hitters were gathered in Mr Osborne’s honour, including Mukesh Ambani, India’s richest man, and three or four ministers. The atmosphere was restrained. The guests wore formal business suits, despite the summer heat. Curiously to this columnist, who had heard little praise for Britain during four years in India, there was a palpable tension and curiosity about the stripling chancellor who stood, lightly perspiring and chatting to anyone who approached. It was a demonstration of the Anglocentricity that resides—almost as a guilty secret—among India’s rich elite. No German or French finance minister would have drawn such a crowd.

Yet India’s affinity with Britain is not deep. Indian tycoons have houses in London, but send their children to study in America. Nor is it evident among most politicians, as Mr Cameron discovered. Neither Sonia Gandhi, the power behind India’s coalition government, nor her son and probable heir, Rahul, was available to meet him in Delhi. Their steward, India’s prime minister Manmohan Singh, was available, but unforthcoming. Mr Cameron is still no closer to realising his dream of a new special relationship— India does not, in fact, go in for such arrangements. Nor, despite the naive hopes expressed by some in the prime minister’s party, will it offer special breaks for British business.

Happily, Mr Cameron, who is due to return to Delhi next week, does not bruise easily. Improving BritishIndian relations remains one of his most important foreign-policy objectives. This is well judged. They were long neglected by his terror-fighting Labour predecessors. And Britain badly needs to boost its business with fast-growing emerging markets, India especially. Britain is India’s seventh biggest export market—after the Netherlands—and its 21st biggest source of imports. This is despite the two countries sharing a common law and language and aspects of culture. Britain also has 1.5m subjects of Indian origin, representing its biggest ethnic-minority group. This shared inheritance should make Britain and India far closer, in trade and otherwise.

The main reason they are not is commercial. As India rapidly industrialises its most urgent need is for Western technology, such as German machine tools and French nuclear know-how. It would benefit from British services, too. By opening its financial sector to foreign investment, India could substantially boost its economic growth rate. Unfortunately, it is in no hurry to do so: the country’s financial, legal and retail sectors are all to varying degrees protected.

History also makes Indians resistant to British diplomatic charm. Resentment of the colonial period is one of the defining principles of modern Indian identity. Those who consider the historic ties between India and Britain to be special are therefore unlikely to view them positively. India’s foreign-policy gurus, for example, consider Britain biased towards Pakistan—just as, they argue, it was towards Indian Muslims in colonial times. Less well-educated or younger Indians (who learn little in school about Britain’s 200-year rule in India) have few feelings about Britain either way. On a rare visit to India, Tony Blair was asked in a television interview whether he acknowledged Britain’s responsibility for the seemingly inextinguishable conflict in Kashmir. The former prime minister, appearing momentarily nonplussed, stammered that the colonial era was now irrelevant. “Then why are you here?” many Indians would have wondered.

A passage to insurance reform All the same, Mr Cameron’s efforts to update Britain’s relations with India have borne some fruit. Britain has opened a deputy high commission office in Hyderabad and plans another in Chandigarh, plus five trade offices in other Indian cities (albeit these plans have been held up by India’s reluctance to issue the necessary permits). This is part of a wider effort to improve British ties to state governments in India’s fastest-growing regions, including poor Bihar as well as industrialised Gujarat. An announcement that Britain will soon stop dispensing aid to India also promises, in the longer term, to put relations on a more even footing. And India, in response to an economic slowdown, has meanwhile eased protections on some services. Pavers, a Yorkshire shoe seller, recently became the first foreign firm to open singlebrand shops in India.

There have been setbacks, too. Mr Cameron’s efforts to curb immigration to Britain has led to a slump in applications for student visas from India and offended its government. The Tory party’s rowdy Euroscepticism has also done damage. Shyam Saran, formerly India’s top diplomat, notes that many Indian businesses are chiefly interested in Britain as a potential conduit to Europe. Like Britons, they are no longer sure whether it will stay in the EU. “There is a lot of confusion in India,” he says. “Should we look at the British-Indian relationship as a bilateral?”

Britain had better hope not: it needs all the diplomatic ballast it can get in its dealings with India. The former jewel in its imperial crown considers, probably rightly, that Britain needs India a lot more than it needs Britain. To his credit, Mr Cameron is the first British prime minister to have registered that

important truth.

Economist.com/blogs/bagehot

International Pope Benedict’s resignation: See you later Papal resignations: Torn vestments Cyber-security: To the barricades Islamic extremism: The languages of jihad Islamic extremism: Internship

Pope Benedict’s resignation

See you later The papal resignation is an ecclesiastical earthquake. How the church interprets it will shape its future Feb 16th 2013 | VATICAN CITY |

LOOKING as ever on the bright side, the Vatican’s habitually good-humoured spokesman, Father Federico Lombardi, averred: “Before Easter, we’ll have the new pope.” But no amount of breezy optimism, nor any amount of praise for the integrity and achievements of Pope Benedict XVI, can detract from the momentous historical significance of his announcement on February 11th—or from the fact that the conclave to elect his successor will be one of the oddest in the papacy’s two millennia. Benedict is one of only a handful of popes ever to resign (see article), and the first for almost six centuries. Father Lombardi could not say what Benedict’s title would be, nor how Christ’s vicar on earth should be addressed in retirement.

Though stubbornly conservative in many respects, Benedict is also a radical (as displayed in his encyclical of 2005 on the theology of love). But he kept his most radical utterance till the end. Speaking in Latin at a routine event, he said: “After having repeatedly examined my conscience before God, I have come to the certainty that my strengths, due to an advanced age, are no longer suited to an adequate exercise of the Petrine ministry.” That several of the cardinals present failed to understand must have highlighted for Benedict, an ardent Latinist, how his church has lost touch with its traditions.

How his resignation is construed will have great effects on his flock and the choice of its next shepherd.

Some Catholics will see it as a betrayal of his divine mission. Marco Ventura, professor of law and religion at Siena University, wrote in his blog: “The theologian who held relativism as the worst foe of the church will be the pope who relativised the papacy.” Popes have always suffered to the end, notably Benedict’s predecessor, John Paul II. In a comment the Vatican said had been taken out of context, the late pontiff’s secretary, Cardinal Stanislaw Dziwisz, said: “one doesn’t come down from the cross.”

Sacrifice on the altar

Yet even the iron-willed Polish pope twice prepared letters of resignation in case he became incapable.

Some wonder if the 85-year-old Benedict had received bad news about his health. Vittorio Messori, coauthor of a book with him when he was merely Cardinal Joseph Ratzinger, noted that the resignation came on the anniversary of the first apparition of the Virgin Mary at Lourdes, commemorated by Catholics as the World Day of the Sick.

No visible evidence suggests that the pope was suffering from more than old age. Since 2011 he has used a mobile platform to cover the vast spaces within St Peter’s Basilica. It emerged on February 12th that he had an operation to replace the battery in his pacemaker a few months ago. It was, the Vatican said, “absolutely routine”.

Benedict had been toying with resignation for almost four years. Visiting the earthquake-stricken Italian city of L’Aquila in 2009, he left his pallium, the woollen band that is a symbol of the papal office, at the tomb of Celestine V, a reluctant pope who resigned to pray. In 2010 he said that a pope who became unable to do his job properly “has the right, and in some circumstances even the duty, to resign”.

The Vatican daily, L’Osservatore Romano , said he reached his decision after an exhausting visit last March to Mexico and Cuba. The impending rigours of the Easter celebrations may have played a role too.

Father Lombardi said it was the outcome of a continuous process of reflection. Benedict “didn’t take the decision and then fix a calendar”. Yet it is striking that shortly before Christmas the last nuns left the cloistered convent to which Benedict intends to retire, because of works on a new chapel and library.

Benedict said in his resignation address that “in today’s world, subject to so many rapid changes and shaken by questions of deep relevance for the life of faith, in order to govern the barque of St Peter and proclaim the gospel, both strength of mind and body are necessary. Strength which has in the past few months deteriorated in me to the extent that I have had to recognise my incapacity adequately to fulfil the ministry entrusted to me.”

By that account, he was giving the papacy a reality check: in the 21st century a vast global organisation is not best entrusted to an octogenarian in failing health. The pope is also a bishop (of Rome); members of the Catholic episcopate normally retire at 75.

If so, the lesson for the 117 cardinal-electors when they meet, probably in mid-March, is to find someone young and vigorous. Cardinal Timothy Dolan, the archbishop of New York, is a feisty 63. Cardinal Peter Erdo, of Budapest, is only 60. Cardinal Odilo Pedro Scherer, who heads the archdiocese of São Paulo, and Cardinal Peter Appiah Turkson, a Ghanaian who runs the Vatican’s development department, are 63 and 64 respectively.

But other interpretations of Benedict’s departure will weigh heavily on the conclave. He was not just tired, but worn out by the conflicts and machinations that have beset the Vatican during his reign. He is to retire to the Mater Ecclesiae convent, founded in 1992 by John Paul II specifically to create a prayerful counterweight to the worldliness of the Roman Curia, the church’s central administration.

In Benedict’s first sermon as pope, he asked the faithful to pray for their new shepherd “that I may not flee for fear of the wolves”. His fans feel the wolves won. A toxic row between his secretary of state, Cardinal Tarcisio Bertone, and other Vatican factions lay behind the so-called Vatileaks scandal last year. The pope’s own butler was found to have leaked documents clearly damaging to Cardinal Bertone.

According to the journalist who received them, the butler was part of a broader network of Vatican

employees and officials bent on exposing corruption and cronyism beyond the Leonine Walls.

Wolves and weaklings To his critics Benedict is not a victim, but a weak pope who gave free rein to an ill-prepared and unsuitable secretary of state. The Vatileaks documents cast a bad light on him, too. A report (said to be explosive) by three cardinals on a tendering scandal has yet to be released. The Vatican has also struggled to convince international bodies that its in-house bank is no longer used for money-laundering and tax evasion. The feuds within the Curia will also be central to the selection of Benedict’s successor.

Cardinal Bertone will prepare the conclave and be the Vatican’s head of state in the period between February 28th when Benedict steps down and the proclamation of his successor. His arch-rival and predecessor, Cardinal Angelo Sodano, is Dean of the College of Cardinals, which will elect him.

It will require a pope of towering stature to heal the wounds and overcome the divisions that have been opened in the past eight years. Will the new man feel intimidated or reassured by the knowledge that just across the Vatican gardens is his unseen predecessor, praying fervently for the recovery from its many ills of the Church to which he devoted his life?

Papal resignations

Torn vestments Benedict XVI is not the first to leave his job Feb 16th 2013 | PIETRO DI MORRONE did not want to be pope. When he was elected as Celestine V in 1294 he was in his 80s and had been living as a hermit in the mountains of Abruzzo in central Italy. His fans hoped he would be holier than his predecessors. Perhaps he was: five months later he resigned, after changing the rules to allow him to do so. Benedict XVI has twice visited Celestine’s tomb.

That voluntary abdication was a first. Three previous popes to leave the See of Peter were all forced out.

Martin I was pope for four years until 653, when he was charged with treason. He was stripped naked in public, his tunic was ripped and his pastoral staff was broken over his head. From exile in the Crimea he wrote that he prayed for the safety of the faithful and “the pastor who is now placed over there”; this epistle was taken as proof of his resignation.

Benedict V held the position for only a month until June 964 when Otto I (of the Holy Roman Empire) demanded his resignation in favour of his protégé, Leo VIII. Benedict IX stayed for a little longer. He was in his early 20s when he was elected in 1032, and was the only one to reign in three separate stints.

Violent and debauched, his papacy was bought for him by his father. Over 16 years he employed a private army to keep himself in Rome and once sold his office for a dowry. He was forcibly removed, and succeeded by Damasus II. The happier precedent set by Celestine helped Gregory XII. He ended his nine-year papacy by resigning in 1415 as part of a deal that ended the Western schism in the church, which had followed a contested election in 1378.

Benedict XVI’s resignation seems relatively peaceful. He will not be humiliated in public, nor immortalised by a poet as he “who made from cowardice the great refusal” (a gibe that Dante in the 14th century seemingly threw at Celestine). He will still live in the Vatican, something which none of these five could do. But his departure echoes Celestine’s resignation, which was “because of my lowliness, my desire for a more perfect life, my great age and infirmities”.

Cyber-security

To the barricades How America and Europe are trying to bolster their cyber-defences Feb 16th 2013 |

WITHIN a week of each other, both the European Commission and the White House have set out a series of new rules designed to stem the rising tide of cyber-attacks against public and private victims. The most dangerous of these are aimed at what is termed critical national infrastructure. The targets may be physical (such as electricity grids) or virtual, such as the computer networks used by the financial system.

Alongside his state-of-the-union message on February 11th, Barack Obama released an executive order intended to plug the gap left by the failure of Congress to pass cyber-security legislation that matches the growing threat. “We cannot look back years from now”, he said, “and wonder why we did nothing in the face of real threats to our security and economy.” The president’s frustration stems from the fate of two stillborn measures. One is the Cyber Intelligence Sharing and Protection Act, known as CISPA, passed by the House of Representatives last year, which failed to make it to a vote in the Senate (the White House threatened a veto because of worries about privacy). The other is the Cybersecurity Act, which was supported by the administration but fell victim to a Republican filibuster in the Senate.

Though all sides agree about the seriousness of the threat, America’s partisan divide hampers agreement even in cyber-security. Most Republicans emphasise national security and information-sharing, but want to avoid imposing burdensome government-set security standards on private firms. Democrats worry less about regulatory overkill, but are fearful of anything resembling a snooper’s charter that would allow the state to pry into data held by internet firms on individuals.

Mr Obama’s executive order focuses on sharing information about threats between government agencies and the private sector. This will usually be unclassified, but could potentially include classified material if the attacks are on operators of infrastructure “so vital to the United States that the incapacity or

destruction of such systems and assets would have a debilitating impact on the nation’s security, economy, health or safety”.

Civil-liberties lobbies are relieved that—contrary to what was envisaged in CISPA—the flow of data is, for the time being, just one-way. Private-sector firms are not obliged to release information about their clients. Nor, if they do so, will they have the immunity from prosecution that CISPA would have given them. A “cyber-security framework” which sets out the relationship between the government and vitalinfrastructure operators will be established within 240 days of the order. CISPA was due to return to the House on February 14th. But without further amendment on privacy matters it is likely to stall again.

By contrast, the European Commission’s cyber-security strategy is at an earlier stage. It wants member countries to introduce laws compelling important firms in industries such as transport, telecoms, finance and online infrastructure to disclose details of any attack they suffer to a national authority, known as a CERT (Computer Emergency Response Team). Each CERT will be responsible for defending vital infrastructure-providers against online attacks and sharing information with its counterparts, lawenforcement agencies and data-protection bodies.

What neither the European nor American measures deal with directly is the shortage of cyber-security specialists. A gloomy review of the British government’s strategy by the National Audit Office, a spending watchdog, said the skills gap could take 20 years to bridge. Schools tend to lack suitable courses, and able specialists may have acquired criminal records during past lives as hackers.

One attempt to solve the problem takes the form of public competitions to find talented outsiders. On February 9th in central London, under the admiring eyes of industry specialists, spooks and other officials, four teams of hackers were trying to breach (dummy) missile-control software in the hope of reaching the final of Britain’s Cybersecurity Challenge. Last year the task, also successfully accomplished, was to blow up a nuclear power station.

Islamic extremism

The languages of jihad Islamic extremists are an increasingly multilingual bunch, especially online Feb 16th 2013 |

Aussi disponible en français ARABIC was for long the unchallenged language of Islamic extremism. Its speakers far outnumber any other linguistic group. Arab lands are the most fruitful recruiting grounds. Without Arabic, tyros may struggle at training camps and on the battlefield. And fluency implies piety: the language of the Koran also connotes learning and wisdom.

But the once monoglot world of jihad is increasingly multilingual. Al-Qaeda has long advocated the creation of self-starting, independent terrorist cells. Materials are being produced in the language of any part of the world that has a Muslim minority and thus potential sympathisers, says Thomas Hegghammer, an expert on violent extremism. Translations are appearing in the languages of countries where jihadist leaders want to see further activity.

In his 1,600-page opus, “The Call to Global Islamic Resistance”, released in 2005, Abu Musab al-Suri, an al-Qaeda strategist, called for jihadi materials to be released in other tongues, including English. Over the past ten years grassroots activists who connect with each other online have published ever more on the internet in an ever greater variety of languages, says Aaron Zelin, a research fellow at the Washington Institute for Near East Policy, who runs a website called Jihadology.

Groups such as Fursan al-Balagh Media and Al Qadisiyah Media (which specialises in Asian languages such as Bengali, Hindi and Urdu) translate jihadi propaganda. In one document Abu Musab Abdel Wadoud, leader of al-Qaeda in the Islamic Maghreb, warns Western powers considering action in Mali: “If you want it [sic] a war then we will meet your desire and the Great Sahara will be the grave of your soldiers and an annihilation for your money, Allah willing.” Organisations such as the Global Islamic Media Front, a virtual entity, then vet such stuff and distribute it. The international version of Ansar alMujahidin, a big online forum, is a clamour of different languages. English is foremost, but publications are also available in Albanian, Bosnian, Filipino, French, German, Italian, Pushtu, Spanish, Urdu and

Uighur.

Militant groups need to reach enemies as well as possible friends. Threats lose their impact if the infidels do not understand the scolding. On the Ansar forum an al-Qaeda statement condemns the intervention in Mali of “crusader France” and threatens retribution—in French as well as English.

Effective public-relations campaigns require not only English, but also the use of social media. Hence the eagerness of the al-Qaeda-linked Shabaab militia that controls most of south Somalia to tweet in English.

Fewer than 5,000 people follow its Arabic Twitter feed (and under 500 follow the Somali one). But more than 20,000 subscribed to the English tweets by the time Twitter closed the account in January (it had carried threats to kill two Kenyan hostages if the Kenyan government did not respond to the group’s demands). A new account set up this month gained 2,000 followers in a week. Its tweets have lost none of the old menace. “Arm yourself,” urges one, “a #Mujahid would loathe to fight the unarmed.”

Internship Feb 16th 2013 | We are seeking a summer intern to write about foreign affairs for The Economist. The internship will last for three months and will be paid—though modestly. Anyone is welcome to apply. Applicants should send an original unpublished article (of up to 450 words) on any issue in international politics or foreign affairs, a curriculum vitae and a covering letter, to foreigneditor@economist.com. We are looking for originality, crisp writing and clarity of thought. The deadline is April 2nd.

Special report: Offshore finance Storm survivors Enduring charms The OFCs’ economic role: The good, the bad and the Ugland Onshore financial centres: Not a palm tree in sight Tax transparency: Automatic response Company taxation: The price isn’t right The merry enablers Switzerland and its rivals: Rise of the midshores Who’s the criminal?

Prospects: Sunshine and shadows

Storm survivors Offshore financial centres have taken a battering recently, but they have shown remarkable resilience, says Matthew Valencia Feb 16th 2013 | WHEN THE ECONOMIST INTELLIGENCE UNIT, a sister organisation of this newspaper, published the first bound edition of “Tax Havens and Their Uses” in 1975, a queue several blocks long formed outside The Economist’s bookshop in London. Interest in offshore financial centres (OFCs) kept growing over the following 20 years as dozens of new havens popped up, often with help from lawyers based in Wall Street or the City of London. Tax authorities did little to intervene. Beginning in the mid-1970s, Jerome Schneider, a well-known “tax planner”, hawked various tax-evasion schemes with impunity for more than 20 years, even advertising in airline magazines.

This tolerance ended in the late 1990s, when prosecutors began to catch up with Mr Schneider and his kind and the Organisation for Economic Co-operation and Development (OECD), a rich-country forum, declared war on “harmful tax competition”. Since then tax havens have been under sporadic attack, including two waves of blacklisting. In 2008-09 the G20 took up the cudgels, America put pressure on Swiss banks to reveal more about their customers and various tax authorities started paying for stolen information about offshore accounts.

Pressure on OFCs has since eased a little because they have all accepted, to differing degrees, that they need to exchange more information with their clients’ home countries. But they remain beleaguered as an increasingly confident band of “tax justice” campaigners pushes for more concerted action on tax evasion and avoidance, money-laundering and the proceeds of corruption. Tax avoidance, the grey area between compliance and evasion, has shot up the political agenda. A recent cover of Private Eye, a British satirical magazine, caught the national mood, showing Santa Claus being booed for living offshore.

Governments have been rushing out action plans. Britain has put tax compliance and corporate transparency at the top of its list of priorities for its presidency of the G8 this year. America’s media often suggest that Congress yank money back from tax havens to alleviate the nation’s fiscal woes.

The world has 50-60 active tax havens, mostly clustered in the Caribbean, parts of the United States (such as Delaware), Europe, South-East Asia and the Indian and Pacific oceans. They serve as domicile for more than 2m paper companies, thousands of banks, funds and insurers and at least half of all registered ships above 100 tonnes. The amount of money booked in those havens is unknowable, and so is the proportion that is illicit. The data gaps are “daunting”, says Gian Maria Milesi-Ferretti of the IMF. The Boston Consulting Group reckons that on paper roughly $8 trillion of private financial wealth out of a global total of $123 trillion sits offshore, but this excludes property, yachts and other fixed assets. James Henry, a former chief economist with McKinsey who advises the Tax Justice Network, a pressure group, believes the amount invested virtually tax-free offshore tops $21 trillion. His methodology is reasonably sophisticated but he admits his calculation is still “an exercise in night vision”.

Once commercial transactions are factored in, the likely total for offshore wealth balloons. Over 30% of global foreign direct investment is booked through havens. Mr Milesi-Ferretti studied a group of 32 of them and found that international banks’ claims on these were of the same order as their claims on all emerging markets. Some OFCs are giants in certain kinds of business. The Cayman Islands (population 57,000) is the world’s leading hedge-fund domicile. Bermuda (population 65,000) is number one in reinsurance.

These two are famous but in many ways atypical. Many of their smaller competitors are what Jason Sharman, of Griffith University in Australia, calls “aspirational havens”: islands that turned to finance to reduce their reliance on tourism and agriculture, but have never got beyond selling a few thousand offshore companies a year.

Evergreens Nevertheless offshore finance has shown a “puzzling resilience”, confounding predictions of decline because of its supposed vulnerability to the regulatory clampdown imposed from outside, says Mr Sharman. An academic study last year found that OFCs’ foreign-owned deposits had actually risen slightly in 2007-11. Mr Sharman attributes their staying power to a growing clientele in Asia and other emerging markets which has offset a decline in America and Europe.

Offshore operators put the havens’ endurance down to their legitimate uses, such as their “tax-neutral” role in mediating international financial flows (of which more later) and the protection they offer from unstable or capricious governments—though they believe these uses are poorly understood. Tax libertarians think the havens meet a need created by the complexity and punitive nature of some national tax codes. Their latest hero is Gérard Depardieu, who has taken Russian citizenship in protest against a proposed French supertax on the rich. Besides, they point out, OECD countries also compete on tax.

Britain, for example, which has the second-lowest corporate-tax rate among the G8 (after Russia), recently cut it further.

Critics counter that the use of offshore centres involves more sleight of hand than genuine competition.

Money is routed through them merely to shelter it from taxes, undermining collection in the client’s home country, where he will continue to benefit from tax-funded public services without paying his way.

Ultimately, says Nicholas Shaxson, one of the offshore industry’s most prominent critics, its appeal rests on “providing rich individuals and corporations with financial boltholes, where they can do things with their money that they wouldn’t be allowed to do at home”. He believes that legally enshrined secrecy is just as important to the havens’ success as low tax.

Individuals have a right to financial confidentiality, but only as long as they set about their business lawfully. When it comes to tax crimes, money-laundering and the like, such confidentiality needs to be set aside. Some OFCs still make this difficult, and layering by service providers compounds the problem: try penetrating a Belize bank account fronted by nominees that is owned by a shell company in the British Virgin Islands (BVI) that in turn is owned by a foundation in Panama. Over the past decade the bigger OFCs have co-operated more with foreign law-enforcement agencies, but progress is patchy, and offshore structures still crop up regularly in corruption and money-laundering cases. A recent example is the alleged use of Cayman companies as conduits for bribes to Saudis by a subsidiary of EADS, a European aerospace and defence company.

The scale of the offshore industry’s dirty-money problem is hotly disputed. Economists at Global Financial Integrity, a research group founded by Raymond Baker, an authority on financial crime, reckon that developing countries alone suffered illicit financial outflows—defined as money that is illegally earned, transferred or used—of at least $5.9 trillion over the past ten years. Some say this estimate is too high, but the figure is clearly substantial. What is less clear is the proportion that ends up in OFCs rather than in one of the laxer onshore jurisdictions. Estimates of tax-revenue losses onshore are equally imprecise. Some think, for example, that Britain’s “tax gap”—the difference between tax owed and collected—is much bigger than the authorities care to admit: perhaps close to 7% of the total collected in 2010-11. On the other hand tax losses are sometimes overestimated, for instance by assuming that the full rate would have been paid if the money had been kept there.

At a recent conference Malcolm Couch, an official from the Isle of Man, one of the more transparent tax havens, delivered a few home truths to an audience of offshore worthies. OFCs should acknowledge that they, along with some of the big onshore hubs, have “to some extent been hijacked” by illicit money, he said, and should not be surprised when they are attacked for robbing other countries of tax revenues. They need to tread carefully because they face “an inherent existential threat”.

This special report will argue that tax havens are indeed facing serious threats but are also being presented with some enticing opportunities, especially if they have strong links with emerging economies.

The best-regulated of them are no longer merely “sunny places for shady people”. They can reasonably feel aggrieved when they are lumped together with the dodgiest havens, or when onshore jurisdictions themselves fail to practise the financial rectitude they preach to their offshore rivals.

All the same, the OFCs will remain under intense pressure as tax compliance receives more political attention. They will have to show not only that they have cleaned up but that they are making a constructive contribution to the world economy.

Enduring charms A brief history of tax havens Feb 16th 2013 | THE HISTORY OF offshore finance is “riddled with myths and legends”, says Ronen Palan, a havenwatcher. The term “tax haven” did not enter the language until the 1950s, but the concept originated in the late 19th century, when the American state of New Jersey eased its business-registration and tax laws to drum up incorporation revenues during a fiscal squeeze. A few years later Delaware copied its methods.

These early moves were driven by Wall Street lawyers.

The first phase of rapid growth came after the first world war when numerous small jurisdictions, led by Switzerland (in concert with Liechtenstein), began to offer tax, banking and incorporation benefits. In 1934 Switzerland dramatically tightened its bank-secrecy laws (not to protect Jewish customers’ deposits, as is widely believed, but in response to a bank’s exposure in a French tax scandal).

A ruling by the Bank of England in 1957 spawned what would become a giant offshore business, the “euromarkets” (dollar deposits held outside America, sterling deposits outside Britain and so on), because it allowed a big chunk of global cross-border lending to go essentially unregulated. International banks embraced this idea over the next decade, transforming Panama, Cayman and the Channel Islands as the banks booked more and more of their euromarket activities through these OFCs. The 1960s to 1990s were golden years during which dozens of new havens sprang up, largely unmolested by rich-world authorities. Caribbean havens in Britain’s sphere of influence were particularly active, using their suzerainty to write laws that would attract mobile capital. In the 1960s Singapore emerged as a regional haven in Asia, offering incentives to banks to set up euromarket-type operations.

In the 1970s and 1980s the number of offshore centres increased to more than 50 and the assets and holding structures they offered became more complex. Fiscally strained islands in the Pacific and Indian oceans entered the fray in the hope of becoming less dependent on tourism. From the 1990s they were joined by a handful of Gulf and African countries and post-Soviet republics. Some of the newcomers focused on e-commerce or internet gambling. It was not long before these offshore centres had become conduits for at least one-third of all international lending and foreign investment as well as ever larger amounts of undeclared income and ill-gotten gains.

Alarmed by this, OECD countries began to push back in the late 1990s. A crackdown on “harmful” tax competition turned into a war on tax evasion. Many havens were put on blacklists. When the global financial crisis struck they were forced to provide more information about their users. But despite the change in sentiment, few of them have disappeared, and offshore financial flows have remained more or less steady.

The OFCs’ economic role

The good, the bad and the Ugland Havens serve clean as well as dirty money Feb 16th 2013 |

DETRACTORS DESCRIBE THE offshore phenomenon as one of the more noxious features of financial globalisation that is now, mercifully, in retreat. The half-dozen senior lawyers gathered in the woodpanelled boardroom of Ugland House, the head office of Maples and Calder in George Town, the Cayman Islands’ capital, have heard it all before, and they beg to disagree. Offshore centres oil the financial interface between larger economies, insists Alasdair Robertson of Maples. Grant Stein of Walkers, another Cayman firm, thinks of it as “the plumbing that connects the global financial system”. His peers nod vigorously. At times they seem touchy, but then Ugland House, the registered address of more than 18,000 companies, is held up by critics as a symbol of all that is wrong with OFCs. The lawyers are members of the IFC Forum, a group of “magic circle” law firms from British dependencies that have joined forces to counter those jurisdictions’ bad press. IFC stands for international financial centres. “Offshore” is considered pejorative, “tax havens” unmentionable.

They enjoy support from some fierce ideological warriors, including libertarians at the Cato Institute in Washington, DC. Their opponents can be equally strident. For the moment the critics have the wind in their sails. They include a number of increasingly well-organised NGOs and even the odd government, most notably Norway’s. Who is right is hard to say, because much of the offshore industry lies in the statistical shadows, with little academic work to illuminate it.

The lawyers argue that many offshore transactions are about tax neutrality, not cheating. For example, if a joint venture with partners from Germany, Turkey and Argentina were registered in one of those countries, the government concerned might seek to tax the flows through the vehicle as well as the investors’ gains. By going offshore they can pool their resources in a jurisdiction that is willing to act as a mere receptacle and refrain from taking a cut other than registration fees. Taxes are still payable by the investors in their home countries. “It’s not about evasion but about avoiding an extra, gratuitous layer of

tax,” says John Collis of Conyers Dill & Pearman, a Bermuda law firm.

Such structures offer legal neutrality too. In a joint venture in, say, the BVI, no shareholder has a home advantage; all get a sophisticated, predictable common-law system with a small but well-regarded local commercial court and Britain’s Privy Council as the ultimate arbiter.

Asians are particularly fond of using BVI companies for initial public offerings and international investments. Indeed, on paper the BVI ranks as the second-largest investor in China (see chart 2). Mr Sharman of Australia’s Griffith University believes there is a lot more to it than hiding criminal money or tax-dodging, though these play a part. Indeed, the flows have continued to grow even as tax incentives have been largely withdrawn and as the BVI has become somewhat less friendly to dirty money. The investors now seem to be using it for institutional arbitrage, he says, attracted by the ease of raising funds, cheaper access to capital markets, speed of set-up and access to reliable courts.

Even when the use of an offshore centre means a loss of tax revenue, it may still provide other benefits for the country concerned. Several African countries have signed tax treaties with Mauritius, hoping that this will help them attract investment from Asia routed through the Indian Ocean haven. They would miss out on some tax revenue but may gain from the extra investment. “This whole area is riddled with trade-offs,” says James Hines of the University of Michigan.

One thing about tax havens that governments onshore might quietly welcome, he adds, is that they allow those governments unofficially to tier domestic tax rates. They can let multinationals and other big, mobile investors use havens and thus pay a lower effective rate but require smaller, more domestically oriented companies to pay the full rate. By differentiating tax burdens in this way, countries can maintain sizeable domestic tax bases in the face of growing international competition. A 2006 study identified another way

in which tax havens may reduce the costs of entering high-tax countries: the use of offshore affiliates to facilitate debt financing, which had been fuelling investment in Japan. A later study concluded tentatively that firms which had cut their costs by establishing offshore operations sometimes expanded their activities in poor countries nearby.

Individuals’ use of offshore centres, too, is often misunderstood, say their defenders. Many people believe that only those with something to hide would want a bank account in Jersey. In fact, it offers several legitimate advantages for British nationals working abroad who are not subject to tax at home until funds are repatriated. These include multi-currency services (not available on domestic accounts) and global portability. And for foreign “non-doms” residing in Britain, whose non-British income is not subject to British tax if held offshore, it can make sense to park it in a nearby jurisdiction with broadly similar banking and legal systems.

Some offshore champions consider tax competition a good thing because it discourages countries from trying to tax their way out of trouble. This view occasionally meets with sympathy onshore: the OECD dropped its war on “harmful” tax competition after George W. Bush’s administration objected. It has since focused on promoting tax transparency.

Andrew Morriss, an expert in offshore law at the University of Alabama, thinks that OFCs impose an important discipline on onshore jurisdictions through innovative regulation to lower transaction costs.

Such places, the argument goes, can tailor their rules more closely to the needs of particular sectors or subsectors than large countries can.

An example is “captive” insurance, corporate self-insurance of risks that would be difficult to insure in the usual way. The business was first developed in Bermuda, later spreading to other OFCs, including the Cayman Islands, which specialises in medical risks. Today three-quarters of America’s leading 500 firms have active captives in Bermuda alone. The business blossomed offshore rather than onshore because America’s state-by-state regulatory regime could not accommodate it—though a number of states, including Vermont, subsequently rewrote their rules to attract captives.

Even offshore’s fiercest critics acknowledge that captives have some virtues. However, they argue that much commercial investment through havens has no good economic rationale. A much-cited example is “round-tripping”, in which domestic investment is routed offshore to qualify for tax breaks reserved for foreign investors. Some suspect this accounts for a sizeable portion of “foreign” investment in India and China.

A bigger gripe concerns tax and regulatory competition. Mr Shaxson argues that competition between jurisdictions is not like competition between companies. If a firm cannot hold its own, the result is creative destruction; yet a country that cannot compete could become a failed state. In fact, some of the indicators used to measure a country’s competitiveness, such as education or infrastructure, suggest that higher taxes might have a beneficial effect. Mr Hines accepts that tax competition is “unresolved, even as a theoretical matter”. Mr Morriss acknowledges that regulatory competition sometimes backfires.

Antigua, for instance, dropped its standards to the point where it became too easy for Allen Stanford to perpetrate a $7 billion fraud through a Ponzi scheme in the Caribbean and America.

Opacity is another problem. On a systemic level it makes the monitoring of financial stability more difficult. Murky vehicles held offshore, and off-balance-sheet, played a part in the financial crisis by concealing risks that banks had built up, though not even the fiercest critics of tax havens claim they were

the main cause of the crisis.

Something in reserve The fog also creates problems for statisticians, and by extension for economic policymakers. Gabriel Zucman of the Paris School of Economics examined anomalies in portfolio-investment data, concluding that official statistics significantly underestimate the net foreign assets of advanced economies because they fail to capture funds stashed away in tax havens. He estimates that 8% of all private financial wealth is held offshore, with three-quarters of it unrecorded. If he is right, the euro zone, officially a big net debtor, becomes a net creditor.

Dodgy funds from poor countries, too, are attracted by the secrecy offered by some jurisdictions. Even the most conservative estimates suggest that the outflow of funds linked to money-laundering, corruption, tax evasion and avoidance and deliberately mispriced commercial transactions exceeds total inflows of aid.

Mr Henry calculates that the elites of 139 low-middle-income countries have parked up to $9.3 trillion of unrecorded wealth offshore. As with the euro zone, that turns some of them from big debtors into creditors. “Developing countries as a whole don’t face a debt problem, but a huge offshore tax-evasion and money-laundering problem,” he says.

Offshore moneymen insist that tighter controls have caused inflows of illicit funds to slow down dramatically. The Cayman Islands, for instance, largely complies with global anti-money-laundering standards. Yet questions linger over its implementation of its own rules. A recent American investigation revealed that in 2008, two years after the most recent peer review of its rules, HSBC accounts in Cayman were subject to “massive misuse…by organised crime” from Mexico and elsewhere, as one compliance officer put it. The bank had no information at all about the beneficial owners of 15% of the accounts, suggesting either incompetence or wilful blindness on the part of regulators.

Alex Cobham, an economist with Christian Aid who has studied financial flows to and from tax havens, thinks they attract as much money from poor countries as from rich ones, if not more. This not only deprives the countries concerned of much-needed tax revenue but gives the elites less incentive to build institutions at home.

This, though, is a problem onshore too. Ill-gotten gains often receive a warm welcome in large OECD countries, some of which offer more corporate secrecy than the leading tax havens. This is important for financial crime-fighting because anonymous shell companies and trusts are favourite ways of moving tainted money into the banking system.

Onshore financial centres

Not a palm tree in sight Some onshore jurisdictions can be laxer than the offshore sort Feb 16th 2013 |

SAM KOIM, THE chairman of Papua New Guinea’s anti-corruption watchdog, raised eyebrows at a meeting of financial crime-fighters in Sydney last October when he described how officials from his country were systematically “using Australia as a Cayman Islands” by laundering a significant portion of corruptly obtained funds through Australian banks and property deals. Papuans were thought to be the largest property investors in Australia’s far north. He vowed to keep up the pressure on Australia until it stopped taking such business.

The traditional image of a tax haven is a palm-fringed Caribbean island, a chillier outcrop in the English Channel or a European microstate such as Monaco or Liechtenstein. But offshore is not so much a geographical concept as a set of activities and offerings. What havens generally peddle is an escape from high taxes and strict regulation, along with easy incorporation and secrecy. Some of the biggest tax havens are in fact OECD economies, including America and Britain, that many would see as firmly onshore. They provide something the offshore islands cannot: a destination for money rather than a mere conduit, with first-world capital markets and banks backstopped by large numbers of taxpayers.

Latin Americans have flocked to banks in Miami for decades, both for legitimate reasons of confidentiality (for instance, fears that details of wealth held at home could be leaked) and to dodge tax.

A congressional investigator, asked where America keeps its dirtiest money, answers without hesitation: “Brickell” (Miami’s financial district).

Can this party go on? Under new IRS rules, from last month America’s banks have had to report interest payments to non-residents. In some circumstances this information could be shared with 80 countries that have information-exchange agreements with America. The regulations were bitterly opposed by Florida’s

banks and politicians, who worried that Latin American depositors would flee in droves. They lost, victims of America’s need to offer some form of reciprocation as it presses foreign governments to provide details of Americans who hold money abroad. The scale of the withdrawals from Miami is not yet clear.

America’s other offshore speciality is shell-company registration. States such as Delaware and Nevada offer cheap, easy incorporation, with anonymity guaranteed. Registration agents do not even have to ask for ID, as they do in most tax havens. And what is not collected cannot be passed to the police, which is why criminals and debtors love American shells. Martin Kenney, a fraud-busting lawyer in the BVI, finds them harder to penetrate than vehicles in the Caribbean, where “there will at least be some sort of lead, even if only nominees, to help you start pounding through the layers.” Dodgy operators also like the air of legitimacy around an American company, and the ease with which shells can be used to open corporate bank accounts.

Delaware is America’s incorporation giant, with 945,000 active entities. It makes so much money from company fees that it does not need to levy taxes on sales or personal incomes. Like some of the classic offshore havens, it is a small state with an economy that relies heavily on services for non-residents. Its political class, left and right, is all in favour of crafting local laws to accommodate corporate customers.

Registrations grew by an average of 7% a year in the decade to 2011, and anything that interferes with them is fought tooth and nail.

Delaware’s corporate spectrum is broad, with a few thousand public companies at one end, overseen by its world-renowned Chancery Court, and hundreds of thousands of tiny, opaque LLCs (limited-liability corporations) and partnerships at the other. Delaware lawyers say the sleazy reputation of the smaller entities is unjustified, and that many LLCs are created by respectable companies for joint ventures and property transactions. Jeffrey Bullock, Delaware’s secretary of state, insists that it has struck the right balance between curbing criminality and “paying deference to the millions of legitimate businesspeople who benefit” from hassle-free incorporation.

Some of the biggest tax havens are in fact OECD economies, including America and Britain, that many would see as firmly onshore But according to a World Bank database, American shells are the most popular corporate vehicles among perpetrators of large-scale corruption. An avid user was Viktor Bout, known as the “Merchant of Death”, a convicted arms smuggler. In a study last year three academics, led by Griffith University’s Mr Sharman, approached shell-company providers around the world posing as corrupt officials and money-launderers.

They found that OECD countries were less compliant than tax havens with international standards on corporate transparency, that America was among the least compliant, and that Delaware was one of the worst states (with not a single fully compliant response). Investigators joke that Delaware stands for “Dollars and Euros Laundered And Washed At Reasonable Expense”.

A federal bill supported by Barack Obama, which would force states to collect information on beneficial owners (the human sort rather than “legal persons” such as trusts), has been stalled for several years. The formidable anti-reform coalition includes the national lawyers’ association and the United States Chamber of Commerce.

Britain, too, offers lax rules to crafty operators. A report last year by Global Witness, a campaigning

group, highlighted the use of British shells as cover for allegedly corrupt funds originating in Central Asia. The main shareholder of one of the companies was a Russian who had died years before the company was registered. Other firms featured nominee shareholders and directors from the BVI and the Seychelles who were, as the authors put it, “paid to pimp their identities” (perfectly legally) for their customers to hide behind.

Investigators also point the finger at limited-liability partnerships, introduced in Britain a decade ago at the urging of accounting firms whose partners were hoping to dilute their long-standing “joint and several” liability. This corporate form has since been widely misused by people other than accountants to hide or shift dirty money. Most LLPs do not have to file tax returns, be audited or have real people as directors.

A 2011 report by Britain’s Financial Services Authority concluded that British banks suffered from serious flaws in their controls so that, knowingly or unknowingly, many of them were handling the proceeds of corruption. Most worrying, the regulator found there had been little progress in compliance since its previous review in 2001. And even as the British government bludgeons rich nationals who use offshore structures, it continues to offer wealthy resident “non-doms” juicy tax advantages.

The City of London first dabbled in offshore finance in the 1950s with the creation of the “euromarkets”—unregulated finance in dollars and other currencies outside their home markets. This grew rapidly, fuelled by Wall Street firms that used it to escape restrictions at home. The City’s offshore connections strengthened from the 1970s to the 1990s when British overseas territories in the Caribbean joined the crown dependencies of Jersey, Guernsey and the Isle of Man in tailoring their laws to attract deep-pocketed non-residents. Today London is at the centre of a vast hub-and-spoke system, with the offshore territories acting as feeders. Banks in Jersey, for instance, who could not possibly find borrowers for all the deposits they take in, pump most of them into the Square Mile, where they finance a variety of activities at the big banks and securities firms.

Ronen Palan of London’s City University calls this “Britain’s second empire”, noting that one-third of all international deposits and investments flow through Britain and its offshore satellites. The strength of their relationship shows up in IMF data that make it clear Britain’s and America’s financial links to offshore centres are far closer than the euro area’s and Japan’s.

America has its own (smaller) offshore zone of influence. This includes the Marshall Islands, a former possession, which offers some particularly impenetrable corporate structures and is one of the five most secretive tax havens, according to a ranking by the Tax Justice Network. The islands’ corporate registry is run by a private company in Reston, Virginia, which casts an odd light on America’s relentless bashing of the tax regimes in Switzerland and the Cayman Islands.

Britain aside, the European Union has several other tax havens. Ireland is popular with mutual funds and tax-planning companies. The Netherlands is the world’s largest venue for tax-treaty shopping.

Multinationals put foreign investment through Dutch holding companies to avoid withholding taxes on dividends. U2, a stadium-filling rock band, upset fans when it moved part of its business to the Netherlands to cut its tax bill.

Luxembourg has bigger and broader offshore offerings, hosting large numbers of “tax-efficient” corporate transactions and thousands of mutual funds with around $3.2 trillion in assets, though most are managed elsewhere. As in traditional tax havens, finance plays an outsized role in the economy: in a country of

525,000, some 13,000 jobs are linked to the fund industry alone. Luxembourg works hard for new business. The Grand Duchy now presents a bigger competitive threat to the BVI than its Caribbean neighbours do, says a lawyer in Road Town.

FATF chance

Luxembourg has a poor record on tax transparency and combating financial crime. Along with Austria it has held out against full participation in the EU’s savings directive, under which members swap information on bank interest paid to each other’s citizens. Of all OECD countries, it is the furthest from meeting the requirements of the Financial Action Task Force (FATF), the multilateral body that sets standards for anti-money-laundering. And the rest of the OECD, in turn, is mostly less compliant than the leading OFCs (see chart 3).

This highlights a serious flaw in global anti-money-laundering standards. Small OFCs and developing countries have been arm-twisted into adopting a stringent set of rules, which they have done mostly without kicking up a fuss for fear of being blacklisted. Meanwhile the advanced economies that insisted on the standards, and to which they are probably better suited, have been less conscientious in applying them. The majority of OECD countries are only partially compliant with the FATF standard on effective sanctions against failures of anti-money-laundering measures. Richard Hay of Stikeman Elliott, who advises offshore law firms, suggests that these double standards, far from being accidental, are the result of “a policy of commercial hegemony” designed to keep tax havens in their place.

Tax transparency

Automatic response The way to make exchange of tax information work Feb 16th 2013 |

NOT ONE TO mince words, Daniel Mitchell of the right-wing Cato Institute denounces the OECD’s push to co-ordinate global tax enforcement as “the devil’s spawn” and possibly even a step towards the fiscal equivalent of—shudder!—the World Trade Organisation. Tax havens “should not have to enforce the burdensome tax laws of other countries”, he thunders. “Having grown rich with the tax policies of their choosing, the OECD countries are pulling up the ladder and saying, ‘you can’t do the same to attract investment’. It’s fiscal imperialism.”

To tax-freedom advocates like Mr Mitchell, one of the most infuriating aspects of this perceived imperialism is the complete overhaul of cross-border information exchange. It is technical stuff, but the changes are extremely important. They promise to shine a light on some of the darkest corners of banking and investing, not only making tax evasion much harder but also casting a net over a host of other financial sins—and, along the way, testing financial firms’ compliance departments to the limit.

The new era began in 2009 with something of a false start. The G20 decreed that in order to be considered clean, tax havens had to sign bilateral tax-information exchange agreements (TIEAs) with at least 12 other jurisdictions. This led to a surge in TIEAs and tax-treaty amendments (see chart 4 below) and the fairly prompt removal of tax havens from the OECD blacklist. The accords call for exchange “on request”. A country has to share information only if the other signatory asks for it and the request is based on well-founded suspicions.

Ask, and it shall be given?

The OECD touted this as a step towards transparency that would also respect individuals’ right to confidentiality as much as possible. But tax investigators complain that the process for getting information is cumbersome and the bar has been set too high. “You already have to have pretty much all the information you’re after to get the last piece. It’s a catch-22,” says one. That may explain why the number of requests made has been small.

Offshore officials have complaints of their own. Françoise Hendy, Barbados’s chief tax negotiator, thinks that the real motive for promoting TIEAs was to draw the tax havens’ competitive sting, because TIEAs do not offer the same benefits as the full-blown double-taxation treaties that OFCs such as Barbados generally prefer. And small jurisdictions felt obliged to comply even though they knew that the main target was Switzerland.

Moreover, the TIEAs did not appear to reduce financial flows to tax havens. An academic study of the crackdown by Niels Johannesen of the University of Copenhagen and Gabriel Zucman of the Paris School of Economics looked at data on cross-border bank deposits in 2009-11 and found that, despite modest outflows from less compliant jurisdictions, the overall level of funds in OFCs barely changed.

Tax NGOs say the “on request” model is a dud and that tax transparency can be achieved only through the regular, automatic exchange of information. America gave the world a big push in this direction in 2010 when it passed the Foreign Account Tax Compliance Act (FATCA). This requires foreign financial firms to identify account-holders and investors who might be American. If the clients do not reply to inquiries, they will have a 30% tax withheld from their income arising in America. The rules will be phased in over four years, starting in 2014.

FATCA’s intrusiveness has caused concern among banks and fund managers. It raises big questions about data privacy. Compliance costs, mostly borne overseas, are likely to be at least double the revenue that the law will generate for America. The necessary overhauls of systems and procedures and the extra digging around to identify American clients could add $100m or more to a large bank’s administrative costs. No wonder bankers have dubbed FATCA the Fear And Total Confusion Act. An OECD tax official describes the law as “awful, in a way, like a nuclear bomb” but also sees it as “a remarkable leap forward for transparency”. And though it began as a brazenly unilateral move, it has since become more inclusive. America has signed or is negotiating bilateral agreements with 50 countries, each of which would accept some version of FATCA. In return America would offer information on its holdings of their citizens’ money. The resulting patchwork of intergovernmental agreements, each one slightly different, will add further to the compliance burden for international banks and fund managers.

The biggest benefit of automatic exchange is that it deters rather than detects Inspired by America’s chutzpah, other countries are drawing up similar legislation of their own. Britain is planning to impose a so-called “Son of FATCA” on its dependencies. The Isle of Man has already agreed to this; its chief minister accepts that automatic exchange “is becoming the global standard”. Jersey and others are holding out for now, but will come under increasing pressure to sign up. “It’s the last days of the Roman Empire,” mutters a senior Cayman lawyer.

The automatic-exchange model also enjoys support from some big emerging economies, such as India.

And the practice has already been adopted within the European Union (apart from a few holdouts) for cross-border bank deposits, through the EU’s savings directive (EUSD). But the EU’s experience has been mixed, not least because the original directive was riddled with loopholes. Some have been closed through amendments, more of which are proposed, but gaps will remain.

Another problem with automatic exchange is the huge quantities of data it produces. Europe’s tax authorities have struggled to stay on top of the information swapped under the directive. An official from a British dependency taking part in the EUSD reportedly complained that some countries which receive encrypted DVDs with client information do not even get round to asking for the decryption key. And information is not necessarily helpful if the recipient still has to penetrate the web of shell companies, trusts and foundations between the account and the beneficial owner.

A further concern is the risk of misuse of information by corrupt administrations, or rogue government

employees, such as the sale of personal financial data to would-be kidnappers. Global automatic exchange is “a developed-world solution for a global economy unsuited to it”, argues Geoff Cook of Jersey Finance. Some developing countries lack the administration to deal with it, says Gurbachan Singh, a tax lawyer in Singapore. In places like Indonesia “you may have a tax officer but not a proper tax office.”

Tax campaigners argue that appropriate checks and balances can be put in place in most countries.

Governments in the developing world already have access to lots of sensitive information about their citizens. And the biggest benefit of automatic exchange is that it deters rather than detects, says John Christensen of the Tax Justice Network (TJN).

Even ultra-secretive Switzerland has made some concessions, such as entertaining other countries’ “group requests” for information on, say, a batch of unidentified clients of a particular bank. But the Swiss remain firmly opposed to automatic exchange and continue to push their own model, dubbed the “rubik” because of its complexity, which involves handing over money but no names. It has signed deals with Britain and Austria under which it will collect and pass on penalties imposed on clients for past evasion, as well as withholding tax on their future investment income. But Germany’s upper house, the Bundesrat, has rejected the Swiss accord with Germany, seriously undermining the rubik project.

Like the EUSD, the rubiks have been criticised for being leaky. The TJN’s analysts believe that the deal with Britain will raise only a small fraction of the £5 billion that the British government hopes to collect.

Whatever the type of agreement, implementation is just as important as design. Some of the Caribbean tax havens that received a pat on the back for signing lots of TIEAs have dragged their feet when asked for assistance.

Universal information exchange is still a long way off, if it happens at all. But not so long ago the norm for countries, whether onshore or offshore, was to refuse any co-operation on cross-border tax enforcement, so a lot has been achieved. That cannot—yet—be said of reform efforts in the corporate sphere.

Company taxation

The price isn’t right Corporate profit-shifting has become big business Feb 16th 2013 |

DURING THE TAX-EVASION trial of Leona Helmsley, a flamboyant hotelier, a former housekeeper testified that she heard her employer say: “We don’t pay taxes. Only the little people pay taxes.” These days, multinational companies stand accused of taking a similarly haughty attitude to their fiscal affairs, shifting profits offshore to cut their tax bills. Many of the tax-avoidance techniques being employed are legal, but many others are ruled to be illegal over time or occupy a grey area between the two. Corporate tax directors have generally worked on the basis that a strategy is legitimate until it is ruled illegal, no matter how aggressively it is structured. Their opponents recall the words of Denis Healey, a former British chancellor, who suggested that the difference between avoidance and evasion was “the thickness of a prison wall”.

The public outcry is forcing tax administrators to rethink their policies. Indignation has been greatest in Europe, with particular venom aimed at Google and Starbucks. In December the coffee chain volunteered to pay around £10m more tax in Britain than it owed, following the news that in 14 years of operation in that country it had paid only £8.6m in corporation tax. Various governments have rushed out antiavoidance “action plans” and general anti-abuse rules.

The political heat has risen in America, too, fanned by Senate hearings last year on tax-saving manoeuvres by Microsoft and HP that routed profits through Bermuda, Puerto Rico and other havens. Not only do large companies shift profits out of America, where the corporate tax rate is 35%, but they also massage down the rate they pay at home by using all manner of tax breaks and loopholes, to an average of just 17.3% in 2009-10, according to Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

Profit-shifting has increased even as corporate tax rates have fallen in OECD countries, from an average of 32.6% in 2000 to 25.4% in 2011. In America corporate profits as a share of GDP have been at record

levels in recent years, but the corporate tax take as a proportion of federal revenues has been near historic lows. Tax experts see a link between these declining receipts and the growing use of tax havens.

This is a big issue for developing countries, too. In Africa it is not uncommon for a multinational to siphon off the bulk of the taxable profits from its local operations. Global Financial Integrity calculates that mispriced cross-border transactions within companies and the misinvoicing of trade between different parties together account for up to two-thirds of “illicit” (illegal or legally contentious) outflows from poor countries. It believes, startlingly, that transfers within corporate families account for 50-60% of the global trade figures.

Built for another age The heart of the problem is that tax collection has failed to keep pace with business as it has globalised.

The main pillars of the international tax system were built nearly a century ago. It treats multinationals as if they were loose collections of separate entities operating in different jurisdictions, giving companies huge scope to move income around the world to minimise their tax liabilities.

One of the main vehicles of corporate tax avoidance is a practice known as transfer pricing. Under international rules, transactions between company subsidiaries are supposed to be priced as if they were conducted “at arm’s length” between unrelated parties. In practice, though, the price can be adjusted to move profits to the lower-tax jurisdiction and expenses to the higher-tax one. The more complex the transaction, the easier this becomes. Many tax-haven subsidiaries are essentially shell companies that exist only to hold intellectual-property (IP) rights and charge other parts of the group for their use or provide other “services” at above-market rates. Transfer pricing (really mispricing) is sometimes also used to load costs onto countries that offer generous subsidies, especially in extractive industries. It has become a key plank of multinational tax strategies.

Technology companies, with oodles of IP to shift around, are avid practitioners of the art. Google, for instance, avoided a tax bill of around $2 billion in 2011 by moving almost $10 billion into a unit in Bermuda, a jurisdiction that levies no corporate income tax. Bermuda is the legal residence for tax purposes of an Irish subsidiary which collects royalties from another Irish division which in turn had collected revenues from ads sold across Europe (a structure known as the “Double Irish”). To avoid an Irish withholding tax, the company added a “Dutch Sandwich” to its tax-planning menu, routing the payments to Bermuda through a shell in the Netherlands. The end result is that there is little connection between where the economic activity takes place and where the profits are booked.

This can happen in more humdrum industries too. In a 2010 report ActionAid calculated that SABMiller, a giant brewer, had avoided around $30m a year in taxes in Africa and India through a variety of devices, including holding valuable trademarks for African beers in low-tax European countries. SABMiller said the analysis was flawed. Brass-plate Swiss companies have been used to strip profits from Zambian copper ventures.

Such data as are available suggest a big increase in the allocation of profits to havens over the past decade. All but two of the firms in the FTSE 100 have at least one offshore subsidiary. The share of American corporate profits booked in tax havens is six to 14 times those jurisdictions’ share of global GDP, calculates Alex Cobham, an economist with Save the Children. American companies are thought to hold $1.6 trillion offshore, which most are reluctant to repatriate unless offered a tax break. The concern has shifted from companies worrying about double taxation to governments fretting about double non-

taxation, says Pascal Saint-Amans, head of the OECD’s tax division.

Not our fault Some executives argue that tax avoidance is a mere symptom, the real disease being the high corporate tax rates and complex rules imposed by rich countries. Others point out that they are big employers and contribute a lot in payroll taxes. Eric Schmidt, Google’s chairman, has said he is “very proud” of his company’s tax-avoidance structures, which are “based on the incentives that the governments offered us to operate”. Accountancy firms have long supported such strategies, though they are becoming more concerned about reputation risk (see article).

Companies may feel bound to exploit weaknesses in the rules, if only because not doing so would put them at a competitive disadvantage. And there are certainly flaws in the global transfer-pricing guidelines overseen by the OECD. Most tax experts see the arm’s-length principle as unworkable because internal transactions often bear no resemblance to those between unrelated entities. Moreover, many countries have adopted national rules that have created a confusing regulatory thicket.

The system has become so complex that a completely new approach is needed. One intriguing proposal, unitary taxation, would aim to tax activities where they actually occur, not where some tax adviser has shifted them. The company would produce a single set of accounts and its worldwide profits would then be apportioned using a formula that takes in assets, sales and other measures in each jurisdiction. This is already being used in some federal systems, including a majority of American states. Unitary taxation comes with its own challenges, however. Agreeing on where exactly business takes place in a world of services and intangible assets is tricky.

Under intense pressure to do something, the OECD has promised to draw up a plan by the summer. But it is opposed to radical change, arguing that unitary taxation is no better than the current arrangements and lacks broad political support. “You’d be swapping one flawed system for another, with the added disadvantage that a new one takes ten years to put in place,” says Mr Saint-Amans. So the most likely outcome is an attempt to simplify the current tangle of rules, perhaps with a push for a global accord on the streamlined version and some specific measures against egregious avoidance schemes. The OECD has already published a guide to help tax authorities spot such ruses, containing details of the 400 most daring.

But this could prove a futile effort to mend a discredited system that is beyond repair. Tax activists accuse the OECD’s tax committee of being cosy with the companies and tax specialists who have an interest in maintaining the status quo. With or without unitary taxation, the activists continue to promote country-by-country reporting. This would require multinationals to disclose the name, location, financial performance and tax liability of each of their subsidiaries and thus reveal the role played by havens.

Accounting standard-setters are cool on the idea, but there is some political enthusiasm and a start has been made: both America and the EU now require firms in extractive industries to disclose their payments to governments on a country-by-country basis.

America could do more to reduce companies’ use of havens, over and above cutting its own corporate tax rate. A proposal now on the table that would require American-managed or -controlled firms to be taxed as domestic entities, even if domiciled elsewhere, would reverse the long-term expansion of tax deferral for offshore income, making profit-shifting less attractive. But corporate lobbyists fiercely oppose it.

Developing countries, meanwhile, could do more to increase their leverage in transfer-pricing skirmishes, argues Krishen Mehta, a former partner at PwC. They could, for instance, require that a statutory auditor confirm the legitimacy of offshore transactions, as Mexico does. Galvanised by the SABMiller case, tax authorities in emerging markets are starting to push back against the multinationals, setting up crossborder bodies to share expertise. They are getting help from the OECD, which lends out specialists under its “tax inspectors without borders� initiative, though they will face an uphill struggle because the companies have bottomless legal budgets.

The tax avoiders now find themselves in a bind. The current status quo is bliss for them, and lobbying to maintain it is money well spent. For the largest of them, a tax reduction of a single percentage point means a saving of more than $200m. Yet pressure not to push avoidance too far is mounting, and NGOs are keeping a closer watch. Ultimately the companies may have more to fear from the public than from governments. After all, it was a threatened boycott by consumer groups that drove Starbucks to offer its voluntary contribution to the public coffers.

The merry enablers Accounting firms will do nicely under any set of rules Feb 16th 2013 | MANY CORPORATE TAX-AVOIDANCE strategies are crafted with the help of the “big four” accounting firms—Deloitte, Ernst & Young, KPMG and PwC. These firms also happen to be among the longest-standing and best-represented providers of corporate services in offshore locations.

Though they have a hand in designing bold avoidance schemes, the real problem is their acquiescence, says a former senior partner of one of the four. “Often the client would work with its lawyers to ensure the legal opinion was favourable and then present it to us as pretty much a fait accompli,” he says. “We were always on the defensive, being pushed to the limit. But to challenge them in that setting you had to have a particularly strong conviction that it was egregious.” The big four see the furore over transfer pricing—manipulating intra-company transactions to shift profits to low-tax jurisdictions—as a growing reputational and legal risk. Big enough already, in fact, for them to hope that multinationals will in future think twice before asking their accountants to sign off on cheeky avoidance strategies, says the former partner.

Loth to be seen as disloyal to their largest clients in public, the big four continue to lobby against changes in accounting rules that would make dodgy transfer pricing harder, such as country-by-country reporting.

Privately, however, some of them see merit in such proposals and believe their adoption could help to reduce pressure on the profession.

Tax activists are convinced the accountants want to maintain the status quo because complex tax-planning work is so lucrative. But accounting changes would bring new lines of revenue. If companies were to adopt country-by-country reporting, for instance, their auditors would have to sign off on more detailed sets of numbers, so their overall income would be unlikely to suffer much. That is why, ultimately, the big four won’t lose much sleep over the current tax-avoidance kerfuffle, says another accountant.

Switzerland and its rivals

Rise of the midshores The offshore industry’s centre of gravity is shifting eastwards Feb 16th 2013 |

AT THE CENTENNIAL gathering of the Swiss Bankers Association last November, held at a swanky hotel in the hills above Zurich, the celebrations were muted. In his opening address the group’s chairman, Patrick Odier, felt obliged to note that “we have an image problem.” His worry was not that only half a dozen of the audience of more than 100 were women. Instead, he was referring to his industry’s travails since America launched its all-out assault five years ago on banks that served tax evaders.

Switzerland is still the world leader in wealth management, looking after $2.1 trillion in assets. But the attacks from Washington, DC, and, more recently, European capitals have sent its moneymen reeling. In 2009 UBS paid America $780m to end a tax-evasion investigation; when Switzerland’s oldest bank, Wegelin & Co, snapped up many of UBS’s undeclared clients, prosecutors took it to court. The bank pleaded guilty, paid a large fine and has decided to close. Under the UBS settlement thousands of client names were handed to America, knocking chunks out of the once-impregnable wall of Swiss bank secrecy.

The beleaguered Alpine country has since been badgered into agreeing to co-operate in cases of suspected tax evasion as well as fraud—“an earthquake” for a nation that treats evasion as a mere civil offence, says René Matteotti, a tax lawyer in Zurich. With help from leads generated by the UBS settlement, America is going after 11 other Swiss banks, including Credit Suisse and Julius Bär.

Switzerland wants a single settlement covering all its banks, but America seems to want to pick them off one by one. Negotiations with European countries are no easier now that Germany has rejected a Swiss proposal to levy and pass on penalties for German tax cheats while preserving their anonymity. The Swiss banks worry that their government could end up with a dizzyingly complex patchwork of bilateral arrangements.

Less luxe

The industry’s commercial prospects are equally uncertain. Before the crackdown the Swiss found offshore private banking highly profitable. They could earn twice as much as banks in Britain doing the same thing, reckons one official, because they could build some of the tax savings on undeclared funds into their fees. Much of that easy money has gone. This is a challenge for “an industry with no real history of transformation”, says Peter Damisch, head of the global wealth practice at the Boston Consulting Group (BCG).

There is talk of a coming wave of consolidation once the legal clouds lift. Smaller banks could struggle to survive. Some of the independent outfits that help devise offshore holding structures for the banks’ clients have put themselves up for sale. The strongest of the survivors may have grounds for cautious optimism.

Mr Damisch expects Swiss assets originating from Europe to decline by up to a third in coming years as undeclared money is “regularised” (American assets are already negligible). But he expects to see offsetting growth in emerging markets.

Still, the next few years will provide a stern test of the Swiss brand in private banking. They will have to show that the selling-points they have long touted—political and economic stability, top-notch service and a holistic investment approach—count for more than the ability to hide money.

They can at least console themselves that they still have some lobbying power. Amid fierce opposition, the Swiss government has dropped a proposal that would have required banks to reject deposits from clients who refused to declare that they were tax-compliant. This was to be part of a national “whitemoney strategy”, still in the making, to shed Switzerland’s image as a tax haven once and for all. Critics suspect it is a smokescreen.

All in all, the Swiss have played their hand badly since 2008. The banks gambled that other countries would continue to turn a blind eye to tax-dodging. The government underestimated the ferocity of the response and then fought fires as they appeared rather than pushing for an overall solution. “Switzerland always gets it wrong when there’s an external crisis,” says a former adviser to its banks, pointing to an earlier debacle over Holocaust-era accounts. “They think they’ll be forgiven because they’re neutral and play a useful role in global diplomacy.”

By contrast, next-door Liechtenstein, which produced many of the secrecy structures that Swiss banks sold, has won plaudits for reacting promptly to international pressure. Just months after a local taxevasion scandal erupted in 2008, the tiny principality had launched comprehensive information-exchange agreements in Europe and America. It has made up for some of the lost business by crafting a unique deal with Britain, the Liechtenstein Disclosure Facility. Britons with tainted assets in the principality’s banks can come clean and pay a 10% penalty (which some think too lenient). Crucially, those who bring in money from other jurisdictions, including Switzerland, are also eligible. Liechtenstein hopes to kill two birds with one stone, winning new business even as it cleans up its own act. Half of the 3,000 people who have taken advantage of the facility so far have brought in their assets from elsewhere. Britain has tripled its forecast for the amount it will raise, to £3 billion.

Singapore zing The Swiss are keeping an eye on the rise of Asia’s private-banking centres, particularly Singapore. For years the offshore world has swirled with rumours that money from Switzerland, Jersey and other European centres was heading east. They may have been exaggerated: the portion of wealth of European origin managed in Singapore and Hong Kong has gone up by only one percentage point in the past three

years, to 8-9% of the total, according to BCG. But the Asian offshore centres do not need help from Europe. Singapore has been sucking in vast sums from South-East Asia, particularly Indonesia, and smaller amounts from India and China. If recent growth continues, Singapore and Hong Kong combined could overtake Switzerland in the next 15 years, reckons BCG. One question is how they will deal with growing international pressure for greater openness. Singapore, for instance, has strict bank-secrecy laws and a poor record on exchanging information. Four years ago it was branded “out on a limb” by the OECD’s tax chief. Recently it has made concessions, signing dozens of bilateral information accords and making tax evasion a “predicate” offence for money-laundering, which means it can be dealt with more sternly. Local lawyers say secrecy is no longer absolute. In any case, Asians generally choose to bank in Singapore for its economic and political stability, not to hide untaxed income, says Barend Janssens of RBC Wealth Management.

Singapore’s apparent commitment to greater openness has yet to be tested. Meanwhile Hong Kong, which registers 150,000 new companies each year, has taken a step in the opposite direction, making it harder for outsiders to identify the directors of private companies. Asia’s offshore centres are becoming big sellers of corporate and investment vehicles, some of them deliberately opaque. Singapore is big in trusts —unregistered asset-protection vehicles that practitioners argue are “relationships” rather than owned entities. These are increasingly popular with rich Chinese keen to preserve newly acquired wealth.

Offshore centres have to strike a delicate balance when levying fees and taxes on the industry Private-equity firms have become big investors in the offshore-incorporation business, lured by the strong, stable cashflows from registration and renewal fees. They like “midshore” jurisdictions such as Singapore and Hong Kong that combine offshore traits (low tax, secrecy) and onshore ones (sophisticated, well-staffed financial centres). Martin Crawford, chief executive of OIL, a big offshore service provider, argues that midshores will thrive as regulatory pressure on pure offshore centres grows.

This eastern expansion will present both opportunities and threats to Switzerland. Some of its banking clients are defecting to Asia, but the big Swiss firms, particularly UBS, are wealth-management leaders in that region. Much the same applies to the main Anglo-Saxon tax havens, such as the Cayman and British Virgin Islands and Jersey. Asians are familiar with the products they offer, particularly those from Cayman and the BVI; indeed, some Chinese use “BVI” as a generic term for an offshore firm. But these jurisdictions worry that Asian clients will increasingly shop closer to home, and have responded by stepping up their marketing efforts in Asia, sending high-level delegations and opening representative offices.

According to an industry survey by OIL last year, Hong Kong could overtake the BVI as the leading seller of offshore firms within five years. A senior BVI official expresses regret that his jurisdiction did not see this coming earlier and push harder into areas such as hedge and private-equity funds. To be taken seriously in such higher-end businesses, the BVI would have to smarten itself up: its capital, Road Town, is charming but shabby, as are most corporate offices. The small, dingy meeting room of its sole vaguely international bank is more bedsit than bastion of finance. Richard Peters, the BVI’s pre-eminent corporate lawyer, sees a “slow run-off over time” in the islands’ core business and thinks “it may be too late for all those new products now.”

After the party Cayman, the most diversified of the Caribbean havens, has its own worries. Its banking assets have declined by 20% from their peak and structured finance is down by considerably more. Overall deal flow fell by 40% during the crisis and is now in “a very shallow climb,” says Kevin Butler of Conyers Dill & Pearman, a law firm. Cayman has maintained its spot as the main hedge-fund domicile, though numbers have dipped by 9%. A lot of fund administration work has gone back onshore, enticed by Canadian provinces, American states and Asian countries dangling tax breaks. The recent ousting for alleged corruption of the Caymanian premier, McKeeva Bush, has not helped.

Cayman’s public sector expanded hugely in the go-go years before the crisis, but it became a fiscal albatross as fees from offshore firms shrank. In response, the government tried to introduce a direct tax on expatriate workers but scrapped it amid fierce opposition from the foreign residents, who make up 40% of the population. Cayman bankers expect their annual licence fees to rise by up to 50% as officials try to plug holes.

Jersey has suffered a similar decline in bank and fund assets. The island has tried to turn regulation to its advantage, marketing itself as being at the “high-value”, respectable end of the tax-haven spectrum. But its time-consuming rules for everything from corporate registration to verifying the provenance of bank deposits are scaring off clean as well as dirty business, claim offshore bankers and corporate service providers. Mr Crawford says Asian law firms have been asking OIL to help move their clients from Channel Islands trusts to Singaporean ones. Jersey has hired McKinsey to help it navigate its challenges.

Keeping tax for most companies at zero is “sacrosanct”, says an official, so the island responded to the squeeze by bringing in a 3% goods-and-services tax (a kind of VAT), subsequently raised to 5%. “When they need more they’ll just turn the spigot, and it’s the locals who’ll pay,” complains John Heys, a tour guide and activist.

Orlando Smith, the BVI’s premier, accepts that offshore centres have to strike a “delicate balance” when levying fees and taxes. If the industry feels squeezed too hard by the OECD’s rulemakers on one side and the local politicians on the other, it might move elsewhere. In jurisdictions where finance typically accounts for around half of GDP, that is no small concern.

Who’s the criminal?

The agony and the ecstasy of offshore whistleblowing Feb 16th 2013 | SINCE THE START of the financial crisis, tax whistleblowing has been roundly applauded by the media.

But it remains “a hell of a tough business”, says Jack Blum, a lawyer in the field. One of Mr Blum’s clients is Heinrich Kieber, who in 2008 handed the German authorities client data from the Liechtenstein bank where he worked. He was paid €5m ($7.4m) for snitching but has been on Interpol’s wanted list ever since for breaking Liechtenstein’s privacy laws, which America supports because it sees Liechtenstein as an ally in the war on terrorist finance. Mr Kieber is in a witness-protection programme in a third country, unable to travel abroad.

Whistleblowers who take on secrecy-obsessed Switzerland can expect even rougher treatment. Rudolf Elmer, a former executive in the Cayman office of Julius Bär, a Zurich-based bank, fell foul of his employer, the police and the Swiss justice system when he accused the bank of shielding tax cheats.

Arrested in Switzerland at gunpoint by masked policemen in 2005, he was put in solitary confinement for six months, during which time no charges were brought and he was not allowed to see his wife. He says that after his release he endured various forms of intimidation, including cars screeching up his driveway at night. He feels that “whistleblowers in a secrecy jurisdiction are treated worse than murderers.” Julius Bär said Mr Elmer was “trying to make a living” out of his case and had “lost credibility”.

Mr Elmer has battled on at great personal cost, refusing to apply for a reward lest it call his motives into question. Almost a decade after he first broke rank, the criminal case against him and his counter-claims are still grinding through the courts. He suspects that is where the authorities want to keep them because “I am seen as a big political problem.” His actions did not even involve a breach of Swiss bank secrecy, he argues, since the data he provided were from the Cayman subsidiary. Switzerland has used the information to go after some Swiss tax evaders but not to challenge any international clients.

Another case involving a Swiss bank had a somewhat happier outcome for the tipster. Brad Birkenfeld was awarded $104m under the IRS’s whistleblowing programme last September for shopping UBS to the American authorities. However, he also had to spend three years in an American prison after negotiations over an immunity deal broke down. America is the country friendliest towards whistleblowers, but even there they receive scant protection from retaliation and blacklisting under the IRS scheme, and the minimum wait for a payout is five years. Which, says Mr Blum, “leaves plenty of time to feel vulnerable and friendless”.

Prospects

Sunshine and shadows Offshore financial centres will always be controversial, but they will stay in business Feb 16th 2013 |

LAST YEAR TIMOTHY RIDLEY, a Cayman-based offshore grandee, mused publicly on whether OFCs would thrive over the next decade or might “go back to tourism, fishing and rope-making…until global climate change finally sinks them”. He foresaw three possible scenarios: “doomsday”, a catastrophic decline as countries introduced policies that eliminated the need to use havens, such as sharp tax cuts; “nirvana”, the continued growth of such centres, driven by increased financial globalisation and continued regulatory and tax arbitrage; and “curate’s egg”, a mix of the other two, in which some flourish and others wither amid stop-start efforts by big countries to whittle away the advantages they offer. The third, Mr Ridley concluded, was the most likely.

In 2009, when the G20 seemed determined to bring tax havens down, that prediction would have looked optimistic. Now it seems about right. By and large, offshore centres have been spared the invidious choice they were supposed to be facing: embrace regulatory standards that undercut their main selling points, or reject them and be locked out of major markets. They have proved adaptable, finding new clients in emerging markets and carving out new product niches, some of them outside finance. Mauritius, for instance, hopes to become an international arbitration centre. Cayman has set up a special economic zone to develop medical tourism.

The history of tax havens is littered with existential panics that proved overblown. Mr Ridley recalls fears in the 1970s that America would strangle Cayman by cutting off air and commercial links. Robert Mathavious, the BVI’s financial regulator, chuckles when recounting predictions after the OECD’s 1998 crackdown that only half a dozen havens would survive. In fact, hardly any of them shut up shop. Some newcomers, such as Samoa and the Seychelles, have done well on the supposedly outdated strategy of offering basic shell companies shrouded in secrecy. Barriers to entry for new OFCs are said to have risen sharply because of higher compliance costs, but the evidence suggests otherwise. Company registries are cheap to set up; some, such as the BVI’s, now stay open round the clock for the customers’ convenience.

Other jurisdictions’ corporate laws are easily copied, sometimes including the spelling mistakes.

That is not to say that the big countries’ latest push for transparency can be ignored. It is still a work in progress, but the move towards more, and more systematic, exchange of client information will not be reversed. America’s FATCA, and the FATCA-lites elsewhere, are here to stay. So is the pressure for more clarity on the beneficial ownership of corporate vehicles, and for more regulation of offshore service providers.

Tax-fairness campaigners reckon that all this is part of a necessary realignment. As they see it, international tax policy and regulation are at last beginning to catch up with the OFCs, which flourished mightily during a quarter-century of laissez-faire financial expansion, allowing big banks, companies and the wealthy to skew the benefits of globalisation. An official in Jersey acknowledges that this movement constitutes “a very powerful current”. The island’s financial regulator, John Harris, says criticism from Britain’s politicians and media has left Jersey “fighting for its life”.

OFCs will always live precariously, not least because much of what they do can be damaged or destroyed at the stroke of a pen. Businesses often move offshore because of a particular tax law or regulation onshore, which may later be reversed. The Netherlands Antilles’ financial sector was trounced by America’s decision in 1987 to terminate a tax treaty that had encouraged international lending to flow through the islands. More recently hundreds of billions of dollars in short-term “sweep” deposits at Cayman banks flooded back to America after the Dodd-Frank act in 2010 permitted the Federal Reserve to pay overnight interest on demand deposits.

Predicting the future level of hostility from onshore governments is tricky, too. America and the European Union have shifted their stance several times over the past decade, depending on what was politically expedient. After the September 11th 2001 attacks tax havens took a beating for supposedly helping to finance terrorism. A few years later they became “partners” in tax-transparency negotiations, but after the 2007-08 financial crisis they were branded as dangerous again. Now that the world economy is no longer staring into the abyss, they might hope to be treated with less suspicion by the countries traditionally least friendly to offshore, such as France.

Clients, clients everywhere In future, however, the tax havens will need to take as much note of attitudes in large developing countries as in the OECD stalwarts. They understand that the balance of power in global economic governance is shifting, which is why they have lately been trying to forge high-level regulatory and political relationships in Asia and Latin America.

They are relieved that China, with Hong Kong and Macau under its wing, seems less hostile to offshore finance than Western governments currently are. India and Brazil, though more critical, take a pragmatic approach. India became aware of the dangers of trying to interfere with a popular tax haven last year when it sought to rewrite a tax treaty with Mauritius that had caused large amounts of inward investment into India to be routed via the island. Financial markets went into a deep dive at the prospect and India had to moderate and delay its move.

Harmonisation of financial rules looks as far away as ever. And where there are differences in national tax rates, regulatory standards and confidentiality laws, there will be opportunities for “international financial centres” to offer “legitimate arbitrage”—or, as their detractors see it, for “secrecy jurisdictions”

to provide “boltholes� that allow elites to undermine their home countries’ policies. Offshore financial centres are not ready to sink into the sea yet.

Business Information technology in Africa: The next frontier Food safety: After the horse has been bolted Lawyers: The say-on-pay payday Carrefour: Up the right aisle PSA Peugeot-CitroÍn’s troubles: Running out of road Swiss watchmakers: Time is money Oil in China: Smog and mirrors Schumpeter: How to make a killing

Information technology in Africa

The next frontier Technology companies have their eye on Africa. IBM is leading the way Feb 16th 2013 | NAIROBI |

MAMADOU NDIAYE grew up in Senegal. His parents were “not poor, but not rich”. He was fascinated by mathematics, which he studied at Cheikh Anta Diop University in Dakar and then taught for several years in Côte d’Ivoire, saving to pursue his dream of studying in America.

He went to New York, where he worked at Staples, an office-supplies chain, to finance his masters in statistics at Columbia University. A customer, impressed by Mr Ndiaye’s sales advice, suggested that the Senegalese apply for a job with his own employer, IBM. That was 15 years ago. Now Mr Ndiaye is back home, as manager of the office Big Blue opened in Dakar last May. The office in Senegal is just one sign that IBM believes Africa will bring in billions. It is no newcomer: it sold its first gear there to South Africa’s railways in 1911 and a mainframe computer to Ghana’s central statistics bureau in 1964. Lately it has been paying special attention to the continent.

In July 2011 it won a ten-year, $1.5 billion contract to provide Bharti Airtel, an Indian mobile-phone company, with information-technology services in 16 African countries. Since mid-2011 it has set up shop in Angola, Mauritius and Tanzania, as well as Senegal. In all, it boasts a presence in more than 20 of Africa’s 54 countries. Last August it opened a research lab in Nairobi, one of only 12 in the world. And between February 5th and 7th Ginni Rometty, its chief executive, and all who report directly to her met dozens of African customers, actual and prospective, in Johannesburg and the Kenyan capital. It was, Mrs Rometty said, the first time the whole top brass had assembled outside New York since she became the boss just over a year ago.

Big Blue may be ahead, but it is not alone. Last month Eric Schmidt, Google’s chairman, spent a week in sub-Saharan cities. He enthused about Nairobi, which, he wrote, “has emerged as a serious tech hub and may become the African leader.” Orange, a French mobile operator, and Baidu, China’s answer to

Google, recently introduced a jointly branded smartphone browser in Africa and the Middle East. Orange also sponsored this year’s Africa Cup of Nations, a football tournament, in South Africa. (Nigeria won it, beating Burkina Faso in the final on February 10th.)

This month Microsoft, which has offices in 14 African countries, unveiled a smartphone to be sold in several African markets. It is made by China’s Huawei and uses Microsoft’s new operating system.

In Kenya Microsoft intends to bring broadband to places that do not yet have electricity, using solar power and “white spaces”, or spare broadcast-television frequencies. Within a year, says Fernando de Sousa, the general manager for Microsoft in Africa, 6,000 people in the Rift Valley will have access to broadband. Similar projects are planned elsewhere. Since October Microsoft has been running “app factories” for programmers in Egypt and South Africa.

Mark Walker of IDC, a research firm, says that in the past three or four years multinational companies have adopted a “completely fresh approach”. They have “a lot more skin in the game: investing in local people, so there’s proper knowledge transfer, investing in country offices.” Companies are in it for the long term now, rather than quitting after a bad quarter or two.

Africa’s chief attraction is that it has been growing while richer regions have stalled (see chart 1). Its demographic prospects are promising, too. As America, Europe and China age, Africa can expect a bulge of workers in their productive prime. Though skills are in short supply, they are becoming more abundant.

According to the McKinsey Global Institute, the consulting firm’s research unit, in 2002 only 32% of Africans had secondary or tertiary education, but by 2020, 48% will have. The continent can call on degree-laden expatriates such as Mr Ndiaye and Uyi Stewart, the Nigerian chief scientist of IBM’s Nairobi lab.

Some countries are better off, more stable or simply keener than others to make the most of IT. Kenya may be keenest. In 2006, frustrated by the slow progress of a regional plan to lay a fibre-optic cable along the east coast of the continent, Kenya negotiated its own link to the United Arab Emirates. The Gulf cable landed in 2009. The regional link, in which Kenya remains a partner, followed the next year.

The lion’s byte

Bitange Ndemo, a bigwig in the Ministry of Information and Communications and the man responsible for the cable from the Gulf, says he wants to see a rise in IT’s share of Kenyan GDP from about 5% now to 35% “within a very short period”. He hopes for a mighty shift of employment away from agriculture. “But politicians must have the will,” Mr Ndemo says.

If they are to create new markets and to profit from them, technology companies have to be on the spot.

John Kelly, IBM’s head of research, says that after the firm set up labs in China in 1995 and in India in 1998, “we found that we were getting innovation out of those research labs which could only have occurred in those locations.” The Indian lab, for example, produced the “spoken web”, for illiterate people with cheap phones.

One of the Nairobi lab’s early challenges is traffic. The city has few traffic lights or cameras; hence the awful congestion. Signals from motorists’ mobile phones can help to track traffic, but planners have few data to work with. IBM’s lab will harness other sources, such as security cameras that are not aimed at the road but capture images of it anyway. IBM will then crunch all the data to help planners control traffic and decide where to build more roads.

The Nairobi lab is expected to earn its keep quickly. The Chinese and Indian labs, Mr Kelly says, took ten years to make a significant contribution technically and commercially. Kenya’s target is five. He says the lab has made a good start, drawing on work by an older sibling in Tokyo to tackle its traffic problem.

In many sectors, such as health care, education and water, as well as traffic, governments are sure to be important customers for IT companies. But private clients matter too, especially in telecoms and finance.

The mobile phone, the first computer many Africans will own (see chart 2), is the bridge between the two.

To Westerners, “mobile banking” is a new way of doing something old. To many Africans, it is the obvious way of doing something new. In Kenya M-PESA, a system of transferring money over phones, is an everyday, reliable utility. Equity Bank, a fast-growing bank, most of whose customers have never had an account before, has come of age with mobile technology: its chief executive, James Mwangi, says his customers can use any of its 54 products on the move. For technology companies, all this means a growing demand for many things: reliable connectivity; software; analysis of data on spending, lending and repayment; and data centres.

Technology companies say they are keen to serve smaller businesses too. Microsoft has announced a

programme called SME4Afrika, which is intended to bring 1m small and medium-sized enterprises online. Mr de Sousa points out that technology can also draw informal businesses into the formal economy. The ability to use software, computing power and storage online “as a service”, paying only for what you need and only when you need it, may put the cost of information technology within the budget of many small African businesses. “The person who invented the cloud did it for Africa,” says Mr Ndiaye of IBM in Senegal.

Mr Kelly makes a bolder claim, linking Africa’s emergence to that of “big data”. IBM’s answer to how the world can cope with the rising torrent of exabytes is “cognitive computing”. Instead of being given detailed instructions, cognitive computers are fed masses of data and use statistical analysis to answer complex questions. Watson, IBM’s first of this kind, was clever enough to win “Jeopardy”, an American television quiz show, beating human champions hollow. The true purpose of a Watson, however, is not to show off on television but to sift data from radio telescopes or provide medical diagnoses.

From Jeopardy to epidemiology Mr Kelly sees an opportunity “for Africa to move, and move first, to this new era of computing.” It can leapfrog straight to the tech frontier, without worrying about adapting old systems to cope with the data it creates. At the Catholic University of Eastern Africa, which will eventually be the new lab’s home, a Kenyan asked Mr Kelly, “Will you bring Watson to Africa?” Yes, he replied, if someone suggests a problem for it to solve. Mr Ndemo spoke up: “Let us bring Watson here in nine months.” Africa has plenty of problems. Computing power can help Africans solve them.

Food safety

After the horse has been bolted Horse meat in the food chain is a wake-up call, not a calamity Feb 16th 2013 |

Do I look like a cow?

TITUS ANDRONICUS avenged himself on the barbarian queen Tamora by murdering her sons and serving them up to her in a pie. European food manufacturers did nothing so dreadful when they sold horse as beef in burgers and lasagne. Horsemeat is not dangerous. Italian gourmets adore thin slices of prosciutto di cavallo. The Chinese chomp half a million tonnes of horseflesh a year. But if a product says “beef� on the label, it should be that.

Some big names are now deeply embarrassed. Tesco, a British supermarket, Aldi, a German discounter, and Findus, a frozen-food manufacturer, all inadvertently sold the fraudulent flesh. It may have reached more than a dozen countries. Sellers withdrew the offending products and grovelled. Politicians fulminated. More test results are expected soon. (Update: On February 14th Britain's Food Standards Agency said that eight horses slaughtered in the country tested positive for the painkiller bute and six of them may have entered the food chain in France.)

That horses have strayed into the food chain does not show that the fencing has collapsed. Food is vastly safer than it was a century ago, when food poisoning was a statistically significant cause of death (see chart). Rules tighten with each scare. After a deadly outbreak of a human version of mad-cow disease, caught from eating British beef in the 1990s, farmers had to give cows passports showing where they came from and where they had been. (Horses have passports, too, though the scheme is somewhat laxer.)

Big retailers and producers have brands to protect, so they are vigilant. When fraudsters are found to have diluted a pricey fruit juice with a cheaper one, or switched Basmati for ordinary rice, it is sometimes because a supermarket has spotted something wrong. An audit by Tesco of its suppliers “is one of the most feared and respected things in the industry,” says Michael Walker, a food-safety consultant. “How come it didn’t pick this up?”

Tesco’s answer is that in one case its supplier of frozen burgers disregarded a list of approved suppliers and its stipulation that the meat come from Britain or Ireland. But such mishaps have deeper causes.

Though prices of raw materials are going up, penny-pinching consumers refuse to pay more for readymeals. Retailers, equally unwilling to forgo profits, are putting relentless pressure on suppliers to cut costs. They in turn are frantically rejigging foodstuffs to be cheaper. “De-sinewed meat” (scraps mechanically separated from the carcass) seemed a fitting ingredient for low-priced British hamburgers until last April. But then the European Commission banned most types of it. Patty makers may have looked abroad for an alternative.

The mislabelled-mince saga reveals “just how convoluted” the supply chain can be, says Bryan Roberts of Kantar Retail, a consultancy. The ground-up horse that found its way into the own-label lasagne of Findus and Aldi was apparently slaughtered in Romania. Two intermediaries arranged its shipment to a French processor, Spanghero, which sent it to a factory in Luxembourg owned by Comigel, also French.

“The more complex the food chain, the more difficult it is to control,” says Mark Woolfe, a former head of food authenticity at Britain’s Food Standards Agency.

This bedevils every industry with stretched-out supply lines. Walmart, an American retailing giant, had no idea that garment suppliers had subcontracted orders to a sweatshop in Bangladesh until it burned down, with consequences more awful than the queasiness felt by unwitting consumers of horsemeat. A recent survey by PwC, a consultancy, found that retail and consumer-goods companies were less likely than other industries to see their supply chains as having “strategic” importance, treating them instead as ways

to save money. The footloose relationships that food companies often have with suppliers can spring nasty surprises.

Even before the horsemeat hoo-ha, there were rumbles of change. A report by Rabobank, a Dutch bank, urges food companies to move away from fleeting relationships with independent-minded suppliers and towards “dedicated” supply chains based on long contracts and close collaboration. Walmart’s IPL and Tesco’s Group Food Sourcing, which bypass middlemen and buy directly from producers, may be steps in that direction.

Horses for courses Retailers say auditors cannot be expected to catch the sort of fraud that may have let horsemeat into the burger chain. The emphasis may well shift towards testing, both by agencies and by the industry. Food is already checked for pesticides, microbes, heavy metals and drugs. One reason horseburgers were not caught earlier is that a panic about horsemeat in salami in 2003 turned out to be an expensive false alarm.

Now testers will no doubt screen for the entire manifest of Noah’s ark.

Mr Roberts hopes that retailers will ease up in their unyielding quest for lower costs. However, that would require shoppers, too, to care less about prices. Good luck with that.

Lawyers

The say-on-pay payday A new wave of cut-and-paste lawsuits Feb 16th 2013 | NEW YORK | THE Dodd-Frank law of 2010 requires a “say-on-pay” vote for shareholders of American companies.

Clever lawyers scent a payday for themselves.

One law firm in particular, Faruqi & Faruqi, has filed a series of class-action suits demanding more information about how companies decide what to pay their senior executives. It seeks to prevent its targets from holding their annual meetings until the extra information turns up. One such suit, against Brocade Communications, a Californian company, forced the suspension of the annual meeting last February. Brocade quickly settled. Faruqi’s fees were $625,000. Several other companies, not wanting to delay their meetings, have settled similar suits.

Alas, paying up does not make the problem disappear, as English kings discovered long ago when they bribed Viking marauders to go away. DLA Piper, a law firm defending companies, warns that if a company offers extra disclosure and settles a suit, “every piece of information it discloses may provoke a plaintiff to argue that yet more backup information is required.” Companies fear they will end up paying an “annual meeting tax”.

Some have decided to fight back. Microsoft was the target of a suit last October, filed by Natalie Gordon, who held less than $6,000 of stock. The company wheeled out bigger shareholders who found nothing wrong with its disclosure, and a law professor who testified that not one of Microsoft’s peers disclosed all the information Ms Gordon was seeking. The suit was eventually dropped—after Microsoft had spent more on lawyers and experts than it would have cost to settle.

Juan Monteverde, the lead lawyer at Faruqi & Faruqi on these cases, says that the extra disclosure he is suing for should be easy to provide, and is part of directors’ fiduciary duty. The first such case that came to him, against Brocade, came “out of the blue” from a concerned plaintiff, he says.

Mr Monteverde will not say anything about Ms Gordon, or how his firm came to represent her in six suits against public companies in the past year (including Microsoft). He dismisses the idea that lawyers are actively seeking clients to win quick settlements and fees: “Every successful plaintiffs’ lawyer in this country is always called ‘entrepreneurial’.” Criticism does not ruffle him. “We believe in what we’re doing,” he says.

Carrefour

Up the right aisle Georges Plassat is reviving the world’s second-biggest retailer Feb 16th 2013 | PARIS | UNTIL recently, Carrefour’s supermarkets in France were run along Napoleonic lines. Strict orders emanated from its headquarters in Paris. Every store sold a similar range of products. If selling groceries were like marching an army over the Alps, this strategy would have worked brilliantly. But it isn’t, and it didn’t.

Customers enjoy choice, and their tastes vary. In Orange, for instance, a town in Provence where many north Africans live, E. Leclerc, a rival chain, was offering 20 varieties of chickpea. The local Carrefour had only two brands, sighs a big shareholder. Sales were flatter than pitta bread.

Enter Georges Plassat, the new boss who joined Carrefour last year. One of his first acts was to give store managers the power to adapt to local tastes. At the big Carrefour in Monaco, for example, out went the racks of cheap luggage, of the sort chic locals would be embarrassed to see their servants carrying. In came a sushi bar and a global wine selection. The place is now humming, says the investor.

Not long ago Carrefour was in such trouble that a break-up seemed likely. It was rapidly losing market share in France, its biggest market, to Leclerc. The “hypermarket” model that it invented in the 1960s is considered to be well past its sell-by date. With more single and older customers, convenient city-centre supermarkets are becoming more popular, rather than vast stores on the edge of town selling everything from charcuterie to televisions. And retailing specialists in consumer electronics and fashion have eaten into Carrefour’s non-food business. Under Carrefour’s former chief executive, Lars Olofsson, a Swede, the firm issued five profit warnings in a year, more than any other big French company has ever made.

But after six months under Mr Plassat, improvement is evident. “The tanker has turned,” opines John Kershaw of Exane BNP Paribas, a bank. According to Kantar, which measures retail-market share, Carrefour started winning back ground in France last spring. Its sales of food had fallen in every quarter except one since 2010, but in the last two quarters of 2012 they grew again. The decline in sales of nonfood items, the trickiest area, also slowed sharply.

What is Mr Plassat doing that his predecessors didn’t? Being French helps. The first boss to leave suddenly, in 2008, was José Luis Duran, a Spaniard with a background mainly in finance. His successor was Mr Olofsson, a marketing whiz from Nestlé, a food company. Mr Olofsson then brought in an Englishman from Tesco, James McCann, to run French hypermarkets, and he encouraged executives to communicate in English at headquarters. “Imagine a Frenchman going to Walmart’s headquarters in Bentonville and saying: ‘Now we will write and speak in French’,” scoffs an insider.

Mr Plassat, by contrast, is a French shopkeeper through and through, having worked for Casino, another French supermarket chain, and for Carrefour itself back in the 1990s. “When dealing with something as sensitive as the place people get their food,” says Mr Plassat, “it’s important to be close to the local culture.”

His diagnosis of Carrefour’s problems is three-pronged. First, the firm failed to digest a merger with Promodès, a group of retail brands, in 1999. The two management teams fought in the aisles and neglected customers. Second, the group overexpanded internationally, leaving it with insufficient funds to invest at home. Its reputation for offering good value slipped. And it became over-centralised, starting well back in the 2000s, so that Leclerc’s local managers ran rings around it.

Mr Plassat has moved quickly to reverse all this, starting with the centralisation. Store managers can now decide how many kilos of pasta or bananas they want to stock. Before, head office simply told them. Now they are free to order regional products, which are popular, not just national brands. Mr Plassat has also sold Carrefour’s businesses in four countries: Greece, Colombia, Indonesia and Malaysia. The firm is still big in China and Brazil, but the proceeds from selling up in places where it was weak can be ploughed back into its European heartland.

Mr Olofsson had started a revamp of 245 hypermarkets across Europe, which would have cost €1.5 billion ($2 billion) in total, called Carrefour Planet. Shoppers were treated to more theatrical food displays, nurseries and more organic produce. It was a step in the right direction but cost a bomb, says Natalie Berg of Planet Retail, a consultancy: the fancy stores cost twice as much as traditional Carrefour outlets.

What French shoppers crave, however, is lower prices. Mr Plassat is keen to oblige. His ads compare Carrefour’s stickers with those of Leclerc. And he is making cheap improvements. On a recent store visit he was buttonholed by a customer who had waited ages for ham to be sliced; he quickly agreed that the store should have a second slicing machine. Carrefour Planet, meanwhile, has been binned.

Two big questions remain. Mr Plassat may drive a revival in sales over the next few years, says Mr Kershaw, but he may not be able to do much more than delay and soften what may be a structural decline in hypermarkets. “Our hypermarkets have in the past suffered from lack of investment and a lack of belief in the format,” answers Mr Plassat. Carrefour is already a multi-format retailer, and will continue to add smaller stores.

Mr Plassat will also face pressure from Carrefour’s two biggest shareholders, Colony Capital, an American property-investment fund, and Bernard Arnault, the boss of LVMH, a luxury-goods firm.

Colony Capital and Mr Arnault jointly bought a stake in the firm in 2007 when its share price was 58% higher than today. They now own 16% of Carrefour. Other shareholders grumble that they have exerted too much influence. Carrefour’s ill-conceived attempt in 2011 to merge its Brazilian business with a local competitor, Pão de Açúcar, for instance, is thought to have been pushed by Blue Capital, the entity which

holds Mr Arnault’s and Colony’s shares. For now, though, the man behind the counter has some room to act.

PSA Peugeot-Citroën’s troubles

Running out of road Another dire warning for Europe’s carmakers Feb 16th 2013 |

Why build a factory anywhere else?

MODERN cars are exceptionally reliable. The same cannot be said for many carmakers. PSA PeugeotCitroën is the latest to suffer a breakdown. On February 13th the French firm announced a record annual loss of €5 billion ($6.4 billion), mainly the result of huge write-downs of the value of assets across the entire company. It also lost money making cars.

Peugeot’s bosses reckon that its European sales will fall by 3-5% this year, and do not expect a recovery soon. The continent has too many car factories, but governments are reluctant to allow carmakers to close them. And Peugeot, like its struggling rivals Fiat, Renault and Ford, is battling a three-way attack on its already declining market share.

Volkswagen has used its immense economies of scale to offer Europeans fine cars at reasonable prices.

Hyundai-Kia and other budget Asian car firms are grabbing share at the bottom and are moving upmarket.

Even Germany’s luxury carmakers, BMW and Mercedes-Benz, are turning out a wider range of the sort of smaller cars that are Peugeot’s biggest sellers.

Peugeot’s family owners have patriotically kept 40% of production in France, where prickly unions and a Socialist government make factory closures and job cuts difficult. Renault, a French rival, has built more factories in lower-cost countries; it makes only a quarter of its cars in France.

Renault has another buffer: its long partnership with Japan’s Nissan. Fiat is held up by Chrysler, of which it is the main shareholder. Peugeot lacks a supportive partner. A cost-sharing alliance with OpelVauxhall, GM’s battered European division, announced a year ago, has achieved little yet. A merger between the two might make sense, but unions and politicians would oppose it.

Peugeot’s cars have improved: the 208 supermini and Citroën’s DS range are nifty motors. The firm has a sizeable cash pile and a government apparently willing to prop it up. Last October French taxpayers handed over €7 billion and rumour has it that the state might take a stake. But can it really keep Peugeot running for ever?

Swiss watchmakers

Time is money An industry ripe for a shake-up Feb 16th 2013 |

Worth the wait?

THE average Swiss watch costs $685. A Chinese one costs around $2 and tells the time just as well (see chart). So how on earth, a Martian might ask, can the Swiss watch industry survive? Yet it does. Exports of watches made in Switzerland have grown by 32% by value over the past two years, to SFr21.4 billion ($23.3 billion). Demand in the biggest markets (China, America and Singapore) dipped recently, but some of the slack was picked up by watch-loving Arabs and Europeans.

No one buys a Swiss watch to find out what time it is. The allure is intangible: precise engineering, beautifully displayed. The art of fine watchmaking has all but died out elsewhere, but it thrives in Switzerland. “Swiss-made” has become one of the world’s most valuable brands.

In the popular imagination, Swiss watches are made by craftsmen at tiny firms nestled in Alpine villages.

In fact, the industry is dominated by one big firm. The Swatch Group’s stable of brands (Breguet, Blancpain, Omega and a dozen others) generated watch and jewellery sales of SFr7.3 billion in 2012.

That is up by 15.6% over the previous year and accounts for one-third of all sales of Swiss watches. In January Swatch announced the purchase of Harry Winston, an American jeweller which also makes watches in Geneva.

Swatch’s dominance goes even deeper than this. It is the biggest supplier of the bits that make Swiss watches tick. It owns ETA, which makes over 70% of the movements (core mechanisms) put in watches by other Swiss watchmakers. Another subsidiary, Nivarox-FAR, supplies more than 90% of the balance springs (which regulate watches).

Many big brands rely on Swatch. LVMH (owner of Bulgari, Hublot and TAG Heuer) and Richemont (owner of IWC, Piaget and Vacheron Constantin) use Swatch components. So do the British and German watchmakers that are trying to break into this lucrative market. Few, however, can match the precision of a Nivarox balance spring.

Swatch became the watchmaker to watch in the 1980s, when it merged two weak companies and launched Swatch watches as a relatively cheap brand (though not nearly as cheap as a typical Chinese timepiece).

It remains dominant, in part, because other firms find it easier to let someone else go to all the trouble and expense of producing their watches’ most fiddly and essential components.

But Swatch now finds this arrangement irksome. It supplies parts to rivals (Swiss and foreign) which then spend lavishly on advertising. Swatch would like to curb its sales of components, to 30% of the Swiss total by 2018. The Swiss Competition Commission agreed to modest reductions in 2012. After lobbying by watchmakers, Swatch will make no more cuts this year, but next year it will probably try again.

Swatch may be doing the industry a favour. Its actions may prod other watchmakers to invest more in their own factories. Already, Richemont and LVMH are buying up smaller component-makers. “Everyone could actually produce these components,” says a spokesman for the Competition Commission.

At present only a few high-end watchmakers can do without Swatch: for example, Patek Philippe in Switzerland and Robert Loomes in Britain. But such Swatch-shunners typically make only a few (costly) watches each year. Firms that make larger batches of not-quite-so-pricey watches still need Swatch. So its retreat from the parts market will cause turmoil, and probably more consolidation.

Meanwhile the Swiss government seems about to tighten the definition of “Swiss-made”. Currently, a watch may not claim to be Swiss unless 50% of its components, by value, were crafted in the cantons.

Swiss watchmakers are trying to get the threshold raised to 60%. That will create demand for Swiss components even as Swatch curbs the supply. So watch out: prices will rise even higher.

Oil in China

Smog and mirrors Sinopec’s big plans hit an obstacle Feb 16th 2013 | SHANGHAI |

Might as well take up smoking FU CHENGYU has global ambitions. In 2005 he led CNOOC, a state-run Chinese energy giant, to make an audacious takeover bid for Unocal, an American oil-and-gas firm. That provoked a protectionist backlash, and CNOOC retreated. (It has since won approval to buy Nexen, a Canadian energy firm.) In 2011 Mr Fu took over as boss of China Petroleum & Chemical Corp (Sinopec), another state-run outfit.

He has tried to transform the domestically focused firm into an international oil giant.

Three things make people take Mr Fu seriously. First, he wields a lot of clout in Beijing. Second, his push to diversify away from low-margin refining ought to shore up Sinopec’s balance-sheet. Third, foreign investors hope that his bold management style will bring better corporate governance. On all three counts, however, he has suffered setbacks.

Beijing is reeling from the worst smog on record, and the public’s mood is as foul as the air. China’s new leaders, ever wary of anything that might cause unrest, have promised to clean up the pollution quickly.

Among their targets are the country’s antiquated, filthy oil refineries. Yet Mr Fu, when asked about the smog, harrumphed to Xinhua, an official news agency, that his refineries were not at fault. He blamed lax regulations. That prompted gales of derisive laughter online.

Sinopec is not like a Western oil firm. As an arm of the state (and a more powerful one than the environmental-protection ministry) it has a lot of say in writing its own rules. That is perhaps why in much of China regulations allow the sulphur content in petrol to be as high as 150 parts per million, whereas European standards cap it at 10 ppm. A pundit in the Shanghai Daily said his comments were “a massive public-relations disaster” and “highlighted a serious lack of responsibility”.

This row will hit Sinopec’s finances hard. They were already suffering because, unlike its Chinese peers, Sinopec is heavily exposed to refining. It owns half of the country’s refining capacity. The snag: Sinopec must buy crude at global prices but its refined petrol and diesel can be sold only at artificially low prices set by the government. The result is red ink (see chart).

Now Sinopec will be squeezed further. The ruling State Council announced earlier this month that it will unveil new standards for diesel in June and petrol in December that will cap the sulphur content at 10 ppm, to be implemented nationwide by 2017. Refiners must upgrade facilities, or else. Sinopec already spends a fortune maintaining and upgrading its refineries. Moody’s, a ratings agency, says it will need to spend an additional 30 billion-40 billion yuan ($4.8 billion-6.4 billion), most likely paid for by borrowing.

This huge outlay and the unwelcome focus on refining run counter to Mr Fu’s strategy. His plan calls for Sinopec to diversify away from refining and into exploration. He also plans to acquire billions of dollars of upstream assets (such as foreign oil wells) from Sinopec’s unlisted parent.

Deep wells, deep debts To do so, Sinopec may need to go deeper into debt. That points to the third recent blow to Mr Fu’s credibility. This month Sinopec irked investors by unveiling a $3 billion share placement with a handful of parties that diluted the holdings of minority shareholders. The firm says the money will be used for “general corporate purposes”, whatever that means.

Corporate-governance scolds will squawk if Sinopec uses the $3 billion to buy upstream assets. It would be even more worrying, adds Tom Reed of Argus Media, an industry publisher, if it needs shareholders to fund its working capital, as a recent regulatory filing suggests. That may mean it is facing a cash squeeze, says Mr Reed. Nobody is suggesting that a Chinese national champion could go bust. Still, Sinopec’s prospects may be dimming, like the sky over Beijing.

Schumpeter

How to make a killing Business has much to learn from the armed forces Feb 16th 2013 |

IT IS not one of London’s grander clubs. The furniture is dowdy, the carpet threadbare. But who needs grandeur when you have heroism? The Special Forces Club was founded in 1945 by former members of the Special Operations Executive, an organisation that wrought havoc behind enemy lines during the second world war. Today it draws its members from the special forces, the intelligence services and the anti-terrorism police. The walls are lined with photographs of former members. Black frames identify those who were killed in action.

The club is a reminder that some things are more important than money. But the world of money is hard to ignore. Harrods, a posh department store, is just around the corner. A Russian oligarch is noisily building a palace across the road. Many members have to think about making a living now that the army is shrinking. They wonder: are the skills that are celebrated inside the club useful in the world outside its windows?

Once upon a time business could not get enough of the smell of cordite. Tycoons referred to themselves as “captains of industry” and crafted “strategies” (from the Greek word for “general”) for their troops. They talked of waging “war” on their rivals. They relaxed by reading Sun Tzu’s “The Art of War”. But more recently attitudes have changed. Businesspeople argue that military-style command-and-control systems are out of date in a world of knowledge workers and fluid alliances.

This argument provokes derision in the Special Forces Club. Sir Michael Rose, a retired general who spent part of his career with Britain’s SAS (Special Air Service), points out that the special forces have always embraced currently trendy management nostrums such as “empowerment” and “high-performance teams”. People who are dropped behind enemy lines have no choice but to rely on their own wits and make the most of limited resources. Sir Michael also points out that the regular forces have followed the special forces in introducing a “mission-command approach”—that is, a commander defines the overall

mission but then leaves the officers on the ground to decide how to execute it.

Plenty of retired officers argue that businesspeople have much to learn from the armed services. For example, business theorists increasingly emphasise the importance of corporate culture, yet many new businesses do a dismal job of nurturing it. The military services, by contrast, have been adept at preserving their culture at a time of social turmoil. Granted, they have sometimes been slow to change.

America only lifted the ban on openly gay troops in 2011, and on women in combat last month. But still, armies are much better than other institutions at building a lifelong esprit de corps. Military mottoes make strong men cry: (“The few, the proud”; “Who dares wins”). Most corporate mission statements make desk warriors cringe with embarrassment.

The armed forces are also good at cultivating soft skills. Andrew St George of Aberystwyth University points out that Britain’s Royal Navy prepares people well to spend long periods in cramped quarters. It urges seamen to be cheerful in all circumstances. It fills dead time with contests—known as Dogwatch Sports—such as passing a stick across an ever-widening divide. The navy’s emphasis on telling jokes and stories over long dinners probably makes no sense to a cost-obsessed management consultant. But it has helped sailors to deal with naval warfare’s awful combination of tedium and danger.

The army has done a fine job of training more generally. It has always grappled with one of the most difficult jobs imaginable: training people to kill and risk being killed. Today, in the West at least, it has to do this in a looking-glass world where teenagers know their “rights”, health-and-safety officials inspect shooting ranges and politicians are constantly squeezing resources. Yet still it turns out soldiers who can handle technology, who work well in teams and who never quit to join a competitor.

Damian McKinney, a former Royal Marine, argues that today’s armed services have more to teach the private sector than ever. For example, how to build a ladder of training rather than just prepare people for the next job: armies routinely think in terms of “two rungs up”. And how to learn from experience: armies routinely conduct post-mortems on their missions.

From foxhole to corner office Some businesspeople are eager to learn from the men and women in uniform. Mr McKinney recently created a “leadership academy” for Walmart, a supermarket chain, modelled on a military staff-training college. He and Sir Michael Rose both pontificate for military-flavoured management consultancies (McKinney Rogers and Skarbek Associates, respectively). Michael Useem of Wharton Business School incorporates visits to battlefields and lectures from military leaders into his courses.

Coping with risks and making decisions quickly under pressure are useful skills for entrepreneurs, which is perhaps why the Israeli army sires so many high-tech start-ups. And the army trains good managers, too.

An officer must never issue an order that will not be obeyed, so he must learn to gauge the mood of his men. As the wars in Afghanistan and Iraq wind down, more veterans will be looking for second careers.

Some have fought for longer than the generation that defeated Hitler. Many have international experience.

Oil and mining firms that operate in the rough parts of Africa and the Middle East are eager to hire them.

So are firms in other industries. Amazon brags about its military-friendliness. Walmart vowed last month to hire any veteran who applied for a job within a year of being honourably discharged. Companies that complain that they cannot find people with the right mixture of drive and experience have only themselves to blame if they miss this arsenal of talent.

Economist.com/blogs/schumpeter

Finance and economics Finance and the American poor: Margin calls Buttonwood: Teacher, leave them kids alone Barclays and Deutsche Bank: Surviving, not thriving Interest-rate swaps in India: Derivatiff Cannabis as an investment: The audacity of dope Carbon markets: Extremely Troubled Scheme Free exchange: Middle-income claptrap

Finance and the American poor

Margin calls Life on the edges of America’s financial mainstream Feb 16th 2013 | ATLANTA |

ONLY one thing is worse than the financial industry dangling inappropriate products in front of poor customers, and that is not providing them with financial services at all. In December the Federal Deposit Insurance Corporation (FDIC) released a survey that found roughly one in 12 American households, or some 17m adults, are “unbanked”, meaning they lack a current or savings account.

The survey also found that one in every five American households is “underbanked”, meaning that they have a bank account but also rely on alternative services—typically, high-cost products such as payday loans, cheque-cashing services, non-bank money orders or pawn shops.

Not all the unbanked are poor, nor do all poor people lack bank accounts. But the rate of the unbanked among low-income households (defined in the FDIC survey as those with an annual income below $15,000) is more than three times the overall rate. The proportion of poor Americans without an account compares particularly badly with other rich places (see chart).

The unbanked usually have no alternative but to use cash for all their transactions. Without an account to put pay-cheques into, they have to use cheque-cashers. This does not just mean incurring a fee; carrying large amounts of cash also increases the risk and harm of theft. To pay their utility bills the unbanked need either a non-bank money order, for which they have to pay a fee, or a place that accepts utility payments in cash.

When they need credit, the unbanked turn to payday lenders or, if they have a car, to car-title loans secured by their vehicles. Payday lenders say that high volumes—estimated at $29.8 billion for storefront payday lenders and $14.3 billion for online lenders in 2012—demonstrate high demand. Critics retort that much of that volume comes not from a broad customer base, but from customers taking out additional loans to cover the original debt. A study by the Centre for Financial Services Innovation, a campaign group, found that the average payday customer takes out 11 loans a year; the annual interest rate can exceed 400%.

Lawmakers are taking an increasingly dim view of this: 18 states and the District of Columbia outlaw high-rate payday lending. The nascent Consumer Financial Protection Bureau (CFPB) has held a public hearing on the subject, boosting speculation that the federal government may start regulating payday lending.

Clamping down on payday loans would make more sense if regulators had not made it harder for retail banks to serve low-income Americans. The Durbin amendment—passed as part of the Dodd-Frank act in July 2010—capped interchange fees, the commission that merchants pay, on debit cards. One year earlier Congress passed the Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act), which reduced interest-rate increases and late fees on credit cards. The CFPB is also looking at overdraft fees. Add in persistently low interest rates, which have eaten into banks’ net interest margins, and the

economics of banking the poor is far less attractive than it was.

Michael Poulos of Oliver Wyman, a consultancy, says that “before the crisis, almost every bank account made money. Big accounts made money on the spread, and small accounts made money on incident fees.

You made money on all the accounts with interchange fees. All of that is either severely curtailed or completely gone.” Oliver Wyman reckons that US banks now lose money on 37% of consumer accounts.

For those concerned that their low net worth bars them from the banking system, there are two reasons for hope. The first is that lenders and credit bureaus are starting to use a broader range of data to determine the creditworthiness of prospective borrowers. Many of the unbanked have no credit histories. But data from rent, mobile-phone and utility bills give lenders a way to find lower-risk borrowers.

The second reason for optimism is an increasingly competitive market in pre-paid cards. Once simply reloadable proxies for cash, many of these cards now offer much the same features as bank accounts.

Consider the Bluebird card, a joint venture between Walmart, America’s largest but decidedly downmarket retailer, and American Express, a decidedly upmarket credit-card firm. Among other things, Bluebird offers direct-deposit facilities (including an option where you can take a picture of a pay-cheque with your smartphone) and fee-free sub-accounts (so that a parent can give a child a card with preset spending limits). Pre-paid cards are not perfect: their fees can be sizeable and opaque, and they offer limited consumer protection. But they are convenient and a growing part of America’s consumer-finance landscape.

The share of unbanked households using pre-paid cards rose from 12.2% in 2009 to 17.8% in 2011. The Mercator Advisory Group forecasts a compound annual growth rate of 21% for the pre-paid card market to 2015, by when it expects the total dollar amount Americans load onto cards to be around $390 billion, more than ten times as much as in 2006.

The banks may yet follow suit. Michael Barr of the University of Michigan suggests that big banks should start offering basic accounts—offering electronic payments rather than cheque-writing, for instance—that operate with either pre-paid cards or debit cards. Overdraft-proofing the debit cards and eliminating paper cheques would reduce cost and risk. Such accounts may offer banks only modest revenue, but that is still better than none.

Buttonwood

Teacher, leave them kids alone Financial education has had disappointing results in the past Feb 16th 2013 |

HERE is a test. Suppose you had $100 in a savings account that paid an interest rate of 2% a year. If you leave the money in the account, how much would you have accumulated after five years: more than $102, exactly $102, or less than $102?

This test might seem a little simple for readers of The Economist. But a survey found that only half of Americans aged over 50 gave the correct answer. If so many people are mathematically challenged, it is hardly surprising that they struggle to deal with the small print of mortgage and insurance contracts.

The solution seems obvious: provide more financial education. The British government just added financial literacy to the national school curriculum, to general acclaim. But is it possible to teach people to be more financially savvy? A survey by the Federal Reserve Bank of Cleveland (see sources below) reported that: “Unfortunately, we do not find conclusive evidence that, in general, financial education programmes do lead to greater financial knowledge and ultimately to better financial behaviour.�

This is especially the case when children are taught the subject at school, often well before they have to deal with the issues personally. Surveys by the Jump$tart Coalition for Personal Financial Literacy, a campaign group, found that American students who had taken courses in personal finance or money management were no more financially literate than those who had not. A detailed survey of students from a Midwestern state found that those who had not taken a financial course were more likely to pay their credit card in full every month (avoiding fees and charges) than those who had actually studied the subject.

Perhaps the answer is to teach people when the issues are more relevant. That was the conclusion of the Cleveland Fed researchers, who recommended that programmes be targeted at specific individuals, such

as those making a house purchase or struggling with credit-card debts. There is evidence that employees who receive training about the benefits of pension plans are more likely to join schemes and to save more when they do.

But even this approach has its problems. Consumer enthusiasm for learning about finance is limited. When a free online financial-literacy course was offered to struggling credit-card borrowers, only 0.4% logged on to the website and just 0.03% completed the course. Those who choose to be educated about finance may be those who are already interested and relatively well-informed about it.

Making such education mandatory for consumers would be expensive. And who would pay for it?

Governments have many claims on their cash. Financial firms might sponsor such courses but would the resulting advice be entirely objective?

Another problem, highlighted by critics such as Lauren Willis of Loyola Law School, Los Angeles, is that many financial issues are much more complex than deciding whether to pay off credit-card debts. How much money should you set aside for retirement, for example? What is the optimal portfolio mix between equities, bonds and other assets? The “right” answer to this question may differ from individual to individual and can be known only in retrospect. Fifteen years ago the conventional wisdom was that equity-heavy pension portfolios would earn high returns and that individuals need make only modest contributions. That turned out to be wrong.

Furthermore, many consumers do not want to make their own financial decisions, either because they find the issues too complex or because they fear the consequences of choosing the wrong option. They would rather leave the decisions in the hands of an adviser or rely on the experience of family and friends. When firms offer a range of pension funds to choose from, the default option is by far the most popular.

Governments should focus on making that option as safe and inexpensive as possible.

So should we give up on financial education altogether? Not necessarily. The purpose of education is to prepare children for the challenges they face in life. Coping with finance is one of those challenges. It may be that better-designed courses can be more successful: replacing yakking lecturers with financiallythemed video games is one way that people are trying to make education more appealing. None of this, alas, will help if students cannot understand basic maths. As the saying goes, there are 10 types of people: those who understand binary numbers and those who don’t.

Sources

"Do Financial Education Programs Work? ", Ian Hathaway and Sameer Khatiwada, working paper 08-03, April 2008 "Financial Literacy: What Works? How Could It Be More Effective? ", William G. Gale and Ruth Levine, October 2010 "The Impact of Financial Literacy Education on Subsequent Financial Behaviour", Lewis Mandell and Linda Schmid Klein "The Financial Education Fallacy", Lauren E Willis, presentation to American Economic Association Economist.com/blogs/buttonwood

Barclays and Deutsche Bank

Surviving, not thriving Europe’s investment-banking champions face a tough future Feb 16th 2013 | BERLIN AND LONDON |

This ethics programme is getting out of hand A DECADE ago the ascent of European investment banks seemed unstoppable. Their fall has been precipitous. Of the more than half a dozen European banks that stood astride the world’s capital markets five years ago, only two real powerhouses remain: Deutsche Bank and Barclays. Both are fighting to retain their perch. On February 12th Barclays released a new strategy that reaffirmed its ambitions to stay in the “bulge bracket” of investment banks. Deutsche, too, is determined to remain in the top league. It will not be easy.

The slide of Europe’s investment banks marks a sharp reversal from the turn of the century, when wellknown American firms such as Paine Webber and Bankers Trust fell in quick succession to expansionary rivals from across the Atlantic. Even the start of the financial crisis seemed at first to offer an advantage to European firms as they circled American banks wounded by the collapse of the housing market: Lehman’s North American operations were bought by Barclays, for example.

Now the boot is on the other foot. Under pressure from Swiss regulators, UBS is closing large parts of its investment bank; the Royal Bank of Scotland has also retrenched sharply. French banks were last year forced into full flight from many of their dollar-based international activities such as trade and infrastructure finance. The most successful American banks trade at price-to-book ratios well above their European competitors (see chart).

Barclays and Deutsche are both slimming down, too. Barclays, for instance, this week announced plans to cut 3,700 jobs, of which 1,800 will be in its corporate- and investment-banking businesses (and most of the rest in its struggling southern European operations). Both banks are taking a knife to costs, with employee pay on the chopping board. Deutsche has slashed its bonus pool to 9% of revenues, down from 22% in 2006.

But neither is about to leave the stage. Deutsche has established itself as one of the world’s leading “flow monsters” in currencies and fixed income, alongside a handful of American banks such as JPMorgan Chase, BankAmerica Merrill Lynch and Goldman Sachs. Barclays has become a master at helping companies sell bonds; and its purchase of Lehman’s business allowed it to establish a strong presence in American equity markets, where it advises companies on takeovers and helps them sell shares. Some had expected Antony Jenkins, Barclays’ chief executive, to announce much harsher cuts in investment banking this week as part of his drive to overhaul the bank’s values. In fact, Barclays will not look so different under Mr Jenkins from the bank bequeathed by Bob Diamond, his predecessor.

Yet both Deutsche and Barclays face a tough future. Few companies in Europe or America are raising money through IPOs; although bond issuance has spiked recently, the upturn was largely driven by refinancing activity as firms tapped bond markets to pay off dearer debt. Such activity could fall off this year, analysts reckon.

Deeper changes are also affecting many of the markets in which Barclays and Deutsche excel. Both used to earn fat profits structuring derivatives to help companies and investors hedge against swings in interest rates, commodity prices and currencies. Yet regulators will soon force many of these over-the-counter derivatives onto exchanges. That will slash margins. Matt Spick, a research analyst at Deutsche, recently noted in a report that revenues for investment banks may fall by 45-50% in some business lines.

American universal banks do not face the same sorts of legislative upheaval as European ones. In Britain, the so-called “ring fence” between investment and retail banking will probably raise the cost of

borrowing for the wholesale arm of Barclays; Germany is also mulling some kind of separation. Another threat to Deutsche and Barclays is a proposal from the Federal Reserve that foreign banks with big operations in America should be forced to maintain a local reservoir of extra capital and liquidity. That would put European banks at a disadvantage in the world’s deepest capital markets. “It would be the beginning of the end of global banking,” says a source at one.

And even as Barclays and Deutsche strive to cut costs, returns are hardly mouthwatering. Analysts at Citigroup think that Deutsche will generate a return on equity in 2015 of 9.3%; Barclays this week said it will be making more than 11.5%, which it reckons is its cost of equity, in 2015. That figure is a stretch without a bounce in revenues. Even if it is achieved, it seems likely that investors would demand more for their capital.

Given a fair wind in markets, both Barclays and Deutsche may yet thrive. But if the economic downturn proves more protracted than they expect, and if regulators force much more risk out of the banking sector, then Europe’s finest may yet have to abandon their aspirations to stay in the top tier of the world’s investment banks.

Interest-rate swaps in India

Derivatiff A retiring official raises the alarm about derivatives in India Feb 16th 2013 | MUMBAI | CENTRAL bankers are supposed to be obscure while in office and demure upon their retirement. But V.K. Sharma, a former executive director of the Reserve Bank of India (RBI), marked his recent departure by giving an almighty kicking to India’s over-the-counter interest-rate derivatives market. In a speech at the end of 2012 he called it disturbing, preposterous, perverse, the antithesis of responsible financial innovation, weird and warped.

Two things do look odd. First, there is the sheer scale of activity. Although India’s regulators tolerate frisky stockmarkets, they typically keep a lid on debt markets. Yet the notional value of outstanding interest-rate swaps is $685 billion, or 37% of GDP. They are mainly held by foreign banks’ local subsidiaries, which are puny. Their gross exposure may be 100 times core capital.

The second oddity is that prices are behaving strangely. That could be a sign of distress, much as haywire interbank rates portended the West’s financial crisis. In theory the interest rates indicated by India’s swap market should roughly match those in the government-bond market. For most of the past decade that has been the case, but since mid-2011 the two markets have diverged, with swap interest rates for five-year money as much as 1.5 percentage points below cash interest rates (see chart). The gap is an intellectual “dilemma a lot of us have struggled with over the last couple of years,” says one banker.

What is going on? The two markets are separate worlds. Government-bond trading is done by local banks and insurers, which are forced to buy lots of debt, partly for prudential reasons but also to help the state plug its deficit. Banks are scared that wild government borrowing will mean an excessive supply of new bonds. That has kept yields high. The interest-rate swap market, meanwhile, is dominated by foreign banks and seems to reflect directional bets on policy rates. Since 2011 traders at these banks have wagered that the RBI will ease policy to revive the economy. That has pushed swap rates down.

Textbooks say that arbitrage activity should eliminate this kind of gap. But that has not happened in India.

The public-sector banks that dominate the bond market are not much interested in dabbling in derivatives:

they are not required to mark their bonds to market and need not hedge. Regulators are unlikely to change this because banks might face losses if forced to book their bonds at market prices.

Without big institutions to straddle both markets, India is an inhospitable place for the hedge funds and hustlers who normally play the arbitrage game. Some outfits are prevented from trading swaps. The RBI frequently buys and sells bonds to massage the market. Foreign portfolio investors own just 1% of government bonds.

At least the rate gap has narrowed recently, thanks to government belt-tightening, hawkish noises from the central bank, and, say traders, a bit of arbitrage activity by banks. But India’s derivatives anomaly is likely to persist. And it raises a question: what on earth are foreign banks up to?

One view is that official figures grossly exaggerate their activity. To annul a swap trade most banks find it easier to write a new, offsetting contract rather than rip up the existing one; the effect of this is to inflate the total. But India has had three rounds of “trade compression” since 2011, aimed at tidying up such redundant contracts. The notional outstanding value of all swaps has already roughly halved. One official involved says the shrinkage does not have much further to go, suggesting foreign banks’ positions are not wildly overstated.

Traders retort that the figures exaggerate their activity in another way. If they use short-term swaps to hedge longer-term bonds (which are more sensitive to interest rates), the notional size of the derivatives position can legitimately exceed that of the underlying position by many times. “Most of derivatives outstanding are plain vanilla,” says a trader at a foreign bank.

India has a good record on monitoring derivatives. It stress-tests banks’ positions and had a central repository of trades before most rich countries. It is also keen to make its debt markets more sophisticated. Still, the swaps market has a slightly unnerving feel to it. Foreign banks seem to be involved in a trading game that dwarfs their balance-sheets and bears a minimal relationship to India’s real economy. It may be harmless but regulators should be on their guard.

Cannabis as an investment

The audacity of dope A fund seeks opportunity in the weed Feb 16th 2013 | New York |

For the focused investor BRENDAN KENNEDY received an engineering degree, started a software firm and sold its assets to Boeing, studied for a Yale MBA and then joined a Silicon Valley bank reviewing new-business proposals. His latest venture takes a sharp turn off the beaten path. Mr Kennedy has become an investor in the marijuana business.

The business case for funding the cannabis industry rests on two things. The first is its scale. Many of the novel ideas Mr Kennedy appraised during his job in Silicon Valley, from electric cars (Fisker and Tesla) to daily coupons (Groupon), had potentially large markets. Marijuana is already an established business.

After six months of research and interviews with growers, dispensaries, trade publications and political organisations, Mr Kennedy believes the American market to be worth $50 billion.

The second is that despite its heft, the cannabis industry operates like, well, a grass-roots movement. The drug’s legal status is messy: although medical marijuana is legal in 18 states and in the District of Columbia, cannabis is illegal elsewhere in America. For social reasons, too, the industry is unfinanceable through normal channels. People in the business lack expertise in everything from branding to staffing.

Data are scarce. Formal benchmarks for quality, such as tests for the presence of contaminants including mould, mildew and pesticides, do not exist. Neither do proper classifications for the different varieties of the drug. Thousands of strains of cannabis can be grown, many with odd names like Apollo 11, Sour Kush, Broke Diesel and the less-than-mellow Chernobyl. Characteristics vary, too. Some strains depress; some stimulate; some suppress nausea, a key reason why marijuana is used by cancer patients undergoing

chemotherapy. Consumers cannot compare what is legally produced in California with what is legally produced in Colorado— to say nothing of what is illegally sold in New York’s Washington Square Park (where a small army of salesmen all have the same patter: “Smoke. The good stuff”).

At first, Mr Kennedy wanted to create a cannabis-focused venture-capital fund but concerns about legal liabilities, as well as a desire to take majority stakes in portfolio firms, led him and a few partners to set up a different sort of fund, called Privateer Holdings. Its first investment is a website, Leafly, which offers user reviews on dispensaries and varieties of cannabis. An app was created for both Android and iPhones and there are now 50,000 downloads a month (for the forgetful, the password hint is “favourite strain”). Work is proceeding on how to add information on things like each variety’s content of tetrahydrocannabinol (THC), the active chemical in cannabis.

Mr Kennedy says Privateer has received over 200 investor pitches since November: potential acquisitions include a testing lab and a clothing company. The fund is now raising another $7m privately, and a public offering is possible once the Securities and Exchange Commission finalises new rules on “crowd-sourced funding” and small public flotations. That will write a new chapter in the story of high finance.

Carbon markets

Extremely Troubled Scheme Crunch time for the world’s most important carbon market Feb 16th 2013 | ON FEBRUARY 19th Europe’s emissions-trading system (ETS) faces a potentially fatal vote. It could not only determine whether the world’s biggest carbon-trading market survives but delay the emergence of a worldwide market, damage Europe’s environmental policies across the board and affect the prospects for a future treaty to limit greenhouse-gas emissions. Quite a lot for a decision which—as is the way of things European—sounds numbingly technical.

The vote is due to take place in the environment committee of the European Parliament. If the committee approves the proposal before it (and the parliament in full session as well as a majority of national governments agree with the decision), this would give the European Commission, the European Union’s executive arm, the power to rearrange the ETS’s schedule of auctions. Its plan is to delay the sale of about 900m tonnes of carbon allowances from around 2013-16 to 2019-20.

The vote matters, its sponsors argue, because the ETS could collapse if the commission’s proposal is rejected. The ETS is the only EU-wide environmental instrument. It trades allowances to produce carbon equal to about half the EU’s total carbon emissions. When the system was set up, its designers thought these allowances would now cost roughly €20 per tonne of carbon. The current price is around €5 ($6.7), and in January it fell by 40% in a few minutes after a negative, but legally meaningless, parliamentary vote (see chart).

The low prices reflect a chronic oversupply of carbon allowances, which the commission puts at 1.5 billion-2 billion tonnes, roughly a year’s emissions. When the ETS was designed in the mid-2000s, growth was strong and demand for carbon allowances was expected to be high. Their number was therefore fixed (at 16 billion tonnes for 2013-20). But demand has crashed. Other temporary factors are also driving prices down: more frequent auctions mean that allowances which once sat unused for months now come onto the market immediately; a special reserve for new entrants has boosted supply; and hedging by power stations has dried up.

Yet none of this justifies interfering in the market, opponents of the commission’s plan say. The ETS remains liquid; the emissions cap stays in place. A low carbon price simply means the aims of the ETS are being met cheaply. What’s the problem?

The commission highlights two. First, if the proposal is thrown out, the ETS could collapse completely: ie, the carbon price could fall to zero. Second, and more likely, even a further, temporary slide in the price could do permanent damage.

When carbon prices are low, coal is cheap relative to cleaner forms of energy, such as gas. As a result power suppliers build more coal-fired plants and Europe emits more carbon. This is already happening.

In the long run carbon prices are likely to rise again: industrial demand will pick up (one day); and the cap (the supply of carbon allowances) is due to be lowered by 1.7% each year. But by the time this has an effect—not before 2026, says Guy Turner of Bloomberg New Energy Finance, a firm of market analysts— the coal plants will be running and expensive to turn off. Their owners will be lumbered with “stranded costs”. Power generators, which are the main buyers of ETS allowances, say a higher carbon price would help them avoid this problem by spurring investment in new technologies.

A lot of people beyond Europe are anxiously awaiting next week’s vote. Australia’s carbon price, which it established in 2012, is currently fixed. If the ETS remains weak, Australia’s carbon price will not soar in 2015 when it will be allowed to float and the country’s carbon market will be linked to the larger European one. But if the ETS collapses, it will encourage further opposition to the already-controversial Australian scheme, worries Tom Brookes of the European Climate Foundation, an environmentalist group.

A collapse could also affect California, which set up a carbon market in 2012, as well as China and South Korea, which are putting together theirs. And it would undermine the chances that all these markets might one day form a global carbon-trading system.

Back in Europe, other environmental policies could suffer. A low carbon price would slow down Germany’s ambitious plan to boost renewable energy and a high one would speed it up. Perhaps reflecting this, the German government is split on the vote. A collapse of the EU’s flagship policy would also throw into disarray European plans for future environmental reforms—and its hopes of leading other countries by example.

Even if the proposal goes the commission’s way, that would not change the ETS fundamentally. The oversupply of allowances would continue unless the auctions were cancelled, not just rescheduled. But that is a battle for another day.

Free exchange

Middle-income claptrap Do countries get “trapped” between poverty and prosperity?

Feb 16th 2013 | ECONOMIC backwardness has its advantages. Latecomers to industrialisation can follow the path their forerunners broke before them and perhaps skip some steps along the way. As a result, poor countries can narrow the gap with rich ones. But this happy principle of economic convergence does not always hold sway. Some poor countries fail to get going. Others make quick progress, then lose their way. The first lot are sometimes described as victims of a “poverty trap”. The second are increasingly described as casualties of a “middle-income trap”.

This trap, named by Indermit Gill, of the World Bank, and Homi Kharas, now of the Brookings Institution, worries policymakers from Malaysia to Mexico. It haunts countries that have escaped poverty but still await prosperity, threatening to turn their aspirations into disappointments and their economic miracles into a mirage. Whether China, an epic example of convergence, will succumb to the trap is “the question on everyone’s mind”, say Barry Eichengreen of the University of California, Berkeley, Donghyun Park of the Asian Development Bank and Kwanho Shin of Korea University in a paper published last month*.

But is the middle-income trap worthy of the name? Is there something especially treacherous about the levels of development that China is now approaching? Despite the term’s popularity, the theory and evidence behind it are surprisingly thin.

First, the theory. Rich countries boast the best technologies; poor countries the lowest wages. Middleincome countries have neither. Intuition suggests they must struggle to compete with countries above and below them. Poor countries also benefit from moving workers out of overmanned farms and into factories, where they are many times more productive. But a decade or two of fast growth will empty the fields of surplus workers, obliging countries to raise productivity within their factories if they are to make further progress. Their economies would seem to face a tricky jump from one growth model to another.

But intuition can mislead. Both pay and productivity exist along a continuum. Countries can remain “competitive” at any level of wages and productivity, provided one stays in line with the other. The evolution from one growth model to another is also continuous. Factories do not wait until the last underemployed labourer has left the farm to begin improving the productivity of the workers who have already arrived. Moreover, as the urban workforce grows in size, a steady flow of new arrivals from the villages makes a smaller proportionate impact. China is a good example. Many worry that it has now exhausted its surplus labour and will slow sharply. But according to Louis Kuijs of the Royal Bank of Scotland, the movement of workers between agriculture, industry and services contributed only 1.4 percentage points of China’s annual growth from 1995 to 2012.

So much for the theory, what about the evidence? The middle-income trap is rarely defined clearly enough to be tested. Some of its proponents argue that middle-income countries typically grow more slowly than richer and poorer economies. That is claptrap. If anything, they grow faster. The left-hand chart uses the Penn World Tables, which compare incomes across countries and over time from 1950 to 2010.

Economies with an income per head of $13,000-14,000 (at purchasing-power parity) achieved perperson growth of almost 2.9% over the next ten years on average. That is faster than the average for any other income level.

The MIT no one wants to get into These excellent averages mask many failures, of course. Such disappointments are the subject of a pair of papers by Mr Eichengreen and his co-authors. They look at fast-developing countries (which enjoyed growth in incomes per head of at least 3.5% for seven years) that subsequently suffered a sharp slowdown (their growth over the next seven years slowed by at least two percentage points). In their latest paper, they argue that such slowdowns seem to bunch at income levels around $15,000-16,000 and $10,000-11,000 (measured at purchasing-power parity), not far from China’s present level.

Both papers are rich and rigorous studies of growth hiccups. But they do not provide compelling evidence of a middle-income trap. Their definition of a slowdown is compatible with simple convergence: growth that slows from 9% to 7% may qualify as a slowdown, but it in no way constitutes a trap. By their definition, even Singapore, one of the brightest examples of catch-up growth on record, has suffered several sharp slowdowns.

The authors explore why middle-income countries decelerate when they do. But they shed little light on whether they are more likely to do so than other economies. Their latest paper ignores any country with an income per head of less than $10,000. Since rich countries rarely sustain growth of over 3.5% and poor countries are excluded by design, it is hardly surprising that the slowdowns they unearth cluster in the middle-income ranges. If their method is applied to countries rich and poor, what does it reveal? In the right-hand chart we have done our best to replicate their method. Per-person incomes of $10,000-11,000 and $15,000-16,000 no longer stand out as especially dangerous.

Development is a long and arduous process, during which economies continuously evolve in scope as well as size. Potential traps lurk at every level of income. There is no reason to single out the middle

levels. In a recent paper Mr Kharas and a co-author likened the middle-income trap to the bunkers that lie in wait for golfers. Not every player falls into them, but every golfer should worry about them. It is an analogy that China’s golf-obsessed rulers would no doubt appreciate. But bunkers are not confined to the middle six holes.

Sources "Economic Backwardness in Historical Perspective: a Book of Essays", Alexander Gerschenkron, 1962.

"An East Asian Renaissance: Ideas for Economic Growth", Indermit Gill and Homi Kharas. World Bank, 2007.

"Globalization's Missing Middle", by Geoffrey Garrett, Foreign Affairs, 5 November 2004 "When Fast Growing Economies Slow Down: International Evidence and Implications for China", Barry Eichengreen, Donghyun Park, Kwanho Shin NBER Working Paper No. 16919, March 2011 "Growth Slowdowns Redux: New Evidence on the Middle-Income Trap", Barry Eichengreen, Donghyun Park, Kwanho Shin NBER Working Paper No. 18673, January 2013 "What Is the Middle Income Trap, Why do Countries Fall into It, and How Can It Be Avoided? ", Homi Kharas and Harinder Kohli. Global Journal of Emerging Market Economies, September 2011.

Economist.com/blogs/freeexchange

Science and technology Manufacturing metals: A tantalising prospect Marine biology: Flea market The microbiome and health: Sniffing out hypertension Human evolution and palaeobotany: Grassed up

Manufacturing metals

A tantalising prospect Exotic but useful metals such as tantalum and titanium are about to become cheap and plentiful Feb 16th 2013 | WATH-UPON-DEARNE |

ALUMINIUM was once more costly than gold. Napoleon III, emperor of France, reserved cutlery made from it for his most favoured guests, and the Washington monument, in America’s capital, was capped with it not because the builders were cheapskates but because they wanted to show off. How times change. And in aluminium’s case they changed because, in the late 1880s, Charles Hall and Paul Héroult worked out how to separate the stuff from its oxide using electricity rather than chemical reducing agents.

Now, the founders of Metalysis, a small British firm, hope to do much the same with tantalum, titanium and a host of other recherché and expensive metallic elements including neodymium, tungsten and vanadium.

The effect could be profound. Tantalum is an ingredient of the best electronic capacitors. At the moment it is so expensive ($500-2,000 a kilogram) that it is worth using only in things where size and weight matter a lot, such as mobile phones. Drop that price and it could be deployed more widely. Neodymium is used in the magnets of motors in electric cars. Vanadium and tungsten give strength to steel, but at great expense. And the strength, lightness, high melting point and ability to resist corrosion of titanium make it an ideal material for building aircraft parts, supercars and medical implants—but it can cost 50 times as much as steel. Guppy Dhariwal, Metalysis’s boss, thinks however that the company can make titanium powder (the product of its new process) for less than a tenth of such powder’s current price.

At the moment, titanium is usually produced by the Kroll process, which William Kroll, a metallurgist from Luxembourg, developed in the 1940s. The Kroll process starts with titanium oxide, which is derived from ores like rutile and is cheaply available (artists use it as a brilliant-white pigment). First, the oxide is reacted with chlorine, to get rid of the oxygen. The resulting chloride is then reacted with liquid magnesium or sodium, to get rid of the chlorine. This creates a porous material, titanium sponge, which is crushed and melted in a vacuum furnace to yield titanium ingots. Making tantalum is similarly onerous.

The oxide (which comes from an ore called coltan) is converted to a fluoride using hydrofluoric acid, and

the fluoride is then reduced with liquid sodium. Both processes are similar to the way aluminium was prepared before the days of Hall and Héroult.

Their insight was that electricity, which was starting to be generated in industrial quantities in the 1880s, could be used instead of chemicals to split the metal from the oxygen in aluminium oxide. And that is what Metalysis is doing in its new tantalum factory, and what it hopes to do for titanium and the rest.

The difference between its process and that of Hall and Héroult (and why electrolysis has not previously been used to make metals such as tantalum and titanium) is that the Hall-Héroult method requires both input oxide and output metal to be in liquid form. That demands heat. But aluminium has a fairly low melting point and its oxide can be dissolved in a substance called cryolite that also has a low melting point, so the amount of heat needed is manageable. Titanium and tantalum are not so obliging. The Metalysis trick is to do the electrolysis on powdered oxides directly, without melting them.

This was shown to be possible in 1997 when researchers at Cambridge University found that immersing small samples of certain oxides in baths of molten salt and passing a current through them transformed the material directly into metal. Metalysis was set up in 2001 to commercialise the idea and in 2005 the firm moved to Wath-upon-Dearne, a village near Sheffield, in South Yorkshire, in order to tap the local engineering skills that once made the county (home of silver plate, stainless steel and the Bessemer converter) the California of metallurgy. These skills turned a technique that could produce a few grams of metal in a laboratory into a process that operates on an industrial scale.

The full Monty The process starts with powdered metal oxide, which serves as the cathode. The anode is made of carbon, and the molten salt (which has a temperature of 1,000°C) acts as an electrolyte, permitting current, in the form of oxygen ions, to pass from cathode to anode. There, the ions react to form carbon dioxide, while the cathode is gradually transformed from oxide to metal.

The company’s first product is tantalum. Its factory is not much bigger than a house, but has enough capacity to supply 3-4% of the 2,500 tonnes of this metal that are used around the world each year. The resulting income, the firm hopes, will provide it with the grubstake it needs to move on to the big prize: titanium.

Even at its current price, some 140,000 tonnes of titanium are sold every year, for a total of around $4 billion. As the price falls, that tonnage is likely to rise, for cheap titanium has many potential uses, such as making car components that would be lighter than steel ones, thus saving fuel. This would require the powdered metal produced by Metalysis’s process to be made into ingots or sheets of the sort currently used in factories. The powder itself, however, could be employed directly in what is known as additive manufacturing, which uses 3D printers to build up objects a layer at a time. Cheaper metal powders would make 3D printing much easier.

This will require a far bigger factory, so Metalysis is on the lookout for a redundant aluminium smelter to convert. And if things go well with titanium, the other metals will gradually be introduced—possibly as mixtures, for Mr Dhariwal says the process will allow mixed oxides to be converted into alloys that were hitherto hard or impossible to make because of the different melting points of the components: titanium and tungsten, for example.

Modern economics have not been kind to South Yorkshire. A place that was once a centre of innovation has been sidelined by sunnier, sexier climes. But if Metalysis’s technology does work at scale it may prove every bit as important as Henry Bessemer’s converter. That was the device which made steel the material of the industrial revolution, displacing wrought iron. The idea that steel itself might one day be displaced by titanium is a long shot, but it is no longer inconceivable.

Marine biology

Flea market A newly discovered virus may be the most abundant organism on the planet Feb 16th 2013 |

A spoonful of virus…

WHAT is the commonest living thing on Earth? Until now, those in the know would probably have answered Pelagibacter ubique, the most successful member of a group of bacteria, called SAR11, that jointly constitute about a third of the single-celled organisms in the ocean. But this is not P. ubique’s only claim to fame, for unlike almost every other known cellular creature, it and its relatives have seemed to be untroubled by viruses.

As Jonathan Swift put it in a much-misquoted poem, “So, naturalists observe, a flea/Hath smaller fleas that on him prey”. Parasites, in other words, are everywhere. They are also, usually, more abundant than their hosts. An astute observer might therefore have suspected that the actual most-common species on Earth would be a “flea” that parasitised P. ubique , rather than the bacterium itself. The absence of such fleas (in the form of viruses called bacteriophages, that attack bacteria) has puzzled virologists since 1990, when the SAR11 group was identified. Some thought the advantage this absence conferred explained the group’s abundance. But no. As they report in this week’s Nature, Stephen Giovannoni of Oregon State University and his colleagues have discovered the elusive phages. Swift’s wisdom, it seems, still holds good.

Tracking down a particular virus in the ocean makes finding a needle in a haystack look a trivial task. A litre of seawater has billions of viruses in it. Modern genetic techniques can obtain DNA sequences from these viruses, but that cannot tie a particular virus to a particular host.

To do so, Dr Giovannoni (pictured) borrowed a technique from homeopathy: he diluted some seawater to such an extent that, statistically speaking, he expected a 100-microlitre-sized aliquot to contain only one or two viruses. The difference between his approach and a homeopath’s was that what homeopathy dilutes almost to nothing are chemicals, and thus cannot breed. A virus can, given a suitable host. So he mixed each of several hundred aliquots into tubes of water containing P. ubique. Then he waited.

The race is to the Swift After 60 hours, he looked to see what had happened. In most cases the bacteria had thrived. In a few, though, they had been killed by what looked like viral infection. It was these samples that he ran through the DNA-sequencing machine, in the knowledge that the only viral DNA present would be from whatever it was had killed the bacteria.

His reward was to find not one, but four viruses that parasitise P. ubique . He then compared their DNA with databases of DNA found in seawater from around the world, to find out how abundant each is. The upshot was that a virus dubbed HTVC010P was the commonest. It thus displaces its host as the likely winner of the most-common-living-thing prize.

That does depend, of course, on your definition of “living thing”. Some biologists count viruses as organisms. Some do not. The reason is that a virus relies for its growth and reproduction on the metabolic processes of the cell it infects. This means viruses themselves are hard to parasitise, since they do no work on which another organism can free-ride. Which is why the next two lines of Swift’s poem, “And these have smaller fleas to bite ’em/And so proceed ad infinitum”, are wrong—and why, because HTVC010P itself can have no parasites, it probably really is the commonest organism on the planet.

The microbiome and health

Sniffing out hypertension Gut bacteria help regulate blood pressure Feb 16th 2013 | THE role of the microbiome, the complement of bacterial passengers carried around by every human being, gets more intriguing by the month. Recent papers have confirmed that having the wrong microbiome can cause malnutrition, and that transplanting bugs from one person to another, in the form of small amounts of faeces, can abolish Clostridium difficile infection, a potentially fatal gut disease, even when antibiotics have failed to do so.

The latest connection to be investigated between the microbiome and health is that of gut bacteria to blood pressure. Work by Jennifer Pluznick of Johns Hopkins University, in Baltimore, and her colleagues, published in the Proceedings of the National Academy of Sciences, confirms that this link exists—at least, in mice and thus probably also in men. And an intriguing aside is that, in essence, the reason is that the kidneys have a sense of smell.

What they are smelling is propionic acid, a substance that several species of gut bacteria produce in quantity. Earlier work, by researchers at Imperial College, London, suggests that formic acid—a similar but smaller molecule—acts on the kidneys to alter blood pressure, but the details are obscure. Dr Pluznick has shown that as far as propionic acid is concerned, one of the detectors which regulates the process is an olfactory-receptor protein of a type more familiarly seen in people’s noses.

Dr Pluznick had previously shown that at least six such nasal proteins are made by kidney cells, too.

Preliminary experiments led her to focus on one, called Olfr78, and also on a second receptor protein, Gpr41, that is not found in the nose.

The kidneys help to control blood pressure via an enzyme called renin, which increases it. Dr Pluznick found that in normal, healthy mice propionic acid regulates this process, causing blood pressure to drop.

She then looked at the role of Olfr78 and Gpr41, and the link with the microbiome, by comparing normal mice with those that have been genetically engineered to eliminate one or other of the genes for the proteins in question.

She found, first, that when she injected engineered mice with propionic acid, the blood pressure of those in which Olfr78 had been knocked out dropped more than it did in normal mice. In those in which the knocked-out gene was Gpr41, by contrast, it did not fall at all. The two proteins thus seem to be acting in opposite ways.

That was intriguing, but did not absolutely prove the connection with gut bacteria. The clincher was when she treated some mice with an antibiotic, to kill off their gut bacteria. Mice so treated that had no gene for Olfr78 showed a significant rise in blood pressure. Those that were genetically normal did not. (She has yet to do the experiment on Gpr41-deficient mice.)

These results, it must be acknowledged, are confusing—indicating as they do that propionic acid can push blood pressure in either direction, depending on which receptor is involved. Almost certainly, other asyet-unidentified receptors are part of the picture, too. It does look, though, as if something produced by gut

bacteria, probably propionic acid or a related molecule, is acting like a hormone and regulating blood pressure. If the same were to prove true in people, it would add a new layer of complexity to the relationship between humans and their microbiomes.

How evolution came to give bugs the power to regulate the blood pressure of their hosts is a fascinating question. A more pressing one, though, is whether what seems true in mice really is true in people, and if so, how big the effect is. Given the amount of hypertension seen in modern humanity, knowing the answer to that is really rather important.

Human evolution and palaeobotany

Grassed up A cherished theory about why people walk upright has just bitten the dust Feb 16th 2013 |

AFRICA’S great grasslands are one of that continent’s most famous features. They are also reckoned by many to have been crucial to human evolution. This school of thought holds that people walk upright because their ancestors could thus see farther on an open plain. Forest primates do not need to be bipedal, the argument continues, because the trees limit their vision anyway.

As “Just So” stories go, it is perfectly plausible. But some go further and argue that the transition took place when the savannahs themselves came into existence, replacing the pre-existing forest and forcing human ancestors to adapt or die out. Fossil evidence suggests humanity’s upright stance began to evolve between 6m and 4m years ago. So the question is, did that coincide with the formation of the savannah? A paper in Geology, by Sarah Feakins, of the University of Southern California, suggests not.

Dr Feakins studied sediment cores from the Gulf of Aden, a place where offshore winds deposit detritus from a goodly part of the east of the African continent. In these, she discovered plant molecules that date back between 12m and 1m years. Such molecules contain carbon, and carbon atoms come in various isotopes, whose ratios give away their history. In particular, the ratio of ¹²C to ¹³C can tell you what sort of plant made the molecule in question.

Plants in rainforests tend to discriminate against ¹³C. Those in modern African grasslands are less selective and ¹³C is thus more abundant in their molecules. Dr Feakins was therefore able to ask when these grasslands came about.

To her surprise, they seem to have been there even 12m years ago. Close examination of the cores shows that the nature of the grass changed over the millennia, as species that were adapted to dry conditions took over from those that prefer wetter weather, but savannah of some form there always was.

The climatic change she observed was already known about. It was the reason people suspected forests had given way to savannah. But, contrary to that suspicion, Dr Feakins has shown that early humanity’s east African homeland was never heavily forested, so the idea that people were constrained to walk upright by the disappearance of the forests is wrong.

Perhaps it was more pull than push—a pre-existing, but empty ecological niche crying out to be filled by an enterprising species that could make the transition. But perhaps those who seek an ecological explanation of this sort are, as it were, barking up the wrong tree.

Books and arts The future of Catholicism: Leap of faith The spying trade: Success by stealth Piero della Francesca: Divine splendour 18th-century courtship: An inept Pygmalion The rise of solo living: A room of one’s own Becoming Picasso at the Courtauld: The incubation of genius

The future of Catholicism

Leap of faith The pope’s resignation offers a fertile moment to consider where the church is going and where it needs to go Feb 16th 2013 |

Evangelical Catholicism: Deep Reform in the 21st-Century Church. By George Weigel. Basic Books; 291 pages; $27.99 and £15.99. Buy from Amazon.com, Amazon.co.uk To the Ends of the Earth: Pentecostalism and the Transformation of World Christianity. By Allan Heaton Anderson. Oxford University Press USA; 311 pages; £24.95 and £15.99. Buy from Amazon.com, Amazon.co.uk AS THEY mull over the details of his papacy—the gaffes, the cerebral pronouncements, the deepening scandals—some Vatican-watchers will struggle to position Pope Benedict XVI in the broad sweep of Catholic history. Does he mark the end of an era? The start of something new? Or was he just a placeholder?

George Weigel, a conservative American Catholic, suffers no such confusion. In his new book, “Evangelical Catholicism”, he sets out his clear views on where the church is going and where it needs to go. As an admirer of both Benedict and Pope John Paul II, his Polish predecessor, he argues that both pontiffs commendably ushered in a new phase of Catholic history: what he calls an “evangelical” period, in contrast to the “counter-Reformation” Catholicism that has held sway for most of the past 500 years.

The counter-Reformation phase, as he sees it, was defensive. It involved delving deep into the devotional and doctrinal resources of Catholicism to withstand the challenges of Protestantism, the scientific revolution and the onset of modernity. The new evangelical spirit, heralded by the last two popes, is more proactive, ready to offer an assertive critique of a secular and disenchanted world.

For Mr Weigel the word “evangelical” does not mean that the church must water down its doctrinal

differences with Christians who are evangelical in the usual sense—ie, zealous, Bible-based Protestants who stress the need to be born again. But he argues that Catholics and evangelicals should make common cause against perceived foes like relativism and liberalism. Indeed, he has long worked to forge a tactical alliance between Catholics, low-church Protestants and other conservatives. He was a co-signatory of a 1994 document called “Evangelicals & Catholics Together”, which called for a joint struggle against abortion and euthanasia and in favour of the traditional family.

Moreover, the Catholicism that Mr Weigel wants would share many characteristics with evangelicalism in the usual sense: it would be exuberant, unapologetic and defiantly willing to fight rather than compromise on matters like sexuality and reproduction. Unusually for a Catholic, he suggests that this revitalised Catholicism should stress the need for a personal relationship with Jesus Christ.

Nobody could accuse Mr Weigel of pandering to conventional wisdom. For liberal Catholics and many observers, it seems obvious that the related problems of clerical-abuse scandals and a vanishing priesthood need to be addressed, at a bare minimum, by opening the sacerdotal caste to married men. But Mr Weigel dreams of something quite different: a reinvigorated celibate priesthood, and reinvigorated religious orders, in which men and women freely commit themselves to a life of abstinence and service to God as a riposte to the self-worship which, in his view, defines modern times. Mr Weigel is fair to insist that the modern cult of the self, made possible by material and physical security, is not history’s last word on human aspirations. He has grand hopes for a church that poses an honest and devout challenge to a sceptical world.

But all that seems a tall order when set against the grimly unfolding realities of contemporary Catholicism. In the latest twist in the American saga of abuse and evasion, the archdiocese of Los Angeles has just stripped a retired cardinal-archbishop of any remaining duties after releasing 12,000 pages of evidence which tell a distressing story of cover-ups. If any Catholics are gaining attention by proclaiming hard truths, it may be mavericks like David Berger, a gay German theologian, who insists that behind the homophobic smokescreen of Benedict’s Teutonic Catholicism lies a subculture of double standards and high camp.

Of course if Mr Weigel’s dream came true and many faithful men and women poured themselves into a life of altruism and chastity, that would indeed bolster the church. But could such a thing occur? It seems unlikely, but with religion odd things do happen—such as the Christian revival that began a century ago in a Los Angeles warehouse, when people suddenly began falling into one another’s arms and speaking in strange tongues. Such was the start of Pentecostalism, which swept through rich and poor countries alike in the 20th century, transcending barriers of sex and culture, and surviving schisms and frequent financial scandals.

That story is told with admirable clarity and detail by Allan Heaton Anderson, a British professor of religion and former Pentecostal minister, in “To the Ends of the Earth”. As he explains, the reach of the movement is not confined to the 300m or so people who belong to Pentecostal churches; it has influenced all Christian denominations, including Roman Catholicism, where charismatic communities—encouraging ecstatic experience—have thrived even in places like France where Christianity in general is declining.

But compared with the new phenomenon of Pentecostalism, the Catholic church carries enormous historical and institutional baggage. However hard it tries to morph into a counter-cultural gadfly, Catholicism will continue to be tainted by its image as an agency that enjoyed too much wealth and power for too long and abused both. That is not rich soil for revivals. Mr Weigel’s elegantly written manifesto

will certainly galvanise conservative Catholics who are dreaming of a vision of how things should be under the next pope. But it will not convince more detached observers who are trying to work out how things are likely to be.

The spying trade

Success by stealth What business executives can learn from intelligence officers Feb 16th 2013 | Work Like a Spy: Business Tips From a Former CIA Officer. By J.C. Carleson. Portfolio; 197 pages; $25.95. To be published in Britain in April by Penguin; £16.99. Buy from Amazon.com, Amazon.co.uk Trading Secrets: Spies and Intelligence in an Age of Terror. By Mark Huband. I.B. Tauris; 260 pages; $29.50 and £20. Buy from Amazon.com, Amazon.co.uk SPIES are often wrongly presumed to work in a shadowy and exotic world. In fact they are more like unusually crafty bureaucrats than James Bond. Their skills would be quite handy for business executives, according to J.C. Carleson, a former CIA officer. In “Work Like a Spy”, her gripping layman’s guide to spycraft, she shows how adopting an intelligence officer’s mindset can make managers more efficient and better at handling people.

In her eight years undercover, Ms Carleson (not her real name) ran agents in hostile countries, getting them to risk their lives to steal secrets for America. Targeting and recruiting such people offers lessons in what might be called “strategic networking”: gaining information about customers and competitors. How do you make contact without seeming pushy? What is the hook, and what are the incentives? It turns out that offering consultancy fees and lavish entertainment rarely works; appealing to the ego is far more effective.

While steering clear of real secrets, Ms Carleson gives an accurate account of how intelligence officers operate. Her “strategic elicitation exercise”, in which she pushes readers to get random information from a stranger, is particularly well described.

In a trade in which deceit is a tool, knowing when to be honest is important. Ms Carleson describes the ideal CIA officer as a “Boy Scout with a secret dark side”. Her terse remarks on ethics sound convincing, not preachy. She explains, for example, why fiddling expenses leads to instant dismissal in the CIA: if you cheat your country out of money, you may betray its secrets too. Readers doing business in places where sleaze is endemic will find these points instructive. It is wise to work out in advance the red lines you and your company will not cross—and make sure everyone involved knows what they are.

While Ms Carleson’s book highlights the skills of individual intelligence officers, Mark Huband’s “Trading Secrets” gives a glimpse of what spy agencies actually do and how they are evolving to combat new 21st-century threats. A former journalist who now runs a security consultancy, he argues that undercover agents are often most useful not when they are spying on a country’s enemies, but when they are talking to them. He gives new details about the role that Britain’s Secret Intelligence Service (SIS, commonly called MI6) played in opening channels of communication with the IRA in Northern Ireland, and with Colonel Qaddafi’s regime in Libya.

Mr Huband also deals with fiascos, such as the political misuse of the sketchy intelligence available about Saddam Hussein’s weapons programmes. Spies rarely provide solid answers, he says, but offer confusing bits of a jigsaw puzzle of unknown size and shape. At best, secret intelligence removes an

element of surprise from foreign affairs, but it rarely makes it clear what to do.

The picture he paints is tantalisingly incomplete. His reporting, based on his years as a journalist, hops across decades and between fronts, chiefly in the “war on terror” (he neglects, sadly, China and Russia).

He concludes that spooks are “awash with more information, insight and knowledge than ever before”, but that the “intrinsic power” of intelligence has waned. One reason is that some of the finest spies are being lured away by the private sector. It greatly rewards those with a background in secret government service—and not only because spycraft has given them exceptional people skills.

Piero della Francesca

Divine splendour Introducing an early Renaissance master to American audiences Feb 16th 2013 | NEW YORK |

Of Apollonia, pincers ready ALDOUS HUXLEY once described “The Resurrection” by Piero della Francesca as the greatest painting in the world. Some will argue that the title belongs to a work by Leonardo da Vinci or Rembrandt van Rijn, but the English author was hardly alone in his view. Born in Borgo Sansepolcro in Tuscany in 1415, Piero is sometimes called the father of the Renaissance, revered for his poetic works in paint and fresco.

Yet few Americans are familiar with him, largely because his masterpieces are immovable frescoes or fragile paintings on wood panel.

The Frick Collection in New York aims to rectify this with “Piero della Francesca in America”, the country’s first show devoted to the artist. On view until May 19th, the exhibition brings together seven works, among them nearly everything by him that Americans were able to collect.

The English began chasing works by Piero in the early 19th century; American collectors followed a century later. Supply, always scarce, was drying up and prices soared. In 1913 Robert Sterling Clark, heir to a sewing-machine fortune, managed to secure Piero’s altarpiece “Virgin and Child Enthroned with Four Angels” for $170,000—three times the cost of his house in Paris. On loan from the Clark Museum in Massachusetts, this large work features a monumental Virgin draped in a dark-blue cloak over a carmine dress and holding a flower. With lowered eyes she gazes at the Christ child, who sits on her knee with a ramrod-straight back. His hands stretch out towards the flower, yet this is not a playful scene. Indeed, the moment appears frozen in time; nothing seems to move, or to have ever moved, not the mother nor the child. The rose wreath on the head of one of the angels will never slip. The painting is a vision of unearthly loveliness, eternal stillness. It is the centrepiece of the show.

Seven paintings by Piero are in American collections. The Frick owns four: a large portrayal of a whitehaired Saint John the Evangelist, two small gold-ground paintings of saints and a small gold-ground crucifixion. These are joined by another small gold-ground image of Saint Apollonia, patron saint of toothache (pictured opposite), loaned by the National Gallery in Washington. The remaining Americanowned work is “Hercules”, a large-scale portrayal of the mythical hero, bought by Isabella Stewart Gardner in 1903. She was the first American to nab a Piero and the only one to acquire a fresco. It is magnificent; unfortunately the Boston museum that bears her name judged it too fragile to send.

Happily the Museu Nacional de Arte Antiga in Lisbon has loaned its large portrait of Saint Augustine.

Dressed as an exceedingly rich bishop, he seems both fierce and sad. His staff is made of precious rock crystal; his gloved fingers are covered with expensive rings; an opulent, cut-velvet cloak hangs over his homespun black robes. Bordered with more than a dozen embroidered panels, each a scene from the life of Christ, Augustine’s mantle is reason enough to see this show. The panels are like a miniaturised exhibition of the masterpieces for which Piero is renowned. If “The Virgin and Child” whispers Piero’s greatness, this painting of Saint Augustine conveys his brilliance.

This show is well worth seeing. But it is more an introduction to Piero della Francesca—a footnote, even —than an exposition of the artist at the height of his powers. Evidence of his profundity awaits anyone able to travel to London and northern Italy, where most of his work remains. It is worth the pilgrimage.

18th-century courtship

An inept Pygmalion A darkly amusing tale about the struggle to create the perfect wife Feb 16th 2013 |

How to Create the Perfect Wife. By Wendy Moore. Weidenfeld & Nicolson; 322 pages; £18.99. To be published in America in April by Basic Books; $27.99. Buy from Amazon.com, Amazon.co.uk WENDY MOORE, a British historian, is developing a nice line in non-fiction 18th-century marital horror stories. “Wedlock”, her previous book, followed the misfortunes of a certain countess at the hands of her abusive husband, who gets his comeuppance to the cheers of every reader. Now, in “How to Create the Perfect Wife”, the man in question is not so obviously a villain and the woman never actually becomes his wife. But he certainly comes close, and she escapes by the skin of her teeth.

Though less ripping than “Wedlock”, this story is told with gusto. At its centre is Thomas Day, a complex man. Heir to a large fortune, he abhorred fashionable society, denied himself every luxury and gave to the poor. He belonged to a group in Lichfield known as the “Lunar Men”, who believed in political reform and the rights of man. An early abolitionist, in 1773 he wrote a poem with his friend John Bicknell called “The Dying Negro”, which caused an anti-slavery sensation. Day was socially inept and uncouth, his hair unkempt, but he was generally admired for his honesty and idealism.

Apart from the bad hair, what’s not to like? Alas, Day had a problem with women. He courted them, got engaged, but they all balked at the altar, unable to stomach his fierce virtue. Like his favourite philosopher, Jean-Jacques Rousseau, he blamed society for corrupting man’s innate goodness. What Day needed was someone young and unformed, a Galatea to his Pygmalion. With Bicknell he hatched a scheme to solve his problems. They went to an orphanage, pretended to need a girl apprentice, picked out the prettiest and made off with her. Then they did it again at another orphanage.

Ann and Dorcas, aged 12 and 11, became Sabrina and Lucretia and began, without realising it, an educational programme designed to fit them for the role of Mrs Day. Unfortunately the programme

involved some violence, as Rousseau believed in teaching fearlessness by way of pain and terror. Having chosen Sabrina once the girls hit puberty, Day worked to toughen her up by dripping sealing wax on her skin, standing her up to her neck in a lake (she couldn’t swim) and shooting bullets at her skirts.

The whole experiment failed. Each girl rebelled. Lucretia married a draper and Sabrina married Bicknell.

The story does not end there, but as far as Day is concerned, it has been told before. The real discovery here is Sabrina and her background. Some of the most fascinating parts of the book are about the foundling hospitals and orphanages of the period, and the unhappy mothers who gave up their babies to them. Ms Moore has combed the orphanage’s archives, read the forms for each baby and seen the tokens left with them—a single earring, a piece of fabric, a playing card torn in half—in the hope of a future reunion.

Sadly, stories of mothers rediscovering long-lost children were rare, the stuff of plays and novels.

The rise of solo living

A room of one’s own Feb 16th 2013 | Going Solo: The Extraordinary Rise and Surprising Appeal of Living Alone. By Eric Klinenberg.

Penguin Press; 273 pages; $27.99. Gerald Duckworth & Co; £16.99. Buy from Amazon.com, Amazon.co.uk “YOU need an apartment alone even if it’s over a garage,” declared Helen Gurley Brown in her 1962 bestseller “Sex and the Single Girl”. To Brown, who went on to edit Cosmopolitan magazine, the benefits of solo living were innumerable: it afforded the space to cultivate the self, furnish the mind, work late and indulge in sexual experimentation. Young women should enjoy their best years without a husband, she advised, as this not only laid the foundation for stronger marriages but also gave them a lifestyle to fall back on in case they found themselves alone again.

Sensational at the time, Brown’s counsel seems sensible now. Certainly both sexes have taken it to heart, marrying later, divorcing readily and living alone in larger numbers than ever before. In America more than half of all adults are single and roughly one out of seven lives alone. Worldwide, the number of solo dwellers has climbed from 153m in 1996 to 202m in 2006—a 33% jump in a decade, according to Euromonitor International, a market analyst. Yet little is known about the wider social effects of this unprecedented boom, writes Eric Klinenberg, a sociologist at New York University. His new book “Going Solo” offers a comprehensive look at the lures and perils of living alone.

Mr Klinenberg parts with those who see the rise of solo living as yet another sign of the decline of civic society. Now that marriage is no longer the ticket to adulthood, a desire to live alone is perfectly reasonable, he writes. Young adults view it as a rite of passage, a period of personal growth before possibly settling down. Its cultural acceptance has helped to liberate women from bad marriages and oppressive families, granting them a space to return to civic life. And as elderly adults live longer than ever before, often without a partner, many hope to stay independent for as long as possible. Nearly everyone who lives alone prefers it to their other options, says Mr Klinenberg, and ever more people hope to join the ranks.

Solitary living need not mean solitude (“No one really bowls alone,” Mr Klinenberg quips). The author offers evidence that people who live alone are often more socially active than their cohabitating peers.

The “communications revolution” has allowed more people to experience the pleasures of social life from the comforts of home, and cities with high numbers of singletons enjoy a thriving public culture of bars, cafés and restaurants. Urban officials are now eager to lure professional singles—known to both work and play hard—in the hope that they will stimulate the local culture and economy.

Living alone is easy enough for the young and solvent; less so for the elderly, frail and poor. Mr Klinenberg came to this story while working on a book about the lethal Chicago heatwave of 1995, when hundreds of people died alone at home, out of touch with friends and neighbours. The trend for solo living can too easily morph into social isolation, particularly for men, who are less adept than women at making and sustaining connections. Other bugbears include loneliness, discrimination (in the workplace, the tax code and so on) and workaholism. Ageing single adults—a fast-growing group—complain that there are few decent, affordable alternatives to withering away.

Mr Klinenberg looks wistfully to the Scandinavian countries, where generous social-welfare benefits and communal urban design allow more people to live alone together. He optimistically calls for “bold policy initiatives” such as more affordable housing and assisted-living facilities. “We’ll need them,” he adds, “since so many of us will be living alone.”

Becoming Picasso at the Courtauld

The incubation of genius A dark and momentous turning point for the young artist Feb 16th 2013 |

Kind of blue SAMUEL COURTAULD, founder of the Courtauld Institute of Art in London, owned only one painting by Pablo Picasso. He was devoted to the French impressionists and post-impressionists, and masterpieces

by Manet, Renoir, Degas, Gauguin and Van Gogh formed the core of his renowned art collection. Yet there was something about Picasso’s tender “Child with a Dove” (pictured), painted in Paris in 1901, that moved Courtauld to buy it in 1928 and keep it in his personal collection until he died in 1947.

The painting captures a moment when Picasso, aged 19, “found his own voice as an artist,” says Barnaby Wright of the Courtauld Gallery. With its bold outlines, melancholy mood and sombre palette, it anticipates the artist’s blue period, yet it sits comfortably alongside the gallery’s post-impressionist works. It is now at the centre of “Becoming Picasso”, a tightly focused exhibition on view until May 26th, which considers this pivotal moment in Picasso’s career.

Picasso came to Paris for the first time in 1900, joined by Carles Casagemas, his closest friend and a fellow painter. He threw himself into mastering the craft of his French contemporaries, and managed to make enough of an impression to secure his first exhibition the next year. But a tumultuous affair soon left Casagemas emotionally distraught, and the two friends left Paris for Spain at the end of the year. Picasso returned alone to Paris in the spring of 1901 and in less than six weeks produced most of the 64 works that were exhibited in his acclaimed debut show that summer, organised by Ambroise Vollard, a leading modern-art dealer.

The first room of the Courtauld show has a small selection of these works. “Spanish Woman” reveals the skill of a savvy young artist. Here Picasso deftly evokes a grandly crinolined young woman in the manner

of Goya, yet he gives his subject the confrontational pout and posture of a Parisian demimondaine.

Another painting, clearly influenced by Van Gogh, depicts a visitor to the artist’s studio sitting in front of a wall hung with Picasso’s proliferating paintings. It was through the spectacle of Paris that Picasso began to try out different voices, such as Toulouse Lautrec’s in “French Can-Can” and Degas’s in “Dwarf-Dancer (La Nana)”. The artist also began signing his name “Picasso”. A 1901 self-portrait has the swagger of a self-possessed, self-conscious dandy-artist.

On the threshold of the show’s second room, two paintings on the far wall signal a drastic change in mood. One is an imagined scene of Picasso’s friend Casagemas in a coffin, the thick black lines and icy blues casting a determinedly tragic mood. The other is “Evocation (The Burial of Casagemas)”, in which an El Greco-inspired farrago of figures surround a seemingly sainted hero swaddled in white and kissed to heaven by a prostitute.

In February 1901 Casagemas had returned to Paris alone and shot himself in front of the woman who had jilted him. Picasso later cited this event as the catalyst for his blue period. The emotional episode triggered a new and more mature aesthetic style. Mr Wright also mentions the significance of Picasso’s visits to the Saint-Lazare women’s prison later that year, which gave rise to a number of solemn portraits of women and children, two of which are presented here. Regardless of the cause, this exhibition argues that 1901 witnessed a profound change in Picasso’s art.

In “Child with a Dove”, “Harlequin and Companion” and “Seated Harlequin”, Picasso is no longer trying on his elders’ clothes. These are original works, powerfully ambiguous and created with thrilling assurance. Not all of these paintings are masterpieces, but together this exhibition dramatises a critical moment in the master’s making.

Obituary AndrĂŠ Cassagnes

André Cassagnes André Cassagnes, inventor, died on January 16th, aged 86 Feb 16th 2013 |

THE place to spot him was Brie, or Vincennes, or Berck-sur-Mer, or any place in France where, on certain days of the year, the sky was alive with kites. There André Cassagnes would mingle with the crowd, an unassuming elderly man in a tweed coat or a baseball cap. If your hands were cold, he might give you a pair of gloves. When your kite-line got tangled he would teach you his own noeud Cassagne, or slip-knot, which could free you in seconds. If a child’s kite was heading for disaster, “Dédé” would unhesitatingly ditch his own to save it.

His own kites, though, were masterpieces: great cellular wheels 13 feet in diameter, a double wheel called “the Crown”, clocks, castles, star-shapes made of tetrahedrons, and five interlocking rings in honour of the Olympic games. No kitemaker was more celebrated in France, and he was closely followed, too, in Germany and America. He had invented a plastic connection that allowed his floating constructions of nylon and aluminium to be assembled and disassembled in a trice. He had also devised a kite-ferry that could run up a line, fold the kite’s wings, slide down the line, reopen them, then climb again, in perpetual motion, like a butterfly. Few stunts were more impressive.

Lines, and how to control them, were his passion. He was no mathematician or engineer—ingénieux rather than ingénieur, as he liked to say—and his education was no finer than could be expected for the son of a baker from Vitry-sur-Seine. Had he not been allergic to flour, he might have stayed in the shop.

But he loved symmetry and geometry, and the way that, if you plotted points on the static x and y axes, lines would start forming and growing. He got bitten by kites, at the ripe age of 50, as he watched the ever-changing lines they made, vertical against horizontal, above a windswept beach in Normandy. Mr Cassagnes employed himself for the next few decades making kites not only more geometrically sophisticated but also more pilotable, or delicately responsive to the flyer’s imagination.

His day-job, until 1987 when he retired, was as an electrician for an interior-decoration firm based near Paris. There too he was involved in laying, tracing and untangling lines, some live, some dead. But the

culmination of his passion appeared elsewhere, in an invention he never boasted of: a rectangular red plastic box with a grey screen and two white knobs, called the Etch-a-Sketch.

This toy, licensed in 1960, sold more than 100m units worldwide in 50 years and earned a place in America’s National Toy Hall of Fame, alongside Barbie and Mr Potato Head. The principle was simple.

The user drew on the screen by turning the left-hand knob, for a horizontal line, or the right-hand one, to get a vertical. The lines were drawn by a stylus moving through aluminium powder; but they seemed to appear by magic and take unexpected turns. They disappeared by magic, too, when the box was turned over and given a good shake. The artist, in theory (for the practice was so difficult that many an Etch-aSketch was thrown aside in despair), was free to take his line wherever he liked. Deliberately, the toy was designed to look like a TV set: but one where the viewer was given only a blank, inviting sky.

Mr Cassagnes had invented this ardoise magique at work. While fitting a plate over an electric-light switch, he noticed that pencil marks he had made on the protective decal were transferred to the other side when he took it off. After much messing around with aluminium powder, and the fitting of a joystick to operate the stylus, he took his invention to the Nuremberg toy fair in 1959. The chairman of Ohio Art, an American company, bought the rights for $25,000, and the rest was history.

The charm of this toy was not only its simplicity, and the way it freed imagination, but the ease with which everything vanished into thin air and could be begun again. Hence the unfortunate words of one of Mitt Romney’s advisers in the 2012 race, who said his candidate’s campaign could be shaken and restarted like an Etch-a-Sketch; and the crowing remark of a rival, Newt Gingrich, who handed an Etch-aSketch to a child at one rally and pronounced her now fully equipped to be president of the United States.

Lines converging All this fame Mr Cassagnes barely registered. He never took full credit, or royalties, for his invention. He could not afford to buy the patent, so a man called Arthur Grandjean did the paperwork and got his name on it. His name, too, went into the Toy Hall of Fame. Mrs Cassagnes was intensely frustrated by this. Her husband however, never seemed to mind much.

He had his kites, and spent, all told, twice as many years on them as on his drawing box. He never tired of finding new geometrical shapes and combinations for them. Besides, it was not in his nature to keep good discoveries to himself. At festivals he sometimes even gave his kites away. Nothing made him happier, at Brie or Vincennes or Berck-sur-Mer, than the free, magical, unexpected, yet subtly controlled movement of their lines in space. And perhaps no epitaph was more apt than the remark of a French blogger: “All our lines converge towards you, and our kites salute you.”

Economic and financial indicators Output, prices and jobs Corporate cash piles Markets Trade, exchange rates, budget balances and interest rates The Economist commodity-price index

Output, prices and jobs Feb 16th 2013 |

Corporate cash piles Feb 16th 2013 |

Although it recently lost its mantle as the world’s most valuable company to ExxonMobil, Apple remains, on one measure, by far the richest. With a hoard of $137 billion, it holds more than two-thirds of its balance-sheet as cash and liquid assets. Greenlight Capital is challenging Apple’s approach. The hedge fund has threatened to sue Apple unless it drops a proposed change to its corporate charter that would prevent it from issuing preferred shares. Greenlight wants Apple to issue these in order to distribute some of its cash to shareholders. Apple, whose shares are trading at $470 and which holds $146 of net cash for each share, paid a dividend last year for the first time since 1995.

Markets Feb 16th 2013 |

Trade, exchange rates, budget balances and interest rates Feb 16th 2013 |

The Economist commodity-price index Feb 16th 2013 |

Table of Contents The Economist The world this week Politics this week Business this week KAL's cartoon Leaders Tax havens: The missing $20 trillion The Italian election: Who can save Italy?

The global economy: Phoney currency wars Free trade across the Atlantic: Come on, TTIP Another sop for elderly Britons: Grey squirrels Letters Letters: On the Nordic countries, private schools, immigration, Sandhurst, Ed Koch, Richard III Briefing Italy’s election: Long after the party Beppe Grillo: Five-star menu United States The state of the union: A House divided Raising the minimum wage: Trickle-up economics The defence secretary’s nomination: Hagelian dialectic The milder side of drones: Here’s looking at you Fracking in the West: Big reserves, big reservations Football in New York: The Cosmos come back North Carolina: Farewell to purple Making guns at home: Ready, print, fire Lexington: The politics of purity The Americas Mexico’s new president: Tearing up the script Brazil’s zombie politicians: Unstoppable?

Housing in Brazil: If you build it Pensions in Argentina: Now or never Asia North Korea’s nuclear test: Fallout Bangladesh: Mass dissatisfaction Indian politics: An illiberal turn Kabuki theatre in Japan: In a pickle Thailand’s capital city: Power failure Banyan: Before the gold rush China Government reform: Super-size me Trade with North Korea: Crystal meth and Tesco Trade with North Korea: Trade with the world Middle East and Africa

Nigeria: Clubbing together Transport in Africa: Get a move on Ruling Ethiopia: Long live the king Divided Jerusalem: An Arab haven dissected Afghan refugees in Iran: Go back home Europe French economic policy: Which way for Mr Hollande?

Russia and America: The dread of the other EU migration to Germany: Sprechen Sie job?

Turkey and Islam: Dress tests Charlemagne: No to EUsterity Britain Redeveloping London: What’s the plan?

Elderly care: Old times Selecting candidates: Supply-side politics Scottish independence: Battle of the profs The future of shopping: Malleable malls New banks: Telling Local television: Coming soon Bagehot: Ties that no longer bind International Pope Benedict’s resignation: See you later Papal resignations: Torn vestments Cyber-security: To the barricades Islamic extremism: The languages of jihad Islamic extremism: Internship Special report: Offshore finance Storm survivors Enduring charms The OFCs’ economic role: The good, the bad and the Ugland Onshore financial centres: Not a palm tree in sight Tax transparency: Automatic response Company taxation: The price isn’t right The merry enablers Switzerland and its rivals: Rise of the midshores Who’s the criminal?

Prospects: Sunshine and shadows Business Information technology in Africa: The next frontier Food safety: After the horse has been bolted Lawyers: The say-on-pay payday Carrefour: Up the right aisle PSA Peugeot-Citroën’s troubles: Running out of road Swiss watchmakers: Time is money Oil in China: Smog and mirrors Schumpeter: How to make a killing Finance and economics

Finance and the American poor: Margin calls Buttonwood: Teacher, leave them kids alone Barclays and Deutsche Bank: Surviving, not thriving Interest-rate swaps in India: Derivatiff Cannabis as an investment: The audacity of dope Carbon markets: Extremely Troubled Scheme Free exchange: Middle-income claptrap Science and technology Manufacturing metals: A tantalising prospect Marine biology: Flea market The microbiome and health: Sniffing out hypertension Human evolution and palaeobotany: Grassed up Books and arts The future of Catholicism: Leap of faith The spying trade: Success by stealth Piero della Francesca: Divine splendour 18th-century courtship: An inept Pygmalion The rise of solo living: A room of one’s own Becoming Picasso at the Courtauld: The incubation of genius Obituary AndrÊ Cassagnes Economic and financial indicators Output, prices and jobs Corporate cash piles Markets Trade, exchange rates, budget balances and interest rates The Economist commodity-price index