The economist august 8 2014

The damage sanctions will do to Russia India’s unloved billionaire How America fell out of love with space Decluttering your business AUGUST 2ND– 8TH 2014

Economist.com

China: fall of the mighty Zhou

Winning the battle, losing the war

Gaza and the future of Israel

Contents

The Economist August 2nd 2014 3

5 The world this week

On the cover For all its military might, Israel faces a grim future unless it can secure peace: leader, page 7. The pummelling of Gaza has cost Israel sympathy in Europe, and even among Americans.

Israelis are debating how to respond, pages 16-18 The Economist online Daily analysis and opinion from our 19 blogs, plus audio and video content, debates and a daily chart Economist.com/blogs

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Leaders 7 Israel Winning the battle, losing the war 8 Mukesh Ambani India’s unloved billionaire 9 Argentina defaults Eighth time unlucky 9 Crime and punishment Stuffed 10 Fund managers Fundamental fears Letters 12 On Hong Kong, cyber-security, Scotland Briefing 16 Israel and the world Us and them United States 19 America and Africa The next great disruption 21 Skilled labour Behind the scenes 21 Primary reform A modest proposal 22 Tattoos in the workplace Ink blots 22 Religious freedom Rabbi to the rescue 24 The Florida governor’s race Close and caustic 25 Lexington America and the space race

Volume 412 Number 8898 Published since September 1843 to take part in "a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress."

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

26 27 28 28

The Americas Argentina’s default No movement Bello Term limits Canadian licence plates Plategate Politics in Venezuela Whose hand on the tiller?

Asia 29 Race and religion in South-East Asia The plural society 30 The Philippines DAP dancing 31 Sport in India The kabaddi craze 31 India and Nepal Neighbourhood watch 32 Nuclear power in Japan Flicking the switch China 33 Corruption The fall of Zhou Yongkang 34 Corruption and the economy Is anti-graft anti-growth?

34 Aviation The sky is a limit Middle East and Africa 35 South Africa Up the creek 36 Ebola in west Africa Death and disbelievers 37 The Syrian war A pincer move 37 Libya Out of control 38 Islam in Egypt Manipulating the minarets

39 40 41 41 42

Europe Sanctions on Russia This is going to hurt The war in Ukraine Closing in Spain’s economy Iberian dawn Turkey’s foreign policy Nasty neighbourhood German politics For curvy cannons and extra sleep

New sanctions on Russia The cost of Vladimir Putin’s Ukraine gamble is going up, but he shows no sign of changing course, page 39.

How far will he go to stave off a Ukrainian victory? Page 40.

Western sanctions will thwart Rosneft’s ambitions to join the ranks of oil’s superpowers, page 50

China The most significant purge in a generation claims Zhou Yongkang, a former security chief, and tightens Xi Jinping’s grip, page 33.

The economic impact of the anti-corruption campaign, page 34

How America fell out of love with space A revealing new history of the Apollo moon landings holds lessons for today: Lexington, page 25

1 Contents continues overleaf

4 Contents

The Economist August 2nd 2014

Britain 43 Prisons Rough justice 44 The economy Resized and reshaped

India’s unloved billionaire Why Mukesh Ambani, India’s richest man, needs to reform his empire: leader, page 8.

He could make his country a better place. But he would have to change his company’s ways, page 47

Bonds and risk Regulators should not tighten the rules on the fund-management industry: leader, page 10.

There are worries that asset management may spawn the next financial crisis, page 54

International 45 Commemorating the first world war In foreign fields 46 How the first world war reshaped Europe Redrawing the map Business 47 Reliance Industries Reimagining Ambani 50 Rosneft Arctic chill 51 Arbitration awards Now try collecting 51 Commercial property The warehouse boom 52 Whole Foods Market Victim of success 53 Schumpeter Decluttering the company Finance and economics 54 Fund managers Assets or liabilities?

55 Buttonwood Whither interest rates?

56 Deleveraging in America Debt calm 56 Forgiving default Borrow, renege, borrow again 57 Latin American economies Andean idols 58 Free exchange Why the ECB should adopt QE

Science and technology 59 Sex differences The Mars and Venus question 60 Solar energy Picking up steam 60 Renewable energy Pee power 61 Entomology It’s gotta bee me Books and arts 62 Nixon and Reagan Invisible bridge 63 Governing Britain A difficult truth 64 European history Rise of the Reformation 64 Cricket in Pakistan Batting for survival 65 King Tutankhamun Boy-king in Oxford 68 Economic and financial indicators Statistics on 42 economies, plus a closer look at import cover Obituary 70 Robert Panara Educator of the deaf

Nixon and Reagan The rise of Ronald Reagan meant far more than victory for the Republicans, page 62

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The Economist August 2nd 2014 5

The world this week Politics

Three and a half weeks after Israel launched its military campaign against Hamas, the Palestinians’ Islamist movement in Gaza, the death toll continued to rise, to around 1,400 Palestinians, 59 Israelis and one Thai. Civilians and civilian infrastructure have borne the brunt of Israeli operations. Diplomats sought in vain to arrange a ceasefire.

The American embassy in Tripoli, Libya’s capital, was evacuated after fighting between militias, which started three weeks ago over control of the international airport, spread farther. Efforts by the UN and the European Union to bring peace were, for the moment, abandoned.

Police shot dead dozens of Uighurs said to be attacking a police station with knives in China’s restless western region of Xinjiang. It was the worst violence there for months.

China adopts a hardline response to Uighur discontent.

The authorities claimed to have thwarted a terrorist attack; Uighurs claimed excessive force.

In the southern Philippines, Muslim rebels fired on a group making its way to a religious celebration, killing more than 20. The gunmen may have been from a militant group, Abu Sayyaf, that opposes a recent peace deal between the Philippine government and Muslim insurgents.

The last surviving crew member of the Enola Gay, the B-29 that dropped America’s atom bomb on Hiroshima on August 6th 1945, died at the age of 93. The plane’s navigator, Theodore “Dutch” Van Kirk, said he never regretted the deaths of an estimated 140,000 Japanese, mainly civilians, because it helped end the second world war.

Residents of the port of Buenaventura on Colombia’s Pacific coast were left without power after an electricity-transmission tower was destroyed.

President Juan Manuel Santos pointed the finger at FARC guerrillas, with whom he is currently conducting peace talks.

Putting pressure on Putin The European Union and the United States imposed new sanctions on Russia to punish the country for its support of separatists in eastern Ukraine.

The new sanctions make it harder for Europeans and Americans to invest in Russian state-owned banks, and prohibit the export of technology to its oil and defence industries. The gas industry was not targeted, presumably because several European countries depend on Russian gas exports. Russia called the measures “destructive and short-sighted”.

Here we go again

Fears rose that the Ebola disease, which took off in Sierra Leone, Liberia and Guinea a few months ago, may spread farther, after an American died of it in Nigeria, having flown there from Liberia. So far this year there have been more than 1,200 confirmed, suspected or probable cases of Ebola in west Africa.

Dishonourable discharge It emerged that Zhou Yongkang, once one of China’s most powerful men, is under investigation by the Communist Party for “serious disciplinary violations”—ie, corruption. Mr Zhou, who was a member of the Politburo’s ruling standing committee and who ran the state’s security apparatus, is the most senior figure to be brought down in this way in decades. It perhaps marks a new consolidation of power by Xi Jinping, the president.

negotiations on a settlement between the government and the hold-outs fell through.

Standard & Poor’s promptly downgraded Argentina’s foreign-currency debt.

On July 30th Argentina entered into default for the eighth time in its history, after it failed to make a payment due to bondholders who had exchanged defaulted debt from 2001 for restructured securities. Argentina missed the payment after a ruling by a New York district court in favour of a small group of creditors who have been holding out for full repayment of the 2001 debt, plus interest.

Axel Kicillof, the economy minister, criticised these “vulture” funds and the American judge. Last-ditch

The death toll in the Ukraine war is mounting. The United Nations reported that by July 26th 1,129 people had been killed in eastern Ukraine, 799 of them civilians. Ukraine’s army has made advances since the start of an offensive in early July, surrounding Donetsk, the region’s biggest city, and establishing some control over border crossings. But many of the pro-Russian insurgents are now dug in to cities. To dislodge them, Ukraine may step up its shelling and engage in street fighting. That could speed up the rise in casualties.

Spain’s economy grew by 0.6% in the second quarter of 2014, the fastest quarterly rate since the financial crisis began.

This follows a report that Spain added 190,000 jobs in the past year, the first annual increase in six years. Economists view the gain as evidence that Spain’s unpopular labour

reforms are beginning to work.

The prime minister, Mariano Rajoy, promised to enact further job-friendly measures after the summer break.

The British government invited firms to bid for the right to extract shale gas, the first new licences for six years. Over 40% of Britain is now open for exploration. In an effort to assuage the concerns of environmentalists, the government said firms would be allowed to frack in national parks, heritage sites and areas of outstanding beauty only under “exceptional circumstances”.

Don’t put that away A federal judge overturned the District of Columbia’s ban on carrying handguns in public, calling it unconstitutional.

Police in Washington were instructed not to arrest residents with properly registered guns. City officials have 90 days to rewrite the law or appeal the decision.

Elsewhere a federal appeals court in Virginia struck down a state ban on same-sex marriage. Nearly all of the legal challenges to state bans have succeeded since the Supreme Court struck down part of the Defence of Marriage Act.

California implemented emergency water restrictions in response to worsening drought conditions. In January Governor Jerry Brown declared a drought emergency, and urged Californians to cut water use by 20%. Fines of up to $500 a day could be levied upon homes and businesses caught wasting water. Fast spreading wildfires, around Sacramento and Yosemite national park, forced hundreds of people from their homes. 1

6 The world this week

The Economist August 2nd 2014

Business A court of arbitration in The Hague awarded some former shareholders of Yukos, a defunct Russian oil company, $50 billion in damages. The court found that the Russian government had acted illegally when it forced the firm into bankruptcy in 2006 before taking control of its assets through Rosneft, a state-run company. It also said that the prosecution in 2003 of Mikhail Khodorkovsky, once the majority shareholder in Yukos, was unlawful. Mr Khodorkovsky was jailed for tax evasion and fraud. Russia is likely to resist paying up.

BP’s share price pence 520 510 500 490 480 1

7

14

21

28

July, 2014 Source: Thomson Reuters

The worsening relationship between Russia and Europe is bad news for BP, which owns a 20% stake in Rosneft. The British oil firm reported a second-quarter profit of $3.2 billion, up from $2.4 billion during the same period last year. However, it said that EU sanctions against Russia (over its actions in Ukraine), some of which target the oil sector, would hurt its business.

America’s GDP recovered impressively in the second quarter of 2014. The economy grew at an annual rate of 4% compared with a 2.1% contraction in the first quarter of the year. Spending by business was particularly strong; consumer spending also grew.

Some 288,000 jobs were added to the economy in June.

Picking up a bargain Two big American discount stores are to unite. Dollar Tree has agreed to buy Family Dollar Stores in a deal worth $8.5 billion. The combined firm, which will continue to

operate two separate brands, will have over13,000 stores and sales of $18 billion. Carl Icahn, an activist investor who has a stake in Family Dollar, had been pushing for the firm to find a buyer.

Brazil’s Central Bank announced measures to ease banks’ reserve requirements. A boost to lending would help Brazil’s sluggish economy, which is suffering from low growth and high inflation.

Virgin America filed for an initial public offering. The airline, which is partly owned

by Sir Richard Branson’s Virgin Group, made its first profit in 2013—$10.1m on revenue of $1.42 billion. The carrier, which launched in 2007, did not declare the number of shares it would issue nor their price.

However, it gave a placeholder target of raising $115m.

Horse trading Reckitt Benckiser is to spin off RB Pharmaceuticals, the arm of the firm that makes Suboxone, a heroin substitute. The move could net Reckitt up to $3 billion. Sales of Suboxone have been hit by the production of generic versions of the drug. Reckitt will now concentrate on its core consumergoods business.

China launched an antitrust investigation into Microsoft. It is the latest blow to the firm in the country, after the Chinese government said earlier this year that it would no longer run Windows 8 on its computers, citing security concerns.

China also began a separate investigation into Qualcomm, a big American wireless-technology firm, alleging it abused its monopoly power. Some think the country is using such probes as a means to protect local firms.

American regulators are investigating UBS and Deutsche Bank over their “dark pools”— private and anonymous trading rooms. Several bodies, including the Securities and Exchange Commission, suspect the banks may have acted unfairly by favouring highfrequency traders over institutional investors. Barclays, which this week announced a half-year pre-tax profit of £3.35 billion ($5.67 billion), down 7% on the same period last year, is already having its dark pool investigated.

Lloyds was fined £218m for manipulating benchmark interest rates, of which £70m was for meddling with the “repo” rate, used to calculate

how much it should pay back to the Bank of England following a bail-out. The BoE described Lloyds’s behaviour as “highly reprehensible”.

Delayed gratification The Bank of England also unveiled plans to delay the payment of bankers’ bonuses for up to seven years, to ensure that they have not been involved in serious misconduct.

Regulators might be allowed to claw back bonuses up to ten years after they are paid. And senior bankers could find themselves legally liable if their firms fail through nefarious practices.

Two American property websites announced a merger.

Zillow, the country’s most popular real-estate listings site, is buying Trulia, a rival, for $3.5 billion in a shares-only deal.

Zillow says that both brands will continue to operate sideby-side.

Banco Espirito Santo lost €3.6 billion ($4.8 billion) in the first half of 2014, stoking fears for its health. The Portuguese bank replaced its management after its parent company sought protection from creditors.

Other economic data and news can be found on pages 68-69

The Economist August 2nd 2014 7

Leaders

Winning the battle, losing the war For all its military might, Israel faces a grim future unless it can secure peace

H

AMAS has ruled Gaza since 2007 and there is not much to admire. The Islamist party is harsh, narrow-minded and intolerant of dissent. Its charter is anti-Semitic. It fires rockets into Israeli territory and builds tunnels under it to kill or kidnap Israeli soldiers. It knows that the Israeli attacks it provokes will kill hundreds of Palestinian civilians, which will garner sympathy around the world. It is also weaker than it was, for it is now losing the military battle against Israel.

By contrast Israel is the most successful state in the Middle East. It is the region’s only true democracy—a hub of invention, enterprise and creativity. Israel has overwhelming firepower in the fight in Gaza. Most of its people are united behind their soldiers and have the firm backing of America’s Congress. Yet, though Israel is winning the battle, it is struggling in the war for world opinion (see pages16-18). That matters in part because Israel is a cosmopolitan trading country that looks to its American ally for security, but also because Israel needs to hear some of what its critics are saying.

Anti-Semitism: a very light sleeper A generation ago, Israel had the best of the argument with Yasser Arafat’s Palestine Liberation Organisation, in many ways a less vile outfit than Hamas. Young Europeans spent their gap years on kibbutzim. The Western world cheered when Israeli commandos rescued Jewish hostages from the terminal building in Uganda’s Entebbe airport in 1976.

But as the occupation of Palestinian territory has dragged on, sympathy has seeped away. In a poll published in June, before the destruction of Gaza, the citizens of 23 countries put the balance of those who think Israel is a good or bad influence on the world at minus 26%, ranking it below Russia and above only North Korea, Pakistan and Iran. A growing number of Europeans call Israel racist (with the sinister flourish that Israelis, of all people, should know better). And even in America, where a solid majority backs Israel, the share that thinks its actions against the Palestinians are unjustified has risen since 2002 by five percentage points, to 39%. Among 18- to 29-yearolds, Israel is backed by just a quarter.

Many Israelis, and their most fervent supporters in Congress, see today’s hostility as the culmination of a long process of demonisation, double standards and delegitimisation.

They have a point. Holding a country to high standards, as Israel’s critics do, can be a compliment—yet against Israel, morality is often used as a cudgel. The common slur that Israel is an apartheid state ignores the fact that Israel’s minorities, such as the Druze, Arabs and Bahais, are protected by the country’s independent courts—including the highest, which has a sitting Arab Israeli judge. The “BDS” campaign to impose boycotts, encourage divestment and introduce sanctions calls not just for an end to the occupation of the West Bank and for equal rights, but also for the right of return of all Palestinian refugees—in other words, for the erosion of Israel as a Jewish

homeland. Protests in France against the fighting in Gaza led to attacks on synagogues and Jewish-owned businesses.

No wonder that many Israelis feel that the world is against them, and believe that criticism of Israel is often a mask for antipathy towards Jews. But they would be wrong to ignore it entirely. That is partly because public opinion matters. For a trading nation built on the idea of liberty, delegitimisation is, in the words of an Israeli think-tank, “a strategic threat”. But it is also because some of the foreign criticism is right.

Please, hear them That begins with the scale of the violence in Gaza. Some 1,400 Palestinians have died in the past few weeks, compared with 56 Israeli soldiers and four civilians. Even allowing for Hamas’s brutality, no democracy should be happy with a military strategy that results in the death of so many children (let alone the crass claim from Israel’s ambassador to Washington that its soldiers deserve a Nobel peace prize). The destruction is driving support towards Hamas and away from the moderate Palestinians who are Israel’s best chance for peace.

But more than that, Israel needs to hear what its critics say about the need for a two-state solution, which remains the only one that will work. Time is not on Israel’s side. Palestinians may already outnumber Israelis in the lands they share.

Without two states, Israelis and Palestinians will be left with one that contains them both. The risk for Israel is of either a permanent, non-democratic occupation that disenfranchises Palestinians, or a democracy in which Jews are in a minority.

Neither would be the Jewish homeland with equal rights for all that Israel’s founding fathers intended.

America’s secretary of state, John Kerry, has made a Herculean effort to forge peace between the Israelis and the Palestinians along the lines of two states for two peoples. When the talks broke down, a few months ago, he blamed Israel’s settler lobby. That outraged right-wing Israelis. And now the left has joined in the derision because he proposed a ceasefire in Gaza that Israelis thought favoured Hamas. But Mr Kerry is right. If Israel continues to build settlements in the occupied territory, it will gobble up land that would belong to an independent Palestinian state, making peace harder to reach.

The same goes for what appears to be Israel’s strategy towards both Gaza and the West Bank. Having created a huge open-air prison in Gaza, Israel remains committed to a blockade that contains Hamas—but also ensures that ever more Palestinians grow up angry. On the West Bank, Israel’s prime minister, Binyamin Netanyahu, has gone backwards: he has said that Israel cannot relinquish security control of the West Bank for fear of Islamist attack. That implies an intention to consolidate the occupation, thus withdrawing all hope from Palestinian moderates. The West Bank would be likely to explode too, then, while the demographic clock ticked on.

For all the blood and misery in Gaza, Mr Netanyahu will soon have a chance to show he has heard the critics. Having won his battle, he could return to the negotiating table, this time with a genuine offer of peace. Every true friend of Israel should press him to do so. 7

8 Leaders

The Economist August 2nd 2014

Business in India

An unloved billionaire Why Mukesh Ambani, India’s richest man, needs to reform his empire

I

N A country full of both ambition and frustration, Reliance Industries is a “role model for all Indians who dare to dream,” says its boss, Mukesh Ambani.

The company certainly has much to boast of. It is hugely profitable, earning more than any other private Indian firm. It is brave, going where others fear to tread, constructing refineries, drilling for oil and gas, building supermarkets and broadband networks. It invests more in India and pays more corporation tax there than any other firm. Without Reliance, which generates 15% of the country’s exports, the balance of payments would be a wreck.

Yet in other ways, Reliance is a rotten role model for corporate India. When it comes to governance this secretive and politically powerful private empire is not a national champion but an embarrassment.

The father of Indian capitalism Reliance’s culture reflects its roots. In the days before India liberalised its economy in 1991, the firm’s founder, Dhirubhai Ambani, fought his way up from a menial job in Yemen through Mumbai’s heaving tenements to the top of Indian business.

Socialist dogma and meddling officials were his foes, charm and cunning his tools. He managed to run rings around the country’s stifling rules. Dhirubhai’s tactics appalled India’s establishment. But he marshalled resources to create industrial facilities of the kind every economy needs, including one of the world’s biggest refineries in Gujarat, his birthplace.

India is a more open place now and Mukesh Ambani—the country’s richest man, worth $23.5 billion—is a more cosmopolitan figure than his father. He studied in America, funds think-tanks and was a director of a Wall Street bank. Yet he has maintained two family traditions. One, making big bets on India, is welcome. Reliance is in the midst of a $30 billion investment plan. Dhirubhai’s other legacy, poor governance, is not.

Reliance is a patriarchy with a lightweight board (see pages 47-49). Although a listed firm, it makes payments equivalent to a quarter ofits pre-tax profits to related entities, mainly privately held by the Ambani family. Its ultimate ownership and beneficiaries are obscured by a mesh of holding vehicles that India’s securities regulator says it does not fully understand. The regulator accuses the firm of making illegal gains from trading derivatives linked to its own subsidiary’s shares (an accusation Reliance is contesting). Some foreign investors, put off by the lack of transparency, shy away.

Reliance’s relationship with the government is even more troubling. Anti-corruption campaigners claim Mr Ambani is the power behind the throne of India’s political leaders. Politicians, officials and regulators say Reliance has unusual clout.

Reliance denies these claims. Meanwhile, the national auditor is investigating a telecoms-spectrum auction the firm won.

In 2010 it seemed that Reliance might be changing. Mr Ambani bid for LyondellBasell, a global chemicals giant. The deal would have both made Reliance a killing and forced it to mo-

dernise its governance, but it fell through. Since then the company’s culture has become even more personalised. In June Mr Ambani’s wife joined the board. In July Reliance took control of a big broadcaster, which will provide Mr Ambani with a platform for his views, should he choose to use it that way.

Mr Ambani seems to believe that Reliance does not need to reform. He is wrong, for two reasons. First, India’s economy is opening up, and the firms most exposed to global competition—tech giants, for instance—have the world-class governance and open cultures needed to command the trust of counterparties, investors and clients, to attract talent and to foster innovation. Asia’s best multinationals, such as Samsung and Lenovo, have had to make painful reforms to stay competitive. Reliance operates in the more opaque parts of the economy, such as infrastructure, that are trapped in a time warp of barons and scandals. But to revive India’s growth rate, Narendra Modi, the new prime minister, will probably expose these sectors to a blast of competition and investment from abroad.

The more open the economy, the more of a liability Reliance’s opacity and bad reputation will become.

Second, Indian society is turning against its tycoons. Independent institutions such as the Supreme Court, the national auditor and the central bank are on the warpath against crony capitalism. The electorate is incensed by corruption. Mr Modi may be beholden to the businessmen who bankrolled him, but the voters want him to tackle cronyism. In this climate, Reliance’s power makes it vulnerable. Already, officials are raising awkward questions about its gasfields. Whereas Dhirubhai Ambani was mobbed by adoring crowds, Mukesh, protected by gunmen, is criticised on Twitter. Pervasive mistrust is dangerous for any firm. In the early 20th century Americans demanded that big businesses such as Standard Oil be broken up; today, Mexico’s richest man, Carlos Slim, is under pressure to shrink his empire.

Taking the plunge There is plenty that Mr Ambani could do to reform his firm. He could adopt global accounting rules, reveal and simplify its ownership and appoint as directors global heavyweights with reputations to lose who can subject Reliance to scrutiny. The company’s shares—like those of many Asian firms—could be listed in America, which has the world’s toughest disclosure regime. To avoid conflicts of interest Mr Ambani could merge his private businesses into Reliance, on terms that are fair to minority shareholders. He could publish details ofReliance executives’ meetings with politicians and officials. He could sell its media assets. He would lose something in personal and political power but gain more through the opportunity to build a more global and more admired business.

There is a contradiction at the heart of Reliance. The firm purports to represent the new India—less deferential, better educated, less corrupt and powered by technology—but runs itself according to the old rules of opacity, hereditary power and political influence. If Mr Ambani is to become the great business leader he wants to be, he needs to let Reliance’s progressive side overpower its darker one. 7

The Economist August 2nd 2014

Leaders 9

Argentina defaults

Eighth time unlucky Cristina Fernández argues that her country’s latest default is different. She is missing the point

A

RGENTINA’S first bond, issued in 1824, was supposed to have a lifespan of 46 years.

Less than four years later, the government defaulted. Resolving the ensuing stand-off with creditors took 29 years. Since then seven more defaults have followed, the most recent this week, when Argentina failed to make a payment on bonds issued as partial compensation to victims of the previous default, in 2001.

Most investors thinkthey can see a pattern in all this, but Argentina’s president, Cristina Fernández de Kirchner, insists the latest default is not like the others. Her government, she points out, had transferred the full $539m it owed to the banks that administer the bonds. It is America’s courts (the bonds were issued under American law) that blocked the payment, at the behest of the tiny minority of owners of bonds from 2001 who did not accept the restructuring Argentina offered them in 2005 and again in 2010. These “hold-outs”, balking at the 65% haircut the restructuring entailed, not only persuaded a judge that they should be paid in full but also got him to freeze payments on the restructured bonds until Argentina coughs up.

Argentina claims that paying the hold-outs was impossible.

It is not just that they are “vultures” as Argentine officials often put it, who bought the bonds for cents on the dollar after the previous default and are now holding those who accepted the restructuring (accounting for 93% of the debt) to ransom. The main problem is that a clause in the restructured bonds prohibits Argentina from offering the hold-outs better terms without paying everyone else the same. Since it cannot afford to do that, it says it had no choice but to default.

Yet it is not certain that the clause requiring equal treatment of all bondholders would have applied, given that Argentina

would not have been paying the hold-outs voluntarily, but on the courts’ orders. Moreover, some owners of the restructured bonds had agreed to waive their rights; had Argentina made a concerted effort to persuade the remainder to do the same, it might have succeeded. Lawyers and bankers have suggested various ways around the clause in question, which expires at the end of the year. But Argentina’s government was slow to consider these options or negotiate with the hold-outs, hiding instead behind indignant nationalism (see page 26).

Don’t try to flee, Argentina Ms Fernández is right that the consequences of America’s court rulings have been perverse, unleashing a big financial dispute in an attempt to solve a relatively small one. But hers is not the first government to be hit with an awkward verdict. Instead of railing against it, she should have tried to minimise the harm it did. Defaulting has helped no one: none of the bondholders will now be paid, Argentina looks like a pariah again, and its economy will remain starved of loans and investment.

Happily, much of the damage can still be undone. It is not too late to strike a deal with the hold-outs or back an ostensibly private effort to buy out their claims. A quick fix would make it easier for Argentina to borrow again internationally. That, in turn, would speed development of big oil and gas deposits, the income from which could help ease its money troubles.

More important, it would help to change perceptions of Argentina as a financial rogue state. Over the past year or so Ms Fernández seems to have been trying to rehabilitate Argentina’s image and resuscitate its faltering economy. She settled financial disputes with government creditors and with Repsol, a Spanish oil firm whose Argentine assets she had expropriated in 2012. This week’s events have overshadowed all that. For its own sake, and everyone else’s, Argentina should hold its nose and do a deal with the hold-outs. 7

Crime and punishment

Stuffed Britain’s prisons are in a shameful state. The solution is simple, but takes courage

“P

RISON works,” declared Michael Howard, then the Conservative home secretary, in 1993—and few politicians from any party have dared to argue with him. As sentences have gradually ratcheted up, England and Wales have acquired the largest prison population in western Europe. The ratio of prisoners to violent crimes is now four times what it was in the mid-1990s. Ken Clarke, another Conservative, tried to reverse the trend; he was roundly attacked (including by Mr Howard, from retirement) and was turfed out of his job in 2012.

At 149 per 100,000, the incarceration rate in England and Wales is still way below America’s 707, but it is far greater than Germany’s 78 and the Netherlands’ 75. Successive governments have failed to build capacity to accommodate Her Majesty’s proliferating guests, so English and Welsh prisons are stuffed, and conditions are worsening (see page 43). Some are at more than 180% of their official capacity. Inspectors catalogue multiple failings—filthy cells, widespread drug use, bullying, too few opportunities for work. Suicides are rising, as are attacks on officers and riots. On July 26th prisoners in a particularly grim establishment in Nottinghamshire refused to return to their cells after lunch, and took over part of the prison.

If society were indeed made safer by banging up more and 1

10 Leaders

The Economist August 2nd 2014

2 more people, then there would be reasonable grounds for do-

ing so. But the facts suggest otherwise.

The “prison works” argument rests mainly on the self-evident truth that if criminals are locked up they are not on the streets committing crimes. And, at first glance, the figures seem to bear the argument out. The prison population has climbed by 68% since 1995 while crime has fallen by 60%.

Yet evidence from outside Britain swiftly undermines the argument. Since 2008 the number of prisoners in the Netherlands has dropped by one-quarter. Bizarrely, that country now has more guards than convicts. Even America is becoming a little less keen on throwing people behind bars. California and New York have both cut their prison populations sharply.

Crime has fallen in all these places, just as it has in England and Wales, suggesting prison does not have much to do with it.

If prison does not work well, that may be because prisons are failing to turn people away from crime. Indeed, the opposite seems to be happening. Increasingly, crimes are committed by ex-cons. In 2003, 20% of people sentenced had committed 15 or more previous crimes; in 2013, 33% had.

Overcrowding is a big reason prisons are failing to rehabilitate people. Teaching people useful skills requires manpower and space. Building more prisons would relieve the crush—but slowly and expensively: a new prison in Wales will cost £212m ($360m). A country with a growing debt pile should only spend more money if it is really necessary.

There is a better alternative: imprison fewer people. The average person released from prison has been inside for nine and a half months, and research carried out by the British government shows that people serving community sentences are less likely to commit crimes than are people released from short spells in prison. At the other extreme, many sentences are too long to be useful. The number of over-60s in prison has more than doubled in the past decade.

Politicians’ reluctance to send fewer people to jail stems partly from their fear of Britain’s virulent tabloid press, which likes nothing so much as a good murder committed by a recently released prisoner. But as newspaper circulations decline, so does the red-tops’ power. This might be a good time to try a new approach. 7

Fund managers

Fundamental fears Regulators should avoid tightening the rules on the fund-management industry

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HERE will the next financial crisis occur? Not, almost certainly, where the last one did. Since the late 1990s, the world has coped with economic meltdown in South-East Asia, the dotcom boom and bust, and the American housing bubble and subsequent banking collapse. The place that regulators are worried about now is the fund-management industry.

In a sense, their worries are the result of the regulatory response to the last crisis. Banks now have to hold more capital than before, so they are less willing to lend money to companies or to act as marketmakers in the corporate-bond market, and companies are now more dependent on the bond markets (and thus asset managers) for finance. Investors have piled into corporate bonds, not least because central-bank policy has pushed down returns on government bonds. Speculative or junk bonds yield just 4.5% compared with 8.1% in October 2011.

This has led to crowded positions in a market where liquidity, by one estimate, has declined by 70% since before the 2007 crisis. Regulators are worried that if everybody tries to sell, the absence of willing buyers could cause prices to tumble, the cost of finance for companies to shoot up and the corporatebond market to, in effect, close—as it did for emerging-market borrowers in the summer of 2013, when the Federal Reserve hinted at reducing the pace of its asset purchases. The damage to the economy could be big.

Regulators are contemplating action. One possibility, mentioned in a paper by the Financial Stability Board, a group of finance ministries and central banks, is to designate fund managers or individual funds as “systemically important financial institutions”, or SIFIs. This would put them in the same category as big banks like Goldman Sachs, potentially making them

hold more capital, a cost that would be passed on to investors.

That would be an odd decision (see page 54). Asset managers invest other people’s money, not their own, and that money is held separately. If an asset manager were to go bust, its clients’ money would be safe. Most asset managers borrow very little: HSBC, a British bank, has a balance-sheet 300 times larger than that of BlackRock, the largest fund manager. Mutual funds have not exacerbated past crises; indeed, retail investors seemed calmer than big institutions in the big equity bear markets of 2000-02 and 2008-09.

A gate worse than death What about hedge funds and money-market funds? Hedge funds are potentially more worrying, as the collapse of LongTerm Capital Management in 1998 showed, because they use borrowed money; money-market funds suffered a run in 2008 after one fund incurred losses. Nothing is being done about the former but regulators are taking aim at the latter. America’s Securities and Exchange Commission introduced new rules for money-market funds last week, allowing some of them to set up “gates” to limit withdrawals, or impose redemption penalties, at times of crisis. A similar restriction could be introduced to avert a bond-fund meltdown.

Such rules might sound sensible, but they risk being counter-productive. The mere prospect of investors being denied access to their money might cause the very run the authorities are trying to avoid.

Regulators are right to try to identify places where problems are building. After all, if they had done that more effectively before 2008, the worst recession since the 1930s might have been avoided. But regulations can cause problems as well as avert them. It is investors who should worry more than regulators: they need to remember that central banks will not prop up asset prices for ever. 7

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The Economist August 2nd 2014

Letters China and Hong Kong

The cyber threat from within

SIR – “No panderers, please” and “Tamed hounds” (July 19th) misinterpreted the Chinese government’s policy on Hong Kong. Both articles accused the Chinese government of oppressing press and religious freedoms in Hong Kong and exerting influence over its political-reform process. Yet the truth is, since Hong Kong’s return 17 years ago, the principle of “one country, two systems” has been implemented earnestly and the rights and freedoms of Hong Kong residents guaranteed to the fullest extent.

According to the Basic Law and the decisions of the standing committee of the National People’s Congress, by 2017 a chief executive will be elected through universal suffrage, from a pool of candidates nominated by a broadly representative nominating committee through democratic procedures. The government of the Hong Kong Special Administrative Region is steadily moving the lawful process forward.

The Chinese government’s white paper on Hong Kong did nothing more than expound long-standing policies. Nothing in the document runs counter to the Basic Law. The paper also reaffirmed Hong Kong’s independent judicial power. Your claims that the autonomy guaranteed by the Basic Law may be eroded and that the white paper is a threat to judicial independence are untenable.

As for calling on the British government to “confront” China over Hong Kong, mutual respect and non-interference in internal affairs of other countries are basic norms governing international relations. They also underpin the steady growth of China-Britain relations. Hong Kong is a special administrative region of China. Hong Kong’s affairs are purely China’s internal affairs.

The Chinese government is against any outside interference by any means.

MIAO DEYU Spokesman of the Chinese embassy London

SIR – While I applaud your efforts to highlight the darker side of cyberspace (Special report on cyber-security, July 12th) you gave short shrift to the insider threat. According to a recent study by Forrester Research, insiders working at an organisation were responsible for more than 60% of data breaches last year. And as the headlines have shown, these company insiders—with their intimate knowledge of internal data-systems and security controls—are to blame for the largest and most damaging leaks of recent years. What is even more alarming, a survey from Raytheon of IT security professionals has found that 69% do not believe their organisations and businesses have the ability to identify an insider before it is too late.

You asked us to change the tone of the cyber-security debate away from military metaphors, but it seems those metaphors will remain the most apt. Instead of suggesting that companies construct an ever more fortified Maginot Line to keep external hackers at bay, greater emphasis should be placed on spotting the Trojan Horse in their midst.

MICHAEL MADON Former deputy assistantsecretary for intelligence at the Treasury Department McLean, Virginia Why we want to leave SIR – I found it hard to recognise the country I live in from your leader urging Scots to vote to stay in the United Kingdom (“Don’t leave us this way”, July 12th). But the very title of your piece seemed misconceived. Who is actually doing the leaving? For example, people in Scotland still value what has been called the post-war British settlement, that is, the NHS and its founding principles and the welfare state. That view seems less and less shared by British governments in Westminster.

As for criticising “statism”, I suggest you look at the OECD’s list of top-performing economies. Little was said about the

degree of alienation felt in Scotland after more than 35 years of neoliberal economic policy. There are good reasons to conclude that the UK is not the “healthy” democracy you describe. It is highly resistant to change and there is an entrenched two-party interest in maintaining a voting system that can, and has produced parliamentary landslides on the basis of a minority of the vote in the country.

To quote Simon Schama on the effect of Edwards I’s ultimately failed wars of conquest within Britain: “Not for the first time, and not for the last time, it would take the rest of Britain to teach England how to be a nation.” Who said that history never repeats itself—and won’t do so again on September18th?

COUNCILLOR ALASDAIR RANKIN (Scottish National Party) Edinburgh SIR – You think that the independence-referendum process has “caused embarrassment for Britain abroad” (“How did it come to this?”, July 12th). Please be assured that, on this side of the pond anyway, you have nothing to feel embarrassed about. Whatever the outcome, the parties’ use of a peaceful referendum to settle a complicated political question should be seen as a source of pride.

KEVIN ELLIOTT Huntington Beach, California SIR – It was a mistake for the coalition government to go along with a referendum under what is seen, in Scotland, as a Conservative government. Toryism is still a toxic brand in large parts of Scotland and a vote for the union is increasingly being seen as a vote for the Tories. The more David Cameron appears on television urging Scots to vote for the union the more the Tory-hating Scots are going to vote for independence. If the referendum had been held under a Labour government things might be different.

In 1992 the late Robin Cook (also a Scot) stated that “Britain was the most centralised state in the EU”. Indeed, it is one of the most centralised states in

the world. Support for Scottish independence is not a rejection of England per se but a rejection of London-based dominance in public affairs.

Many people in Scotland, Wales and the regions of England dislike intensely the arrogance and patronising attitude of the London elites.

Rather than introducing limited devolution to the Celtic regions (and none to England) a solution might have been the conversion of the UK into a proper federal state with the powers of the various tiers of government defined and enshrined in a written constitution.

PROFESSOR MALCOLM PROWLE Nottingham Trent University Business School SIR – Scotland would indeed be a new state, and the UK a continuing one (“Dear Prime Minister and First Minister…”, July 12th). Currency union works for neither, and the share out of assets and liabilities gets negotiated. As you say, all this takes not 18 months but maybe four years.

One cavil though: getting into the European Union matters for Scotland, and the balance of opinion is that it would be by accession treaty rather than treaty amendment.

What matters more is that neither delivers membership on the terms the UK has today.

EU politics sees to that. So no rebate, and fewer if any opt outs. No wonder you came down against independence.

JIM GALLAGHER Oxford SIR – You contemplated what the negotiations might be like between an independent Scotland and “the Remainder of the United Kingdom”, or RUK. I think the name Former United Kingdom would be more appropriate.

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

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Executive Focus Institute of International Finance (IIF) Washington, DC The IIF is one of the world’s largest global associations of financial institutions. The IIF’s Regulatory Affairs Department focuses on the development and articulation of industry perspectives on numerous global financial regulatory issues, including: systemic risk, banking, securities and insurance regulation, supervision, international accounting, and industry practices in the areas of risk management and governance.

Managing Director, Regulatory Affairs The responsibilities of this senior management position will include crafting advocacy strategies to address regulatory policy issues of concern in the global financial services industry; chairing related committees and working groups; developing written products that articulate members’ global policy interests; generating consensus among IIF members on key policy issues; and advising the CEO on regulatory and management issues. This person will represent the IIF at membership and board meetings; will meet with senior executives of member and nonmember organizations; and meet with public and private sector officials to represent members’ views on banking, insurance, and other regulatory issues of mutual concern. Successful candidates will have extensive experience at the senior level managing banking and/or regulatory operations in a financial firm, regulatory body, or central bank.

Insurance Regulatory Senior Policy Advisor, Regulatory Affairs We are also seeking an experienced Senior Policy Advisor specialized in insurance regulatory matters to spear head the IIF’s insurance regulatory advocacy activities. The responsibilities of the position will include: analyzing new international regulatory initiatives by groups such as the G20, the FSB, the IAIS, and the Joint Forum; leading the development of global industry positions on a wide range of challenging insurance regulatory issues; developing position papers, response documents and other analytical pieces; managing the work of a range of high-level industry committees and working groups; and engaging in dialogue with international insurance policymakers on behalf of IIF members. Successful candidates must be strongly motivated, highly articulate, exercise effective judgment and have strong analytical abilities. S/he will likely have a graduate degree in finance, risk, law, economics, or another relevant discipline from a leading university. At least ten years of professional experience in an insurance company in the areas of finance, risk, legal or government/ public affairs, an insurance trade association, an insurance regulatory agency or experience in a related field are required. Solid knowledge of IAIS standards would be advantageous. S/he must be fluent in English and have excellent oral and written communication skills.

To apply for either of these positions, please email cover letter, with salary requirements, and resume to personnel@iif.com in Microsoft Word format. More detailed descriptions of each of the positions below can be found on our website at www.iif.com/about/iifjobs.

The Economist August 2nd 2014

Executive Focus

15

DEAN The Mohammed Bin Rashid School of Government (MBRSG) was established in 2005 with the vision to become a pioneer in the application of knowledge to government administration and policy. Under the patronage of HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai, the School is committed to the advancement of good governance in Dubai, the UAE and the Arab World. We now seek applications from qualified and experienced candidates for this strategic-academic leadership appointment with significant cross-institutional responsibility and a high level of external engagement.

Role: • Leadership of the School’s Academic, Executive Education and Research Departments • Support for all aspects of program growth, specifically through strategic and operational planning guidance • Research and lead responses to new academic opportunities • Develop and direct all academically related conferences, forums and roundtables Required Qualifications & Expertise • Ph.D. in Public Administration, Public Policy or a related field • At least 10 years of experience in heading a comparable institution of Public Policy and Governance • Proven track record of academic competency and research • Preferably bilingual in Arabic and English

For complete details on the appointment please refer to the School website www.mbrsg.ac.ae. Interested candidates meeting the qualifications and requirements may send their expression of interest, CV and scanned passport copy to DeanSearch@mbrsg.ac.ae within 15 days of this posting.

The Economist August 2nd 2014

16

Briefing Israel and the world

Us and them JERUSALEM AND NEW YORK

The pummelling of Gaza has cost Israel sympathy not just in Europe, but also among Americans. Israelis are debating how to respond

“W

AS Israel all a mistake?” asks a lawyer at a debate on the Gazan war in a grand Georgian library in Manchester. None of the 40 or so professionals present says no. In the streets outside noisy, heavily policed anti-Israel demonstrations are taking place. “Death to Jews,” a few protesters chant at ultra-Orthodox Jews on their way home through Broughton Park, in the north of the English city.

As the toll from the war in Gaza rises, its echoes are rumbling in Europe’s streets. Israel says it is fighting terror—trying to halt rocket attacks by Hamas, the strongest force in the strip, and destroy tunnels through which Hamas fighters can raid Israel. But civilians and civilian infrastructure have borne the brunt of Israeli operations. Palestine’s health ministry lists some 1,400 dead since July 8th, of whom fourfifths are civilians; one-fifth of these are children. Palestine’s only power station has been destroyed, as have more than 4,000 homes, some with families inside.

Fifty-six Israeli soldiers, including ten on July 28th, three Israeli civilians and a Thai have also been killed. Hamas’s rockets continue to fly, though in smaller numbers.

From Antwerp to Warsaw, demonstrators’ placards have ranged from criticism

of Israeli policy (“1,2,3,4, Occupation No More”) to denouncing Israel itself (“5,6,7,8, Israel is a Terror State”) to the most wounding anti-Semitism (“Hamas, Hamas, Jews to the Gas”). In France, which has Europe’s largest Jewish and Arab (mainly north African) populations, trouble may be no surprise. But its extent—attacks on synagogues, raids on Jewish shops—has been shocking nonetheless. Even in Oslo, the Jewish museum closed its doors.

Clearly, Europe’s antipathy towards Israel is more than just loud protest. Many Israelis think they can no longer count on public opinion in Europe—and, to a much lesser extent, America—and that where popular sentiment leads, democratic politicians will sooner or later follow. They see the rising number and vehemence of demonstrations against Israel’s wars, and as a result fear “delegitimisation”: the turning of Israel into a pariah state, outside polite international society.

A global poll in and about several countries, conducted for the BBC long before the latest strife in Gaza, reported that negative views of Israel’s influence in the world outweighed positive ones by more than two to one (see chart 1 on next page). In aggregate, Americans saw Israel favourably;

The Economist August 2nd 2014

Europeans did not. But plenty of Americans worry about Israel’s reputation. Barack Obama has fretted about his country’s “limited” ability to manage the “international fallout” were a Palestinian state no longer within reach. Delegitimisation, says Einat Wilf, a former Israeli parliamentarian and one of the authors of a three-year, as-yet-unpublished study of the topic at the Jewish People Policy Institute (JPPI) in Jerusalem, is becoming “a strategic threat”.

The concept of delegitimisation is not new. But it is acquiring new weight in parts of the world where Israel once felt itself anchored. The JPPI traces the turning-point to the World Conference against Racism in Durban in 2001, which brought 1,500 government and non-governmental delegations together under the auspices of the UN. Its draft declaration, subsequently amended, condemned Zionism as racism.

Since then, says Michael Herzog, a former defence-ministry official and head of the JPPI’s project, networks of Islamist and leftist activists have spread the idea wide.

How wide is a matter of debate. Israel’s supporters paint a picture of rampant antiSemitism, particularly in Europe, under the cover of hostility to Israel. A survey released this year by the Anti-Defamation League said 34% of eastern Europeans and 24% of western Europeans harboured antiSemitic views—implying that the continent houses 165m Jew-haters. Others are less gloomy. Vivian Wineman, who heads the Board of Deputies of British Jews, the umbrella body of British Jewry, notes that spikes in anti-Jewish attacks correlate to bouts of fighting in the Middle East. His 1

The Economist August 2nd 2014 2 French counterpart, Roger Cukierman,

says public attitudes are driven “by the images of Palestinian babies on television, which makes [people] very angry.”

Some of the Israeli government’s critics hit back by accusing its supporters of highlighting rising anti-Semitism in Europe and elsewhere to deflect criticisms of its own abuses of human rights. “Ninety-five per cent of demonstrators have nothing against Jews,” says a French government official and Jewish campaigner for a twostate settlement.

Worried by the threat to their own civil order, Belgium and France have banned protests and arrested scores of participants for defying the ban. But despite this, and a flurry of visits to Israel by European leaders, all upholding the country’s right to selfdefence, it is hard to ignore the change in attitudes from decades past. Gone are the days when Israel, with its kibbutzim, was a darling of idealistic young Europeans; faded, too, the idea of Israel as vulnerable and poor, encircled by massed armies.

Businesses and governments in Europe have largely resisted demands for a boycott. That said, retailers have labelled and sometimes stopped importing products made in Jewish settlements in the West Bank, which Israel has held since winning the war of 1967. “Tesco: We’ve axed fruit from Israel,” ran a headline about the British supermarket chain in the Irish Sun on July 27th, referring only to harvests from the occupied Jordan Valley. Others have disinvested from Israeli firms or institutions with settlement-related assets. A Dutch pension-fund manager, PGGM, and Denmark’s largest bank, Danske Bank, have sold stakes in Israeli banks that finance settlement construction. The Netherlands’ largest public water-supplier, Vitens, cut ties to Israel’s water company, Mekorot, which takes water from the West Bank and then sells it back to Palestinians.

European governments have also concentrated their criticism on the occupation.

After the collapse of talks between Israel and the Palestinians in April, 17 EU states cautioned their firms against conducting business with the settlements, which “are illegal under international law”. Funding for the Palestinians, said EU officials, could also be affected since the union would no longer meet costs that legally should be borne by the occupying state.

Were Israel and Palestine to conclude a deal on a two-state solution, however, the EU’s Council of Ministers has promised to reward them both with special trading status. And for all its huffing and puffing, Israel enjoys plenty of privileges in its relationship with Europe. It is the sole nonEuropean country participating in Horizon 2020, the EU’s largest research project—although institutions with links to the settlement programme are barred. Last February Germany gave all visiting Israelis the

Briefing Israel and the world 17 1

Bad company 2013-14 % of respondents* saying whether a country’s influence on the world is: mainly negative mainly positive 60 40 20 – 0 + 20 40 60 Germany Canada Britain France Japan EU Brazil United States China South Africa South Korea India Russia Israel North Korea Pakistan Iran Source: Globescan/PIPA

*Average of 20 or 21 countries

right to obtain six-month work permits.

Once the violence in Gaza subsides, public opinion, a remarkably forgetful and fickle force, may move on. But the more protracted Israel’s conflict with the Palestinians becomes, the greater the risk that the violence and anger at Israel will acquire a life of its own. Once-fringe jihadist groups, says Mr Cukierman, are wooing a growing number of north Africa’s alienated youth to join their cause.

The doubting young Israel remains much surer of its friendship with America. But even here, tempers have frayed. Last weekend anonymous Israeli officials accused John Kerry, America’s secretary of state, of proposing a Gaza ceasefire agreement tilted towards Hamas. And some Americans, especially the young, are becoming more likely to question the Israeli government’s version of events.

Polls show that Americans overwhelmingly sympathise with Israelis more than with Palestinians—even more so now than they did in the 1990s. But they also show a widening generational split. Younger Americans are far likelier than older ones to say Israel is more responsible than Hamas for the fighting in Gaza. A recent Gallup poll found a majority ofthose under 30 thought Israel’s actions in Gaza unjustified (see chart 2). Baby-boomers whose views were shaped by Israel’s wars against Soviet-aligned Arab states in 1967 and 1973 may still see Israel as a plucky little David standing up to Goliath. But for many younger Americans, who have mainly seen a powerful Israel occupying the West Bank and battering Hamas, the picture is different.

Another rift is opening too, between liberal American Jews and the conservative Israeli government. Seven-tenths of America’s nearly 7m Jews say they vote or

lean Democratic; they strongly back a twostate solution to the Israeli-Palestinian conflict. But Israel’s government has moved to the right in the past decade; and the peace process has ground to a halt. Binyamin Netanyahu, Israel’s prime minister, has piqued Democrats’ anger by spurning Mr Obama’s demands for a freeze on Jewish settlements in the West Bank.

Many liberal American Jews, opposed to the settlements and put off by Israel’s rising religious nationalism, have gravitated towards new organisations that support Israel while opposing its government’s policies. The most important of these is J Street, a doveish group founded in 2008 whose members include former officials of Bill Clinton’s and Mr Obama’s administrations. It lacks the political heft of the American Israel Public Affairs Committee, which has for decades promoted bipartisan congressional support of Israel. But the existence of a mainstream Jewish group that criticises Israeli policy has made it easier to dissent without being painted as an enemy of Israel or even anti-Semitic.

Other left-wing Jews have gone further.

Jewish Voice for Peace is among a small number of Jewish groups that have declared support for the BDS (boycott, divestment and sanctions) movement, a Palestinian-led initiative which seeks the economic, diplomatic and military isolation of Israel until it ends the occupation.

BDS has had success on university campuses and in some Christian churches. At the far edge of the spectrum, some young, left-wing Palestinian and Jewish Americans have abandoned the two-state solution, advocating a single state of which Jews and Palestinians would be citizens.

Meanwhile, on social media and the internet Americans are seeing more reporting that is critical of Israel: if they are so inclined, they can read the Guardian and watch Al-Jazeera. Last month, when NBC tried to reassign a reporter who witnessed an Israeli bombardment that killed four 1 2

Friends divided Americans’ views* of Israel’s actions in the current conflict Justified Unjustified 0

10 20 30 40 50 60 70

All By age 18-29 30-49 50-64 >65 By party Republicans Independents Democrats Source: Gallup

*Polling date July 23rd

18 Briefing Israel and the world 2 children playing on a Gaza beach, he was

reinstated after a furious social-media campaign. An intense debate over whether Israel exaggerated Hamas’s responsibility for the kidnapping and murder of three teenaged Israeli settlers has been fuelled by tweets sent by reporters for Buzzfeed, a website, and the BBC. IfDemocrats have become more critical of Israel recently, Republicans have only grown more supportive. Both Orthodox Jews and evangelical Christians tend to vote Republican. Evangelical support for Zionism has solidified since the 1970s, based in part on a biblical conviction that God granted Palestine to the Jews, and in part on a sense of shared values and a common struggle against terrorism and political Islam. Some younger evangelicals have shown sympathy for the Palestinian cause, but they remain at the fringes. Libertarians in the Tea Party have challenged interventionist foreign policies, but to little avail: in March a new congressman, Thomas Massie of Kentucky, even voted against a bill to name Israel an American strategic partner.

The bill passed, 410 to 1.

As such margins show, any shift in American popular attitudes towards Israel has yet to be reflected in policy. Both the Senate and the House of Representatives unanimously approved resolutions last month supporting Israel’s actions in Gaza.

Advocates ofIsrael’s policies argue that under pressure of war, American Jews will come together in defence of the Jewish state. The violence and anti-Semitism of some European Muslims in recent demonstrations also tends to solidify American Jews’ support for Israel.

Yet the change in American discourse on Israel is real. In one striking example last month, Jon Stewart, a television comedian popular among secular Jews under 50, ran a blistering item denouncing Israeli violence in Gaza. His guest the next day, Hillary Clinton, repudiated his critique, assigning all blame for Palestinian deaths in Gaza to Hamas and its indiscriminate rocket attacks against Israel—the line that has prevailed in American politics since her husband was president. If Mrs Clinton succeeds Mr Obama in 2016, Israel will feel it has less to worry about.

Delegitimising the delegitimisers In principle, Israel could counter the threat of delegitimisation by changing policy. It would have a chance of securing diplomatic relations with the world’s 56 mainly Muslim countries by agreeing to the Arab Peace Initiative of2002 and ending its military occupation. “If Israel was to make a real peace with the Palestinians, the incidence of delegitimisation would inevitably subside,” admits Mr Herzog.

But after decades of failed peace talks and with a government ill-disposed to changing course, Israel’s think-tanks offer

The Economist August 2nd 2014 other, more practical suggestions for limiting the damage to the country’s reputation.

One, the Reut Institute, proposes establishing a pro-Israel network, for instance involving evangelical churches, to counter Islamist and leftist ones, and rebranding Israel with liberal images such as gay-pride pageants. Ms Wilf of the JPPI proposes shifting some of the 60 billion shekels ($17.5 billion) Israel spends on its security to the under-appreciated foreign ministry, which has a budget of about 1.6 billion shekels.

Another think-tank, the Jerusalem Centre for Public Affairs, headed by Dore Gold, who is Mr Netanyahu’s senior foreign-policy adviser, focuses on delegitimising the delegitimisers. It places delegitimisation as one of “three Ds”, along with demonisation and double standards—expecting more of Israel than of other states, especially in the Middle East—which it says constitute a “new anti-Semitism”.

The army sniffs at a reallocation of resources. (“Planes cost more than a blogger,” says an army spokesman.) But there are signs that some in government are taking notice. Yuval Steinitz, the strategic-affairs minister, is seeking 100m shekels to co-ordinate efforts by the army, the foreign ministry, the government press office and other bodies to combat delegitimisation.

In the recent Gaza campaign, the government has co-opted universities to its war effort. Several have established “war rooms” with banks of computers where student volunteers use army talking-points to rebut social-media attacks.

Israel’s parliament, the Knesset, has warned the country’s civil-rights groups that they could be branded as delegitimisers if they insist on promoting rights for Israel’s Arab minority and oppose the definition ofIsrael as the nation-state of the Jews.

(This week the Knesset banned an Arab member, Haneen Zoabi, for six months for “aggressive behaviour” in anti-war de-

But Israel still has many friends

monstrations.) It is now pondering a more active approach abroad, too. After the antiIsrael protests and attacks on Jews, the Knesset summoned European diplomats.

“If European countries fail to protect Jews within their territory, the state of Israel will,” said Israel Hasson, a parliamentarian and former deputy head of the Shin Bet, Israel’s internal intelligence agency.

Daphna Kaufman of Reut wonders whether Israel is also moving away from Europe. The secular and social-democratic leanings of Israel’s early decades dovetailed with western Europe’s. But the 1m migrants from the former Soviet Union, who arrived in the 1990s, have scant democratic tradition; many seek salvation in a strongman, a Jewish Putin, to rescue Israel from its enemies.

A similar number of national-religious Jews, heavily represented in government, see Israel as part of the divine plan for the Messiah’s coming, and worry that democracy might get in the way. More often now, Israel finds it easier to deal with non-democratic regimes, in the region or in the AsiaPacific, where politics intrudes less on business. All of that bodes ill for co-operation with the country’s European critics and perhaps its American ones too.

Some hope that the common threat of a jihadist menace will yet induce Europe to treat Israel as its frontline bulwark and to overlook the plight of the Palestinians.

“Ours is the fight ofthe free world,” says Mr Steinitz. But others see only greater divergence ahead. “Within 50 years, Europe’s lingua franca will be Arabic, and Britain will have a Muslim majority,” Moshe Feiglin, a hardline member of Mr Netanyahu’s party, Likud, tells a nodding audience in Bet Shemesh, a commuter town between Jerusalem and Tel Aviv. His listeners see a future in which Israel is increasingly forced to rely on its own devices—and its own might. 7

The Economist August 2nd 2014 19

United States

Also in this section 21 Help wanted on Georgia’s film sets 21 One way to improve Congress 22 Tattoos in the workplace 22 Championing religious freedom 24 Florida’s caustic governor’s race 25 Lexington: America and the space race

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

America and Africa

rope (Nelson Mandela said that the election of Mr Obama, the son of a Kenyan economist, was proof that people everywhere should “dare to dream”). America is more trusted in Africa than China, whose vast investments have at times sparked comparisons with colonial exploitation.

Yet critics accuse Mr Obama of all but ignoring the continent, only paying his first lengthy visit as president in 2013, after his re-election. Asian and European cities have hosted numerous summits for African leaders, ending with ceremonies to sign agreements worth billions of dollars.

From August 4th to 6th Mr Obama is finally holding his first US-Africa summit, bringing nearly 50 heads of state and government to Washington, DC. Some aid projects are expected, notably $498m in public funds for power projects in Ghana, a country hailed as a model by American officials for its recent record of democracy. Such “compacts” with poor but reasonably well-governed countries are intended as seals of approval, prodding businesses to make still-larger investments.

Officials in Washington defend the relatively modest scale of the projects that 1

The next great disruption AIR FORCE ONE AND WASHINGTON, DC

Barack Obama’s ambitions for Africa will be a measure of American engagement with the world

A

MERICA, an exceptional place, has long stood out for a willingness to take big bets on the rise of others. Post-war American governments devoted vast amounts of money, attention and military might to rebuilding or being the midwife of economies and democracies in Europe and Asia, with spectacular results. Of the country’s 15 largest trading partners today, 11 are former recipients of American aid.

Now Africa is set to deliver a fresh asymmetric shock to the global order, taking its place as the last great emerging market. Its population is set to double by 2050, and will be astonishingly young (see chart). Does Barack Obama’s America have the patience and confidence to welcome this change, harnessing it for mutual gain? Or is today’s America more like an old-world power, risk-averse, inward-looking and fearful of change? Africa may seem a sideshow now, but it is not a bad test of America’s standing in the world.

Speaking to The Economist on his way back from a speech in Kansas City, the president acknowledges that global balances of power have shifted since America “necessarily” moved to create a post-war order.

Now, says Mr Obama, the global “ecosystem” belongs to everybody. If that brings greater competition, he argues that his country can still be “central” to the process of moving Africa into the next stage of growth. He lists America’s strengths, from the global standing of its companies to its

traditions of transparency, accountability, the rule of law and property rights. America’s economy is based on ideas and innovation. “Our emphasis on developing human capital is something that Africa very much wants and we’re good at,” he says.

Finally, Africa has “fascinating” opportunities to “leapfrog certain technologies and skip certain phases of development”. He recalls meeting small farmers in Senegal whose smartphones gave them profitboosting news about the weather, market reports, even new seed technologies.

America is “better than just about anybody else” at such smart applications of technology.

America has reasons to bet big. It enjoys more latent goodwill than ex-imperial Eu-

Young & growing North America

Africa

Median age by region, years

Europe

Latin America & the Caribbean

Oceania

Asia

Population by region, bn FORECAST

50

FORECAST

6 5

40

4

30

3 20

2

10

1 0

0 1950 60 70 80 90 2000 10 20 30 40 50 Source: UN Department of Economic and Social Affairs

1950 60 70 80 90 2000 10 20 30 40 50

20 United States 2 American taxpayers have funded in Afri-

ca. Quality trumps quantity, they insist.

American investments come with promises to obey workplace and environmental laws, as well as the bribe-banning Foreign Corrupt Practices Act. Mr Obama has crafted a summit agenda around African priorities. It will focus on such issues as agriculture (helping farmers feed the continent, after decades of sending hungry Africans aid) and infrastructure. That means physical projects: new roads to bring crops to market before they rot and electricity for a power-starved continent. But it also involves America pushing hard for less tangible changes: more transparency and democracy to weaken the grip of kleptocrats, as well as reforms to increase trade flows globally and internally—just 12% of African trade is within the continent.

“It is easier now to send a shipment of goods from Nairobi to Amsterdam than it is to send those goods to many parts of Africa,” notes Mr Obama. The president is proud of Power Africa, his 2013 pledge to double access to electricity in sub-Saharan Africa, where over two-thirds of the population, or 600m people, are without it.

Sceptics retort that Power Africa covers six countries to date, with a focus on greener forms of power. An African ambassador is scathing, arguing that his whole continent needs a vast increase in electricity production to spark a much-needed manufacturing revolution—even if that involves coal for now, or huge dams that arouse the ire of American environmental groups and some Democratic members of Congress.

America struggles to build renewable energy at home, charges the ambassador, so has to “export” its low-carbon idealism.

Officials in Washington insist that African leaders prefer American investments to those from less squeamish countries like China. American firms hire Africans in Africa, then promote them and offer them global careers, they argue. Chinese firms stick with their own.

Mr Obama takes a slightly milder line.

When it comes to foreign investors, “the more the merrier”, the president says: China has deep pockets. But China’s need for natural resources may colour its investments, in ways that are less true for America, he says. “So my advice to African leaders is to make sure that if, in fact, China is putting in roads and bridges, number one, that they’re hiring African workers; number two, that the roads don’t just lead from the mine, to the port, to Shanghai.”

Balancing idealism and commerce will be a theme at the summit. In Washington, support for Africa draws on a curious coalition, spanning conservative members of Congress, often linked to Christian groups active on the continent, leftist Democrats interested in development and pro-business moderates from both parties.

Mr Obama’s predecessor, George W. Bush,

The Economist August 2nd 2014 earned his legacy in Africa by launching the President’s Emergency Plan for AIDS Relief. Bill Clinton earned his legacy by working with Republicans to pass the African Growth and Opportunity Act (AGOA), removing tariffs on most exports to America from about 40 countries. AGOA trade remains small (it represents about 2% of American imports) and is dominated by crude oil. Still, a few firms do well from it, from Kenyan clothes exporters to German companies that build cars in South Africa for the American market.

I’m one of you Mr Obama’s summit will begin with an event honouring religious activism, and devote a whole day to a business forum at which American chief executives will tell African leaders which reforms they think are needed to trigger a surge in investment (and a surge is needed: in 2012 Africa took just 1% of America’s overall foreign direct investment).

Yet Washington politics may yet complicate Mr Obama’s bold aspirations.

There is pressure to revisit the terms of AGOA when it comes up for renewal in 2015, amid grumbling that some countries, such as South Africa, have offered better trade terms to Europe, for instance, putting American firms at a disadvantage. Mr Obama must also hope that Congress reauthorises the Export-Import Bank when its mandate expires in September.

The bank, a once-obscure source of loans, loan guarantees and credit insurance to foreign buyers ofAmerican goods, is under fire from Tea Party conservatives who call it “corporate welfare”.

Mr Obama is confident AGOA will be reauthorised, though it may need to be “refined”. If the Export-Import bank is axed, he is sure that American firms will suffer, as the void is filled by companies from China, Germany, India and other countries.

“There is no doubt that a thread has emerged in the Republican Party of antiglobalisation that runs contrary to the party’s traditional support for free trade,” he says. With six of the world’s ten fastestgrowing economies in Africa, he believes

After the fall US merchandise trade with sub-Saharan Africa $bn

Exports

Imports

Trade deficit 25 +

0 –

25 50 75 2000 02

04

06

08

10

12 13

Sources: Census Bureau; Department of Commerce

100

that business is on his side.

The American public is weary of military engagements overseas. But Africa hands worry about what they see as America’s inattention to the violence—often tinged with religious extremism—that grips many regions. European leaders grumble that America has done too little to help France and other ex-colonial powers in some nasty conflicts, as in Mali. Some Africans complain about American drones and special forces operating in such hotspots as Djibouti, Ethiopia and Niger.

Mr Obama says that right now, America has the security balance “about right”. He calls America “the one indispensable power that is willing to spend blood and treasure” to defend universal values. But America “cannot do it alone”. America wants to help African peacekeepers do more. But he also sees a special role for European powers and the NATO alliance.

“We need to have a much more intentional, explicit plan for NATO to engage with African countries and regional organisations. Not because the United States is not prepared to invest in security efforts in Africa, but rather to ensure that we are not perceived as trying to dominate the continent,” says the president. France can “obviously” do some things in Francophone Africa that America cannot, he adds.

Africa gets a vote, of course. South Africa, notably, has butted heads with Mr Obama when defending the brutal regime of Robert Mugabe in Zimbabwe. As a big African power, South Africa can either invest in the kind of international or regional order that helps ordinary Zimbabweans thrive or face a flood of migration from that country, Mr Obama says. “Ultimately, those chickens will come home to roost.”

He suggests that a culture steeped in the old “non-aligned” movement stops some African leaders from intervening in each other’s affairs: it may take “a new generation of leadership” to change that.

Is that enough? European leaders, among others, worry that Mr Obama is willing to be helpful in Africa, and to explain to African leaders why it is in their interests to follow the liberal, free-trading principles that America champions—but that deep down he sees Africa as Europe’s, not America’s, backyard.

Africa policy remains a bit of a backwater in official Washington. Many in the capital may notice Mr Obama’s summit mostly for snarling the traffic. But a great global disruption is coming. America has a lot of advantages, from entrepreneurial drive to its lack of a colonial past. The task ahead requires effort and persistence. Asia and Europe were transformed by their own people and leaders, but also because of the extraordinary things that America did. It is not at all clear whether a more insular America will do the same for Africa this century—or if it has ambitions to try. 7

The Economist August 2nd 2014

United States 21 Politics

A modest proposal Why America should hold all of its primary elections on one day

T

Skilled labour

Behind the scenes ATLANTA

What a shortage of workers on film sets in Georgia says about America

T

HE recent arrival of aliens and murderous youth in suburban Atlanta might seem like cause for concern. But they are merely characters in films shot at the Atlanta Media Campus and Studios, the largest complex of its kind outside California. The lot has hosted the final two instalments of “The Hunger Games” and “The Fifth Wave”, an upcoming science-fiction film.

What ought to worry local residents is Georgia’s inability to produce workers who can build the sets, run the wires or manage the sound for such films. This skills shortage may endanger the $4 billion or so that Jim Jacoby, whose firm plans to redevelop the complex, reckons the film industry could bring to the state this year.

Georgia offers generous tax incentives to lure production companies. They can receive a credit for up to 30% of the costs incurred while making movies, as long as they spend more than $500,000. This convinced Mathew Hayden to move his firm, Cinipix, from California to Georgia. But Mr Hayden still imports many workers from Florida and New York. “It’s a big concern,” he says. The state’s movie business will only prove as profitable as its workers prove employable.

Georgia’s skills shortage goes beyond the film industry. For every four tradesmen that retire just one takes their place, even though the state’s unemployment rate hovers around 7.4%, over a point higher than the national rate. But a similar problem, albeit in less acute form, is in evidence across America. More than half of the country’s tradesmen are aged over 45.

HE system for choosing candidates to run for Congress might have been designed with the welfare of journalists and lobby groups in mind. Primary elections begin in March and end in September, allowing reporters to travel the country eating barbecue with candidates for seven months. They attract relatively few voters (under 20% of those eligible turned up in 2010), meaning that wellorganised lobby groups can hold disproportionate sway. Organised labour influences Democratic primaries more than ought to be the case given that only 11% of workers are union members. In Republican primaries, relatively small outfits like the Club for Growth, which campaigns for smaller government, can make a big splash.

Sensing a problem, some states have tried to get more voters interested in primaries. One idea has been to open them up to members of either party, or none at all. Only 11 states now have primaries where Republicans pick Republicans and Democrats pick Democrats.

California allows the two most popular candidates in the primary to run against each other in the general election, even if they are both from the same party. But turnout for primaries continues to fall, even as spending on campaign advertising soars. Kantar Media/CMAG, which

tracks political advertising, predicts that $2 billion will be spent on television ads in this year’s congressional elections.

This, together with a decline in the number of competitive seats in the House of Representatives, gives too much sway to dedicated partisans on either side. Smart states have stripped politicians of the power to draw congressional districts, which has led to fewer lopsided elections. But there is still the problem of low primary turnout, for which the Bipartisan Policy Centre, a think-tank, believes it has a solution.

The centre is proposing America do away with its pointilliste timetable for primaries and hold them all on the same day. It thinks that the change would create a media event—a pre-election election—thereby attracting more voters to the polls and giving more power to moderates. Persuading members of Congress, who arrived there under the current rules, to approve such a plan would be a struggle. But Elaine Kamarck of the Brookings Institution, another think-tank, reckons that the two parties, which generally dislike the freakish results that low-turnout elections sometimes produce, might push for it. That would be a fine idea: the benefits might even outweigh the harm done to the wellbeing of political reporters.

According to the Department of Labour, America will need 41,700 more cement masons, 114,700 more electricians and 218,200 more carpenters by 2022. The government already spends around $17 billion a year trying to close what the president, Barack Obama, calls the “skills gap”. On July 22nd Mr Obama signed laws that he said would make job-training programmes that receive federal money “more effective, more responsive to employers and more accountable for results”.

One such programme is Go Build Georgia, which teaches teenagers a trade. But efforts to train young people as plumbers or pipe-fitters run up against concern from parents. Instead of being proud to raise a future welder, “everyone wants to believe that their child will go to Harvard”, says Matthew Gambill, the director of the Georgia Association for Career and Technical Education. Despite the lower cost of a skills-based education and the solid job prospects, enrolment at technical colleges has dropped 23% since recession-stricken students clamoured for entry in 2010.

Still, Georgia is pouring money into

training, and targeting industries such as the movie business that are particularly short of skilled labour. It spent $24m last year on the teaching of trades in schools, while the state’s technical colleges received $318m. Some of these institutions are already collaborating with film studios to design specialist courses. Lee Thomas, the deputy commissioner of Georgia’s film, music and digital entertainment office, says a stand-alone academy is also in the works for those who wish to become stars behind the scenes.

Mr Jacoby, though, is taking matters into his own hands. By next summer he wants the Atlanta Media Campus to host a school that will teach students how to work on a film set. American firms spent $162 billion training their employees in 2012. The success of Mr Jacoby’s investment in Georgia may depend on whether he can bridge its skills gap. 7 Correction: In last week’s piece on the Senate race in Maine (“Her reign in Maine is easy to explain”), we said that Susan Collins opposes raising the minimum wage.

In fact, though she opposes a rate that her opponent supports, she does favour a higher minimum wage.

22 United States Tattoos in the workplace

Ink blots

The Economist August 2nd 2014 Religious freedom

Rabbi to the rescue A deft nomination could garner support across the political spectrum

NEW YORK

Body art is growing more popular, though few employers are keen

I

N THE North Star tattoo parlour in downtown Manhattan, Brittany shows off her ink: a Banksy-inspired tableau covering both feet. Now a student at New York University, she hopes to be a lawyer one day.

“That’s why I got the tattoo on my feet,” she says. “It’s easy to hide.”

Once the preserve of prisoners, sailors and circus freaks, tattoos have become a benign rite of passage for many Americans. One in five adults has one, and two in five thirty-somethings. These days women with tattoos outnumber men. But what happens when these people look for work? Alas, not everyone is as savvy as Brittany.

Though increasingly mainstream, tattoos still signal a certain rebelliousness that works against jobseekers, says Andrew Timming of the University of St Andrews in Scotland. In a forthcoming study, Mr Timming and colleagues asked participants to assess job candidates based on their pictures, some of which were altered to add a neck tattoo. Inked candidates consistently ranked lower, despite being equally qualified. In a separate study Mr Timming found that many service-sector managers were squeamish about conspicuous ink, particularly when filling jobs that involve dealing with customers.

Designs of flowers or butterflies were deemed comparatively acceptable. And

Shame about the tie

T

HE State Department’s latest report on religious freedom, published on July 28th, says the persecution and displacement of the world’s vulnerable religious communities is at its worst in recent memory. Whatever their squabbles about contraceptive mandates or school prayer, most Americans can surely agree that the execution of “apostates” from Islam, or North Korea’s suppression of all religion, are dreadful things that their diplomats should oppose.

In fact, global religious liberty is nearly as contentious as the domestic sort.

Conservatives call Barack Obama’s administration grossly neglectful of persecuted Christians in Egypt, Iraq and Pakistan, and have bemoaned the fact that the State Department’s post of ambassador-at-large for religious freedom has been unfilled for nearly a year.

This week Mr Obama made a deft move to allay that criticism by announcing his intention to nominate Rabbi David Saperstein, a Capitol Hill lobbyist, to the empty chair. Having spent around half his 66 years speaking for Reform

Judaism around Congress, he has been described as America’s most influential rabbi. Though liberal in many respects (he supports abortion rights and stemcell research) Mr Saperstein has won some conservative hearts by lobbying for causes they care about, such as persecution in Sudan.

Mr Saperstein recalls an era when religious liberty, at home and abroad, was less contentious. He was a prime mover of the Religious Freedom Restoration Act of1993, in which a left-right coalition moved to protect America’s diverse faiths from perceived intrusions.

But that will not protect him from all conservative ire. He has decried the act’s application in the recent Hobby Lobby case (in which a craft-store chain was exempted from offering some forms of contraception to its employees), which the right regards as a famous victory. Still, the hope is that he will be able to plead for the rights of Bahais in Iran, blasphemers in Pakistan and jailed pastors in China knowing that most Americans stand behind him.

some workplaces are more open-minded: a prison-services manager explained that having tattoos made it easier to bond with inmates. Firms with a younger clientele are also more tattoo-friendly. But by and large the more visible the tattoo, the more “unsavoury” a candidate seemed—even if the

boss had one.

Such prejudice may seem anachronistic, but it is not unfounded. Empirical studies have long linked tattoos with deviant behaviour. People with inked skin are more likely to carry weapons, use illegal drugs and get arrested. The association is stronger for bigger tattoos, or when there are several, says Jerome Koch, a sociologist at Texas Tech University.

This may help explain the army’s recent decision to reinstate old grooming standards. These restrict the size and number of tattoos, ban ink from the neck, head and hands, and bar body art that might be seen as racist, sexist or otherwise inappropriate.

The change is intended to promote discipline and professionalism. But it is making it harder to recruit to the army, says Major Tyler Stewart, who handles recruitment in Arizona. His battalion is turning away 50 tattooed people a week.

Some aspiring soldiers and other jobseekers are solving the problem by getting their ink removed. Tattoo-removal has surged 440% in the past decade, according to IBISWorld, a market-research firm. At the North Star, where Brittany’s friend is getting a question-mark inked on her wrist, the prospect of such buyer’s remorse seems remote. “I don’t think it will help her job prospects,” observes Brittany, “but hopefully it won’t hurt, either.” 7

24 United States

The Economist August 2nd 2014

The Florida governor’s race

Close and caustic CAPE CANAVERAL AND SARASOTA

Two unpopular candidates battle it out in the Sunshine State

F

OR two white males approximately 60 years old, both of whom have been Republican governors of Florida for one term, Rick Scott (pictured left) and Charlie Crist (right) are remarkably different. Mr Scott, the incumbent, does not appear to enjoy speaking in public, an unusual quality for a politician. At a campaign event held in a factory where the space shuttle was once maintained, he introduced other speakers and then stood with his hands glued to his sides, grinning. His own speech was put in the shade when the head of Orlando’s science museum took the floor. The following day, over on the state’s Gulf coast, the Democratic challenger did his thing. Mr Crist, who was until 2010 a Republican, met with teachers in Sarasota. He poured on charm as thick as suntan lotion. Before entering the room he stared straight into a television camera and told the lens, “I care about you.”

Of the big states that will choose governors in November, Florida has the most competitive race. In demographic terms the state is older and more diverse than the national average, but these effects cancel each other out to make it a good proxy for the country as a whole. It also mixes together the rural south (situated in the state’s north) with city-dwellers and suburban sprawl. This makes for tight statewide elections. In 2010 Mr Scott won by a percentage point. The state has delivered its electoral-college votes to Barack Obama twice; in the past ten presidential elections it has only backed the loser once, in 1992.

Mr Crist began this campaign with a lead

but polls now have the race as too close to call.

Local politics are not so purple. In addition to the governor, the lieutenant governor, attorney general and majority leaders in both chambers of the statehouse are Republicans. This has drained the pool of good Democratic candidates. The party is hoping to take a shortcut to success by picking Mr Crist as its candidate. Given the mutual loathing between Republicans and Democrats, switching from one side to the other is unusual. Mr Crist has an explanation for why he did so, expounded in a campaign book called “The Party’s Over: How the Extreme Right Hijacked the GOP and I Became a Democrat”. It is not wholly convincing. The timing of his conversion has a lot to do with his losing the Republican primary for Senate in 2010.

Careful whom you hug Still, in an age where too much ideology makes compromise impossible it is refreshing to find a candidate with no apparent anchor. In 1995, when Florida was enacting its three-strikes law, Mr Crist argued for the return of chain gangs. In 2006 and 2010 he ran as a “Jeb Bush, Ronald Reagan conservative”. As governor he was a centrist. Mr Crist’s main sins, in Republican eyes, were to accept federal stimulus money for the state—which was sensible—and to give the president a hug in public— which ought to have been trivial. These cost him the chance of winning the Senate seat for which he sacrificed a probable second term as governor. Since becoming the

Democrats’ candidate he has supported a rise in the minimum wage and an expansion of solar power.

Unfortunately for Mr Crist’s electoral prospects, he was elected in time for the tail-end of the subprime boom. The state’s unemployment rate went from 3.5% to 11.4% during his term. Under Mr Scott it has fallen again to 6.2%. This has everything to do with a nationwide rebound, but Mr Scott is trying hard to take credit for it. As governor he has pushed some conservative ideas, such as introducing drug tests for welfare recipients, but in this campaign he has been reluctant to talk about anything other than jobs. Asked about his position on gay marriage, which two Florida judges have favoured in recent rulings, he replied: “I favour traditional marriage but I don’t want anyone to be discriminated against. I want everyone to have a good job.” The state’s upturn has also allowed Mr Scott to cut taxes and see revenues rebound, which delights conservatives.

This may be enough to get Mr Scott over the line, but it has not made voters love him. His poll ratings have remained in the swamp even as Florida has rebounded.

This partly reflects a lack of political polish.

“When it comes to charisma,” says Darryl Paulson of the University of South Florida, “Scott is on life support.” Mr Scott had not run for anything before he became governor; the state’s GOP establishment favoured another candidate. He first came to prominence as a successful entrepreneur, building a large hospital group, Columbia/ HCA, from scratch. During the 2010 campaign his opponent made much of the company’s part in Medicare scams that resulted in an enormous fraud settlement.

This continues to colour opinions about Mr Scott, but is unlikely to change anyone’s mind this time around.

Mr Crist, meanwhile, has his own troubles. The man he picked to lead Florida’s Republican Party was subsequently imprisoned for money laundering; a campaign donor has been put away for 25 years for running a Ponzi scheme. With so much material to work with, both sides have gone negative early. Mr Scott’s campaign spent $85m (most of which was his own money) in 2010 and looks likely to beat that this time around. With over three months to go he has already spent $18m on advertising, which has coincided with a drop in his opponent’s ratings. Mr Crist will not be able to spend as much, but he begins with a level of name recognition that no other available challenger had.

By November 4th the race will probably have cost more than any other in an election-heavy year. Florida’s voters will be sick of the sound of both men. Based on which a few thousand of its voters end up choosing, one party will then make extravagant claims about its prospects in the presidential election of 2016. 7

The Economist August 2nd 2014

United States 25

Lexington America and the space race A revealing new history of the Apollo moon landings holds lessons for today

A

MERICA’S space programme has twice made news this summer. In June a non-partisan committee heaving with experts—among them astrophysicists, a space-shuttle commander and Mitch Daniels, a former White House budget chief and Republican governor of Indiana—issued a crushing verdict on NASA’s plans to put humans on Mars. After 18 months of study, their National Research Council (NRC) report found the project unsafe, underfunded and doomed to fail in its current form.

Next, on July 22nd, came an only-in-Washington squabble when Barack Obama marked the 45th anniversary of the first moon landing by greeting Apollo 11 astronauts in the Oval Office, but failed to invite reporters to the photo-op. The spat about press access generated more coverage than the NRC’s weighty report (“Obama ‘Transparency’ at Work”, scoffed Fox News).

It is tempting to ponder these two NASA stories, and to spy a parable about much that is wrong with the America of 2014.

Somehow, it seems, a glorious national endeavour—to Mars and beyond!—has lost its power to stir the public. Instead of looking up and out, the public finds it easier to turn inwards, towards familiar rows about division and elite dysfunction.

Since John F. Kennedy launched the race to the moon in 1961, presidents have invoked its spirit in other contexts. Lyndon Johnson claimed NASA’s moonshots as part of his Great Society agenda—proof of the power of government expertise and activism. Trying to end a national funk caused by an Arab oil boycott and soaring fuel prices, Richard Nixon urged citizens to unite behind the national goal of achieving energy independence, “in the spirit of Apollo”.

Nowadays, those looking for modern decline will be tempted to conclude, political leaders find it easier to quarrel than to agree on America’s next journey towards the stars. George W. Bush announced in 2004 that man would return to the moon by 2020, as a first step towards Mars and “worlds beyond”. Six years later Mr Obama nixed Mr Bush’s lunar plans, saying: “I just have to say pretty bluntly here: we’ve been there before.” To persuade sceptical taxpayers will take “major breakthroughs”, not the same old plans, Mr Obama argued, urging NASA to work towards landing on an asteroid before travelling to Mars. Winning over public opinion was essential, he noted. After all, “we don’t lack for pro-

blems to solve here on the ground.”

Yet anyone mourning the country’s lost “Apollo spirit” needs to revisit the history of the space age. For Americans were always deeply ambivalent about going to the moon. A historian from the University of Connecticut, Matthew Tribbe, has written a persuasive, rollicking account of the moon landings as the final act in a post-war American love affair with science and rationalism. Unhappily for the Apollo astronauts their triumph came just too late, Mr Tribbe suggests in his book, “No Requiem for the Space Age”. By the summer of 1969 Americans had already started to lose their faith that technology could resolve the knottiest problems. The first landing sparked a surge of enthusiasm. But the public mood soured fast. A year after Neil Armstrong stepped on the moon, newspapers in New York and Philadelphia found that large majorities had forgotten his name, while most Americans thought his mission was not worth the money spent.

A combative NASA boss, Thomas Paine, saw a culture war in which his boffins were champions of conservative America. He called the Apollo missions a battle between “Squareland” and “Potland”. Squareland was outward-looking and rational, NASA’s chief declared. Squareland knew how to make crops yield, save children from polio and send men to the moon. Potland was sex- and drug-addled, parasitic and mystical.

Leftists, radicals, primitivists and allies certainly loathed the Apollo programme. They glimpsed a dehumanised future, full of test-tube babies and artificial habitats. Scientists had promised that atom-splitting would be benign; why trust them in space? If political will could be mustered to reach the moon, what about the Great Society, failing to end poverty as promised? Black Americans were notably angry about government priorities. To them, the landings looked like “One small step for ‘The Man’”, Ebony magazine reported. Hollywood made films about science out of control, such as “2001: A Space Odyssey”. NASA patriotism was mocked in such rock songs as “Beer Cans on The Moon”.

The right stuff But partisans such as Paine missed parallel changes on the right.

The wretched ending of the Vietnam war (planned by such archtechnocrats as Robert McNamara) fuelled conservative contempt for government “expertise”. So did inner-city unrest. In their private lives millions of conservative Americans left chilly mainstream churches for evangelical congregations that offered miracles and a personal relationship with God. Left and right were united by a resurgence of individualism. Americans devoured a flood of best-selling books on telepathy and reincarnation: introspection and mysticism were much more fun than contemplating dull moon rocks, or Earth’s minor place in the galaxy.

Today polls suggest more Americans know Mr Armstrong’s name than in 1970—his exploits are taught at school, and celebrated in such works as “The Right Stuff”, a hit book and film. The moon landings are popularly remembered as a bright spot in a bleak period. But that involves selectively remembering the past.

The NRC’s report on NASA and the Mars mission comes to a striking conclusion about why Americans still fly into space at all.

It is not because the public strongly wants them to, it found. Instead astronauts fly mostly to avoid a negative: namely, seeing space exploration “dominated by the vehicles and astronauts of other nations”. That was always true. Beware romanticising the “spirit of Apollo”. In America grand, collective national endeavours are usually a hard sell. 7

26

The Economist August 2nd 2014

The Americas

Also in this section 27 Bello: Term limits 28 Politics in Venezuela 28 Plategate, a Canadian row

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

Argentina’s debt saga

No movement Buenos Aires

Argentina has defaulted again. But a deal with its creditors is not out of the question

D

ISAPPOINTMENT, melodrama, and a faint glimmer of hope. The ingredients of the latest instalment of Argentina’s legal stand-off with its “hold-out” bondholders were painfully familiar. The disappointment came late on July 30th, when Argentina entered into default for the eighth time in its history (see chart). The melodrama came courtesy of Axel Kicillof, the economy minister, railing against Thomas Griesa, the New York court judge whose ruling precipitated this moment. And the hope is that a settlement remains possible.

The country’s previous default, when it reneged on $81 billion in debt in 2001, is the source of its latest one. Most of its creditors exchanged their defaulted debt for new securities in two restructurings that took place in 2005 and 2010. But a few creditors took a different path. They scooped up the cheap defaulted debt in order to chase payment of full principal plus interest in the New York courts, under whose law the original bonds were written.

Led by NML Capital, a hedge fund, a group of these hold-outs—Mr Kicillof and his boss, President Cristina Fernández de Kirchner, prefer the term “vulture” funds— won an order barring Argentina from paying its exchange bondholders unless it also coughed up the $1.3 billion plus interest they wanted. That meant Argentina either had to deal with the hold-outs or stop paying the exchange bondholders, and thereby tip into default again.

The Argentine government refused

even to meet the hold-outs in person until July 29th, the day before a grace period on a payment to exchange bondholders expired. The government claimed it could not pay the hold-outs without triggering a Rights Upon Future Offers (RUFO) clause contained in the restructured bonds. This clause, which expires at the end of the year, states that the country cannot voluntarily offer a better deal than the one it gave in its 2005 and 2010 exchanges without extending the same deal to all creditors. Not true, responded the hold-outs, who argued no judge would interpret a court-ordered payment as voluntary.

In the event, face-to-face negotiations, held in New York, yielded no breakthrough. The language afterwards was harsh. Mr Kicillof held to the official line that Argentina cannot be in default if it is willing to pay its obligations to the ex-

change bondholders. In a belligerent press conference, he cast doubt on the mental state of Judge Griesa; the integrity of the mediator appointed to oversee negotiations; and the objectivity of international credit-ratings agencies (one of whom, Standard & Poor’s, has downgraded Argentina’s foreign-currency debt). NML, for its part, said that the mediator had proposed many creative solutions and that Argentina had chosen to default.

And yet hope remains. As the two sides were meeting, rumours swirled that a group ofprivate Argentine banks might rally together to buy up NML’s claim and then negotiate a deal with the government that would involve payment after the expiry of the RUFO clause. Tantalisingly, Mr Kicillof said that, although the government had not reached an accord with the hold-outs, a non-governmental settlement remained possible. “A solution between private actors wouldn’t be weird to me,” he said.

Some speculated that it suited Mr Kicillof to be seen not to have any part in a thirdparty deal, in order not to trigger the RUFO clause. Daniel Pollack, the court-appointed mediator, said that he would remain on hand to help reach a deal.

If an accord is made and Argentina is quickly pulled out of default, the effects 1

Something of a reputation Sovereign defaults, top ten countries (no. of defaults) 1820 Argentina (8) Ecuador (10) Venezuela (10) Uruguay (9) Costa Rica (9) Peru (8) Brazil (9) Chile (9) Mexico (8) Turkey (8)

40

60

80

Sources: Carmen Reinhart and Kenneth Rogoff; Moody’s

1900

20

40

60

80

2000

14

The Economist August 2nd 2014 2 may be muted. Standard & Poor’s decision

could easily be undone, for example. That might also help avert the possibility of claims for immediate payment, triggered by “cross-default” clauses, from all the country’s foreign-law bondholders, not just the ones governed by New York law.

The international ramifications of default are also expected to be slight. Argentina has been locked out of international capital markets for 13 years; its debt under foreign law amounts to a bit over one-third of what it was in 2001.

But the costs to the country will rise the longer it remains in default. “The situation

The Americas 27 might not be cataclysmic, but defaulting was still the worst decision the government could have made,” says Maximiliano Castillo of ACM Consultants. The country may have got used to doing without access to external financing, but its foreign-exchange reserves have been shrinking, and the economic boost it received in the 2000s from rising commodity prices will not be repeated. It needs to borrow to grow.

The government is aware of this. In the past few months it has scrambled to resolve disputes with the International Centre for the Settlement of Investment Disputes (ICSID); the Paris Club, an informal

group of government creditors; and Repsol, a Spanish oil firm whose stake in YPF, the state oil firm, it expropriated in 2012. A default will undo this progress.

The fear now is that the need to print money to finance its deficits will further spur inflation, putting the exchange rate under renewed pressure. Add in the likely jolt to consumption from default, and the recession that the country entered earlier this year will only deepen. Abeceb.com, a consultancy, is predicting that Argentina will contract by 3.5% in 2014; if the country had avoided default the projection was of a milder tightening of1.5%. 7

Bello I, the Supreme Latin America needs term limits. But how strict should they be?

N

O SOONER had Juan Manuel Santos, Colombia’s president, secured himself a second term in a run-off election in June than he announced that he wants to prevent such a thing happening again. He will propose a constitutional change barring immediate re-election and lengthening future presidential terms, from four to five or six years. Why didn’t he think of that before, cynics might ask? He might reply that it was in Colombia’s interest to give him more time to complete peace talks with the FARC guerrillas, for which a single four-year term proved too short.

Mr Santos’s move runs counter to the regional trend. In country after country in Latin America, term limits have been loosened over the past two decades. The latest to seek to abolish them altogether is Ecuador’s president, Rafael Correa. He declared last year that his current term would be his final one, only for his supporters to unveil a bill in July allowing indefinite re-election for all public offices.

Since Mr Correa commands a large legislative majority, Ecuador is likely to follow Venezuela and Nicaragua in allowing a presidency for life.

Not coincidentally, these countries are among a handful in Latin America in which presidents now exercise nearabsolute power. Mr Correa, the late Hugo Chávez in Venezuela and Nicaragua’s Daniel Ortega deployed their electoral majorities to crush the independence of the judiciary, curb the media and hamper opposition. In the extent of their power, if not in the route by which they obtained it, they resemble the region’s 19th-century dictators—whose absolutism is captured in the title of a classic Paraguayan novel

by Augusto Roa Bastos called “Yo, el Supremo” (“I, the Supreme”).

The trend to looser term limits goes far beyond these three countries. Daniel Zo-

vatto of the International Institute for Democracy and Electoral Assistance, an intergovernmental organisation, points out that in the 1980s the norm in Latin America’s restored (or newly established) democracies was to restrict presidents to a single term. Of the 15 Latin American countries with no plans for indefinite re-election, four now allow two consecutive terms and seven permit former presidents to run again after an interlude. Only four— Mexico, Guatemala, Honduras and Paraguay—still confine their presidents to one term only. (Some Mexican streets still bear the name “Effective Suffrage, No Re-election”, the slogan under which the country rose in revolution in 1910 against Porfirio Díaz, whose 30-year rule included seven consecutive terms.)

Critics of this trend say that incumbents have an even greater advantage over opponents than they have in, say, the United States. Only twice since 1990 have candidates who were sitting presidents lost elections in Latin America. Several incumbents have also managed to anoint their chosen successors, who in the case of the late Néstor Kirchner of Argentina was his

wife, Cristina Fernández de Kirchner.

But the recent success of incumbents owes much to their good fortune in presiding over a golden decade of commodity-fuelled economic growth, and in their distribution of some of this windfall to the poor. Now that economic growth has slowed, presidents have become less popular. A test of whether incumbents remain near-invincible will come in Brazil’s election in October, in which Dilma Rousseff faces a tough fight for a second term.

There are, in fact, some sound reasons for allowing re-election—though not indefinitely. If a president is popular and has done a good job, surely voters should have the right to choose him or her again?

A four-year term, as eight countries have, is too short to do much. Indeed, it is not all that long ago that political scientists fretted that Latin American presidents were too weak rather than too strong.

What matters is not whether a president can run for re-election, but whether countries possess the countervailing institutions required to curb the abuse of executive power and the advantages of incumbency. Strong and independent judiciaries, electoral authorities, media and political parties are all vital.

Paradoxically, Colombia is fairly wellserved in this regard. Its constitutional court knocked down an attempt by Álvaro Uribe, Mr Santos’s popular predecessor, to run for a third consecutive term. Mr Santos told Bello during the campaign that he thinks Colombians dislike re-election, initiated in 2006 by Mr Uribe. That may be one reason why he barely squeaked to a second term, winning the run-off by less than six percentage points.

It seems that Mr Santos has come up with a solution to a problem that Colombia doesn’t really have. Perhaps he should export it to Ecuador.

28 The Americas

The Economist August 2nd 2014

Politics in Venezuela

Whose hand on the tiller?

Caracas

Both government and opposition are in a state of paralysis

A

N UNEASY calm has returned to the streets of Caracas and Venezuela’s other main cities after months of clashes between opposition youths, riot squads and pro-government gunmen. But the discontent that sparked the demonstrations— over inflation, shortages of basic goods, collapsing public services and violent crime, among other things—remains profound. So are the tensions within both government and opposition ranks.

The ruling United Socialist Party ofVenezuela (PSUV) held its third party congress this week. The congress, which was scheduled to end as The Economist went to press, was carefully choreographed. As expected, President Nicolás Maduro was acclaimed as the new party chairman and the contentious issue of internal democracy was swept under the carpet. But the outward show of unity raises the question: united around what?

The radical left accuses Mr Maduro of betraying the legacy of the late Hugo Chávez. In June the president fired Jorge Giordani, the planning minister and the economic guru of the radical left. Mr Giordani, a close ally of Chávez, hit back with a long and bitter open letter, in which he accused Mr Maduro of lacking leadership and of ignoring his advice on how to avert the economic crisis.

In an unprecedented show of dissent, several prominent, left-wing chavistas called for the issues raised to be debated.

Another long-serving former minister, Héctor Navarro, was summarily suspended from party membership for backing Mr Giordani, in what a former colleague described as a display of “pure Stalinism”. Mr Maduro hit back, saying he would not be “hogtied by the outdated left”.

The departure of Mr Giordani seemed to clear the way for some economic adjustments, including the simplification of the country’s byzantine exchange-rate system and a reduction in petrol subsidies, which the government says cost around $12.5 billion a year (some independent analysts say the cost is over $30 billion). The new economic supremo, Rafael Ramírez (who Correction: In a Bello column on Venezuela (“Devaluing the Bolivarian Revolution”, June 21st) we stated that during months of opposition protests “more than 40 people have been killed, most of them by government agents”. The government’s own tally shows that 32 civilians died during the unrest, along with ten military and police personnel and other public officials. But we are happy to clarify that we cannot be certain how many of these deaths were caused by government agents.

Maduro, overshadowed by mentor also holds the posts of energy minister and head of the state oil corporation), has for months been signalling his intention to move in that direction.

But even if Mr Maduro has seen off the radical left, he still faces less visible opposition from other factions within the revolution. Exchange controls and subsidies have created vast opportunities for graft. Mr Giordani has alleged that in 2012 alone

over $20 billion was fraudulently siphoned out of foreign reserves for imports that never arrived. Reform would threaten such gains.

Discontent in government ranks was underlined by the poor turnout on July 20th in elections for delegates to the PSUV congress. Of a supposed 7.6m party members, “almost two million, or more” voted, according to Mr Maduro. But most polling stations saw little movement all day, and dissidents put abstention rates at 85-88%.

Enthusiasm was dampened not only by declining living standards and gloom about the future but by a widespread feeling that voting was a waste of time. The party leadership screened all candidates for election, and handpicked 40% of them.

The opposition Democratic Unity (MUD) alliance, however, is in no position to take advantage of the government’s unpopularity. In recent months its more confrontational wing, led from jail by Leopoldo López (whose trial is now under way behind closed doors), backed the youths on the barricades; the moderates held talks with the government. Neither tactic proved successful. This week the alliance’s executive secretary, Ramón Guillermo Aveledo, resigned amid a so-far inconclusive internal debate on the way ahead. For all the government’s problems, the MUD is a long way from taking the initiative. 7

Wild Rose Country

Plategate Ot tawa

A row about Alberta’s licence plates

F

OR over four decades, car licence plates in Alberta have proudly proclaimed that the western Canadian province is “Wild Rose Country”. The slogan may lack the poetry of Saskatchewan’s “Land of Living Skies”. Its shape cannot compete with the plate of the neighbouring Northwest Territories, which is stamped in the form of a polar bear. Still, the province’s official flower is a far more positive symbol of Alberta than the tar sands.

Just how strongly Albertans feel about the plate became apparent earlier this month when the ruling Progressive Conservatives announced a redesign, supposedly for safety reasons, that would replace Wild Rose Country with the somewhat less lyrical “alberta.ca”.

“Plategate” has dominated political discourse in the province ever since.

No one has been fooled by the official explanation—that the change was needed because the government wanted plates to sport a new reflective coating that would make them easier to read. The most obvious reason, and one that offi-

cials admit to privately, is that the Progressive Conservatives thought the licence plates were giving too much free publicity to the opposition Wildrose Party, which is currently leading in the polls.

Danielle Smith, the Wildrose leader, said the party would probably not suffer if the slogan were dropped. It may not come to that. An opinion poll conducted in the wake of the government’s announcement indicated that almost 60% of Albertans don’t want the plates changed. It has not helped the government’s cause that one of three proposed redesigns submitted by the American company handling the revamp features a mountain range in Montana, and not the Canadian Rockies.

The Progressive Conservatives, who have been in power since 1971, may quietly backtrack from the mess they’ve created. They would have been better off following the lead of New Hampshire, which allows its residents to cover over the American state’s “Live Free Or Die” motto on their licence plate if they disagree with it.

The Economist August 2nd 2014 29

Asia

Also in this section 30 The Philippines 31 Sport in India 31 India and Nepal 32 Nuclear power in Japan Banyan is on holiday

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

Race and religion in South-East Asia

The plural society and its enemies JAKARTA, SINGAPORE AND YANGON

Our departing South-East Asia correspondent explains how the “plural society” remains key to understanding the region’s problems

I

N MANDALAY in central Myanmar, another bout of bloody sectarian violence between Buddhists and Muslims recently left two dead and many injured. The riot was sparked by rumours that two Muslims had raped a Buddhist woman. The deaths brought to about 240 the number killed in sectarian clashes over the past two years.

Most of the victims were Muslims.

Myanmar is just one of several SouthEast Asian countries recently forced to confront old questions of race and religion. In Malaysia, a prominent Malay Muslim leader, Abdullah Zaik Abdul Rahman, has been charged with sedition for accusing ethnic Chinese, a minority in Malaysia, of being “trespassers”. And in Indonesia the winner of the presidential election, Joko Widodo, or Jokowi, squeaked home after a huge early lead over his rival evaporated, in part because of unfounded rumours that he was a Christian Chinese rather than in fact a good Javanese Muslim.

These events may appear disparate, but they reflect a common thread running through the history of race and religion in South-East Asia. Specifically, they reflect the legacy of those colonial territories which one British academic and colonial administrator, John Furnivall, first characterised as “plural societies”. The British and Dutch Asian empires that gave rise to such societies have long gone, but the con-

sequences of their creation remain. Indeed, the concept of the plural society is more relevant than ever for understanding and even predicting the course of events in the region, and especially in Myanmar—or Burma, as it was when Furnivall lived and worked there.

Furnivall was a Fabian socialist who arrived as an administrator in 1902 and married a local Burmese. Though he left the colony in 1931, he returned in 1948 to advise the first post-independence governments as well. Furnivall’s original description of the plural society is very different from the way “pluralism” has come to be understood in the West. Rather than referring approvingly to a rainbow of ethnicities choosing freely to live together, Furnivall coined the term to criticise the imposition of immigrant races on indigenous societies in the name of commerce and free trade.

This occurred most obviously during the 19th century in the ports of the British and Dutch seaborne empires, in littoral cities such as Akyab (now Sittwe) and Rangoon (Yangon) in Burma, in Penang and Singapore of the Straits Settlements, and in Batavia (now Jakarta) on the island of Java, capital of the Dutch East Indies. Eventually more formal colonial rule was extended by conquest to the interiors of these places, carrying the plural society with it.

For the most part, the immigrants, often

destitute, who poured into these territories under European rule were Chinese. But millions of South Asians, many of them Muslims, migrated as well, especially to Burma, then administered by Britain as part of its Indian empire. Indians migrated in large numbers throughout the Malay world. The immigrants often provided manual labour, in Malaya’s copper mines and rubber plantations, for instance. But they also contributed to the entrepreneurial zest and trading connections that helped to create the wealth and vitality of imperial entrepots such as Rangoon and Singapore. Colonial Rangoon was a majority-Indian city by the 1920s. It boasted Armenian, Jewish and Chinese communities. The Chilean poet Pablo Neruda, who was consul there at the time, described Rangoon as “a city of blood, dreams and gold”.

But as Furnivall saw it, the wealth came mostly at the expense of the indigenous Burmans in Burma, the Malays in Malaysia, the Javanese in Java and so on. Indeed, many such groups felt themselves to be elbowed aside by foreigners who came in under colonial protection.

For all that the plural society produced wealth, for Furnivall it was essentially brittle and unstable, lacking in any “social will” or shared sense of community. “It is in the strictest sense a medley”, he wrote; the different races “mix but do not combine. Each group holds by its own religion, its own culture and language, its own ideas and ways. As individuals they meet, but only in the market-place, in buying and selling.” He worried, therefore, about what would happen once the coercive power of the colonial authority was gone. Colonial protection was the chief impediment to immigrants being attacked by resentful in- 1

30 Asia 2 digenous peoples, or even clashing among

themselves.

Post-colonial societies have been dealing with this worry ever since. Race riots in Malaysia and Singapore in 1969 pitted Malay against Chinese. They seemed to confirm Furnivall’s worst fears about “the whole society relapsing into anarchy” once the colonial power had gone.

Where it all began The new elites’ response was often to replace colonial authoritarianism with their own brand. In Malaysia and Singapore many of the old oppressive laws from colonial days have been defended as the surest way to keep in check the resentments and antagonisms that follow from the plural society. In both places it has also, as a happy consequence, helped keep the same ruling parties in power since independence.

By contrast, the post-colonial military governments of Myanmar tried a different strategy. Rather than devising a way to cope with the plural society, they tried to dismantle it. The junta that seized power in 1962 expelled hundreds of thousands of Indians, Chinese and other non-Burmese in an attempt to smash the plural society and create an artificially homogenous Burman one. This, however, was even more coercive than the plural society it was meant to replace. The Burman-dominated military governments tried to impose a policy of “Burmanisation” on the country’s other ethnic groups such as the Kachin and Karen, officially recognised as indigenous, provoking long-running civil wars.

That is how things stayed until the democratic reforms of the present government, initiated in 2011. A loosening of central control has seemed to lead to the “anarchy” between races that Furnivall had feared. In western Myanmar, the (Buddhist) Rakhine are finishing the ethnic cleansing begun in the 1960s. They are clearing what remains of the plural society, mainly Muslims, from Sittwe. In other commercial centres, such as Mandalay, where the plural society has limped on for decades, some Burmans, led by chauvinist Buddhist monks, are whipping up similar antagonisms.

Regrettably, a supposedly modernising Myanmar government is now supporting the chauvinists against the South Asians and Muslims. In a new democratic era it has an election to win. It faces annihilation at the hands of Aung San Suu Kyi’s popular National League for Democracy in next year’s general election, so it is exploiting old resentments against the plural society for electoral gain.

The army-backed ruling party is supporting four pieces of legislation, proposed by the monks, to protect “race and religion”, implicitly that of the Burman Buddhist majority against an imagined Muslim takeover. The laws would make it very

The Economist August 2nd 2014 hard for people to convert to other religions or for Buddhist women to marry Muslim men. Thus the ruling party hopes to turn the election into a debate about Burman rights and privileges rather than democracy. It presents Miss Suu Kyi with a quandary. Many foreigners criticise the Nobel peace-prize winner for not standing up more for the Rohingyas in Rakhine and other Muslims. She knows that if she did speak out she would forfeit much sympathy among Burmans and undermine her hopes of restoring democracy—and coming to power.

The generals’ strategy might help them, but it will jeopardise the vital contribution that industrious and commercially-minded immigrant communities could still

make to the impoverished country. Yangon’s plural society, which prompted Furnivall to think about all this in the first place, was, after all, a precursor to today’s highly global cities, with all the riches that accrue to them. It is no coincidence that Burma’s precipitous economic decline followed the generals’ attempts to dismantle the plural society in the 1960s. Nearly all the evidence points to the benefits of diversity and immigration in terms of innovation and productivity. If the chief motivation for Myanmar’s generals to start reforming the country was in order to revive a decrepit economy, they ought to want a flourishing plural society, though without the former colonial coercion, more than anything else. 7

The Philippines

DAP dancing MANILA

The president versus the Supreme Court

O

N JULY 28th Benigno “Noynoy” Aquino, the Philippines’ president, delivered his fifth—and, because presidents are constitutionally limited to a single six-year term, his penultimate—State of the Nation address. It was upbeat and boosterish, as such speeches usually are, punctuated with impressive-sounding numbers and less-impressive doses of false humility (when a politician tells his constituents, “You are our bosses,” he usually thinks nothing of the sort).

Towards the end of the peroration, however, came a grouse: “We have had to suspend a number of projects to make certain that we remain in accordance with the Supreme Court’s decision on the Disbursement Acceleration Programme, or DAP. I

know that those of you in this hall are one with me in believing that we must not deprive our countrymen ofbenefits.” Stoking public resentment toward the Supreme Court risks becoming a habit of Mr Aquino’s. This speech marked his second attempt in as many weeks.

In both cases, the cause was the court’s 13-0 ruling that Mr Aquino’s DAP was unconstitutional. The programme was designed to speed the Philippines’ slow and inefficient government spending. It ran from the last quarter of 2011 to the first of 2013, and financed programmes and projects worth 144 billion pesos ($3.3 billion).

In a nationally televised speech on July 14th, Mr Aquino insisted that the funds “were used for the benefit of Filipinos. And 1

The Economist August 2nd 2014 2 not for later, not soon, but now.”

Nobody contests that claim. Even the ruling concedes that “the DAP yielded undeniably positive results that enhanced the economic welfare of the country.” The problem was not what the money was spent on, but where it came from: mainly unreleased appropriations, funds reassigned from slow-moving to more urgent projects, and “unprogrammed funds” (ie, standby amounts to be released when revenue collections exceed targets).

Mr Aquino’s government defined those funds as savings. The Philippine constitution allows the president to “augment any item in the general appropriations law …from savings in other items”, bypassing the usual appropriations process.

The Supreme Court was unimpressed.

It held that the DAP funds were not actual-

Asia 31 ly savings, so the president exceeded his constitutional authority in disbursing them. The court found that the DAP disbursals need not be undone, because beneficiaries accepted in good faith that the DAP was legal, but that the presumption of good faith does not apply to the programme’s “authors, proponents and implementers…unless there are concrete findings of good faith in their favour”. Mr Aquino has filed a motion for reconsideration, but given that the Supreme Court ruled unanimously against him, it is hard to see such a petition succeeding.

So far two impeachment complaints stemming from the DAP ruling have been filed against Mr Aquino. Both have been endorsed by members of the House of Representatives, so the House justice committee is now bound to consider them.

Sport in India

Not cricket DELHI

A shiny televised image for an ancient village game

“K

ABADDI! Kabaddi!” goes the chant that gives the game its name. For hundreds, maybe thousands, of years, small teams of Indians have taken turns hopping back and forth over a patch of earth, tagging and grabbing at one another while the call goes up. A player must repeat the word to prove he is not drawing breath as he makes his raid over the boundary line. The play is quick, strenuous and requires no equipment.

Cue swirling lights and cut to the spotlit purple floor of the National Sports Club of India in Mumbai. Sparklers fire from darkened corners and loudspeakers thump out riffs. The spanking-new teams of the Pro Kabaddi League (PKL)—the Patna Pirates, the Telugu Titans and six others—face off before a cheering stadium. Kabaddi has been turned into slick fare for television, rife with opportunities for sponsorship. The model is Indian Premier League cricket, where a sped-up game has made the league into a commercial juggernaut. Most strikingly, in PKL matches, raiders no longer mutter “kabaddi” to show they are not drawing breath. Instead, an overhead screen counts down 30 seconds. New India has claimed a bit of timeless India for its own.

The producers, Star TV and the Mahindra group, are drenching the new league with star pulling power. The first matches saw Ronnie Screwvala, a media mogul who owns the Mumbai franchise, sitting opposite a film icon, Amitabh Bachchan, whose son owns the Jaipur Pink Panthers. Smart TV ads give a nod to the sport’s village background. The new celebration of kabaddi takes a certain

Since the court released its DAP ruling the president’s popularity has taken a tumble. The DAP controversy only came to light after the programme was alleged to be the source of the 50m pesos that Jinggoy Estrada claimed he and other senators were offered as an incentive to vote to convict a former Supreme Court justice. Mr Estrada was implicated in a scandal involving another fund called PDAF (Priority Development Assistance Fund), which the Supreme Court declared unconstitutional last year. The way the DAP was revealed may remind some voters that Mr Aquino was slower to condemn the graft stemming from PDAF than an anti-corruption president should have been.

The danger to Mr Aquino and the Philippines is less that he will be impeached or removed from office—his majorities in both legislative chambers will prevent that—than that his spat with the judiciary deepens, becoming a drag on his last two years in office. “We do not want two equal branches of government to go head to head,” said Mr Aquino in his July 14th speech. But neither does he seem anxious to take himself out of the ring. 7

India and Nepal

Neighbourhood watch Can Nepal learn to love big brother?

S

Hold your breath: we’re going pro pride in its Indianness. Charu Sharma, a PKL organiser and celebrity commentator, predicts that foreign brands wanting to become locally strong will associate with the new league.

At the same time the PKL wants kabaddi to look at least somewhat international. Each team must field three players from non-Indian countries. So players from Japan, South Korea, Turkmenistan and Britain make their appearances—if only from the benches. One day they might bring the word back to their own countries—thus spreading this game’s international appeal.

INCE assuming office as India’s prime minister in May, Narendra Modi has been much in demand among the world’s great powers. China’s foreign minister popped over to Delhi within a month; John Kerry, America’s secretary of state, was there this week. A trip to a talkfest in Brazil aside, however, Mr Modi’s own travel abroad has been rather parochial—a jaunt to one Himalayan neighbour, tiny Bhutan, in June; and, from August 3rd, he plans another to Nepal. Local they may be, but both trips can be seen in geopolitical terms, as efforts to shore up Indian influence in its own backyard against that of China, the giant to the north.

Bhutan remains in effect an Indian protectorate. But India fears China will bully it in a dispute over their border, which runs close to the thin strip of land to the north of Bangladesh joining India’s north-eastern states to the rest of the country.

In Nepal, another close Indian ally, Chinese influence is even more apparent. Mr Modi leads a Hindu-nationalist party and will visit Kathmandu’s most famous temple, highlighting India’s cultural bonds with Nepal, four-fifths of whose people are Hindus. But China has already supplanted 1

32 Asia 2 India as the biggest source of foreign direct

investment in Nepal. The number of Chinese tourists almost doubled, to 90,000, between 2011 and last year. This month China is to open the extension of its railway in Tibet from Lhasa to the second city, Shigatse. It has said the line will be further lengthened, to the borders of Nepal, Bhutan and Sikkim, by 2020. By contrast, Nepalis moan, the infrastructure along the long open border with India is ramshackle.

In Nepal, Mr Modi will hear two contradictory criticisms. The first is that India has taken Nepal for granted. He is the first Indian prime minister to pay a bilateral visit since 1997. When his foreign minister, Sushma Swaraj, visited late last month to prepare the ground, she reconvened a “Joint Commission” set up by the two governments that had not met for 23 years.

Yet her visit seems to have been a success. It may even have encouraged Nepal to defy China. This week the government changed its mind and allowed the cremation in Kathmandu of a senior TibetanBuddhist monk from Bhutan. China was thought to have opposed this, fearing that the ceremony might become a pro-Tibetan, anti-China demonstration. In recent years Nepal has bowed to Chinese pressure to curb the rights of Tibetans on its soil.

During Ms Swaraj’s visit, she agreed to talk about everything from a new cricket stadium in Pokhara, close to the Annapurna mountain range (how’s that, China?), to renegotiating India’s 1950 treaty with Nepal, which many Nepalis resent. That hints at the second criticism Mr Modi will hear: that India is a domineering bully, intent on meddling in Nepali politics.

It is true India has been an intrusive

India’s largesse is cricket

The Economist August 2nd 2014 presence. Many Nepalis believe that India played a role in 2006 in bringing an end to the monarchy and to a nine-year civil war with Maoist rebels. It has rarely had easy relations with incumbent governments in Nepal.

A constituent assembly there is currently drafting a new constitution. Sukh Deo Muni, a Nepal expert in Delhi, says that India will want to “nudge” the assembly towards a constitution that is seen as inclusive. The risk is that the assembly, dominated by representatives of higher castes, does not do enough for lower castes and people of the plains near India, whose disaffection fuelled the Maoist insurgency.

Nudge too hard, however, and India will be pilloried. Many of the projects Ms Swaraj discussed—notably the export of hydroelectricity from dams in Nepal to India—will struggle to overcome deeply ingrained suspicions of India. That is why all Nepali governments also try to stay on good terms with China. 7

Nuclear power in Japan

Flicking the switch SATSUMASENDAI

Restarting nuclear plants is unpopular but crucial for Shinzo Abe

W

HEN he was a student in Satsumasendai, Ryuichi Somekawa was taken on trips to the nuclear-power museum next door to the reactors of the Sendai plant. The museum, which is still open, amounts to a lavish public-relations effort extolling nuclear safety, yet he remained fearful. Now Satsumasendai in Kagoshima prefecture, on the southern tip of Kyushu, southernmost of Japan’s four main islands, is likely to be the country’s first city to approve the restart of a nuclear plant.

The Fukushima disaster in 2011 led to the mothballing of all of Japan’s 48 reactors.

Like many residents, Mr Somekawa, who is now 47, is dismayed at the news, but he says the decision is well-nigh inevitable.

The final word will come from the governor of Kagoshima prefecture and from Satsumasendai’s mayor. Operations are expected to resume in the autumn. Japan will still need to power itself through a sweltering summer without nuclear energy. Conventional power stations, some formerly idle, have so far saved the economy from power cuts. The pro-nuclear government of Shinzo Abe, the prime minister, hopes a restart at the Sendai plant can open the way for a dozen or more reactors to resume operations.

To that end, Japan’s nuclear watchdog, the Nuclear Regulation Authority (NRA), is inspecting 17 further reactors. Last month it

declared the Sendai plant in compliance with its new safety rules. The next to restart is likely to be one at Takahama in Fukui prefecture. Switching nuclear back on could quickly halve Japan’s trade deficit, which has climbed along with fuel imports. Without nuclear power, Mr Abe’s plans to revive the economy might falter.

Choosing Satsumasendai for the first restart was politically savvy, says Jeff Kingston of Temple University in Tokyo.

Few places better symbolise a decades-old policy of siting plants in remote and poor locations with few economic options. The power plants provide jobs, and nuclear-related subsidies from the central government pay for an array ofsports and cultural facilities, parks and museums. The Sendai plant is a long way from Fukushima; so the catastrophe of the triple meltdown at the Fukushima Dai-ichi plant in 2011 remains rather distant for many locals, according to Ichiro Yunohara, head of the city council of Aira, a neighbouring town that has not benefited from nuclear largesse.

The cost of closure to the local economy means that officials who favour nuclear power overwhelmingly outnumber opponents in the local assemblies that will vote in the autumn. Yet on the national stage, Mr Abe may still pay a price. His popularity has recently flagged. Last month his Liberal Democratic Party lost a gubernatorial election in Shiga prefecture, partly due to rising anti-nuclear sentiment. Some three-fifths of people are against the Sendai restart, according to a recent nationwide poll of public opinion.

Backin Kyushu, the possibility of an imminent restart was driven home this week when the prefecture handed out iodine tablets to households near the plant to protect against thyroid cancer in case of an accident. Other plans are incomplete, most notably on basic evacuation routes in case of a nuclear emergency. The plant is likely to restart without an earthquake-proof offsite emergency centre, though these were mandated after the Fukushima disaster. Japan lies in one of the world’s most seismically active areas, but insufficient discussion has been held about the risks posed by a surrounding group of five calderas and by Sakurajima, an active volcano only 50 kilometres (31 miles) away from the Sendai plant.

The central government has to date relied on the NRA and on Kagoshima officials to make the case for the restart. Yet the governor, Yuichiro Ito, now says the authorities in Tokyo must convince the public of the plant’s safety. In 2012, before two reactors at Oi in Fukui prefecture were switched back on for a while, the governor there ensured that the then prime minister, Yoshihiko Noda, reassured the public over the plant’s safety. Mr Abe may have to dip deep into his political capital if reactors across the country are to be fired up. 7

The Economist August 2nd 2014 33

China

Also in this section 34 Corruption and the economy 34 Flight delays and the armed forces

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

Corruption

No ordinary Zhou BEIJING

In carrying out the most significant purge in a generation, Xi Jinping seeks to tighten his grip

S

INCE President Xi Jinping launched his anti-corruption campaign at the end of 2012, the question has been how high he would aim. On July 29th an emphatic answer came with the news that Zhou Yongkang was under investigation by the Communist Party for “serious violations of discipline”—for which, read corruption.

Mr Zhou (above) was once one of the most powerful men in the land. Until two years ago he was a member of the Politburo’s ruling standing committee: in charge of the state’s vast security apparatus, he controlled a budget bigger than the army’s.

It had long been an unwritten rule of China’s power politics that men of Mr Zhou’s stature were untouchable. In flouting the rule, Mr Xi has left no doubt about the authority he believes he now wields. He appears to be the most powerful Chinese leader since the late Deng Xiaoping.

Mr Zhou first appeared to be in trouble in 2012, with the purge of Chongqing’s party secretary, Bo Xilai. It is thought that Mr Bo had been eager to challenge Mr Xi’s ascent to the presidency, and Mr Zhou was a close ally who argued against bringing Mr Bo down. The result was a rare serious split in China’s highest leadership.

Mr Zhou sat atop a network of patronage that ran across the country, in particular through the police state and the oil-andgas industry (through which he himself had risen). In recent months protégés have

been rounded up for graft, including Jiang Jiemin, once head of PetroChina and, last year, of the government body overseeing state-owned assets. And on July 29th reports surfaced of the arrest of Mr Zhou’s businessman son, Zhou Bin, who also has interests in energy. Foreign media have reported that the family’s assets run to hundreds of millions of dollars. But whether Mr Zhou and his clan are much more corrupt than the families ofmany other senior leaders is moot. His chief sin appears to have been, as with Mr Bo, seeking to amass so much power that he threatened a system of collective leadership that depends on a precarious balance of different factions and interests.

Still, Mr Xi and his able sideman, Wang Qishan, who runs the anti-corruption campaign, appear deadly serious about graft. Since the start of 2013, the party says, over 200,000 officials have been punished. That includes three dozen ministers, provincial leaders or top executives at state-owned companies. Many officials have committed suicide.

Mr Xi and Mr Wang appear to believe that corruption frustrates ambitious economic proposals unveiled late last year, including reforms to make state-owned enterprises—energy companies among them—perform much better. They are out to smash the interests resisting reform.

But the two men also seem to think that

graft poses an almost existential threat to the Communist Party’s rule. And they are probably right. Ordinary people are disgusted with party corruption, and going after corrupt “tigers” underpins Mr Xi’s popularity, as far as it can be measured. On July 30th the People’s Daily, the party’s mouthpiece, said that Mr Xi is serious about purifying the ranks, and that no one is safe from scrutiny.

For the moment, the initiative is with Mr Xi and his allies. Mr Zhou’s downfall has elements of a good old-fashioned purge in which rivals are eliminated and power is consolidated. Optimists hope Mr Xi will use his power to push on with economic and social reforms. This week the party also announced that it would convene a big meeting in October to discuss the rule of law, an area that was once Mr Zhou’s to define and control.

Yet Mr Xi’s strategy also raises questions. One is that his anti-corruption drive—more far-reaching and lasting than any other—has sent such a chill through the governing apparatus that demoralised officials are scared to act on any policy or project without clear direction from above.

That could hamper the implementation of the very reforms that Mr Xi and Mr Wang are supposed to be working towards.

The second caveat follows from the first: there are presumably risks in taking down too many tigers. Ordinary Chinese may understand better how truly rotten the system is, while other senior leaders will think they are next. Should that happen, then the party’s famed unity could be in trouble as others challenge Mr Xi’s authority—the opposite of what he intends.

At some point, then, he and Mr Wang must find a way to bring the anti-corruption juggernaut to a halt. At the moment it is careering along. 7

34 China Corruption and the economy

Is anti-graft anti-growth?

JIEYANG

Weighing the economic impact of the anti-corruption campaign

E

VEN by Chinese standards, growth in the southern city of Jieyang was remarkable under Wan Qingliang, the local boss with bouffant hair who cultivated an air offrugality in his personal life. When he took over, in 2004, annual expansion was 4%. By 2007 Jieyang’s growth rate had surged to 18%. Dirt roads were paved, banana groves uprooted and high-rises planted in their place. Propelled by these achievements, Mr Wan’s ascent up China’s political ranks was swift. He was made vice-governor of Guangdong, China’s wealthiest province, and then mayor of Guangzhou, the province’s capital and China’s third-biggest city.

Yet Mr Wan’s fall was even more precipitous than his rise. In June investigators accused him of widespread corruption; he has disappeared from sight. The man who said he owned no homes allegedly dispensed favours worth at least 600m yuan ($97m) to one property developer, Comhope, and the charge sheet is growing. But the takedown of Mr Wan, who knew how to get the local economy fizzing, raises a question about President Xi Jinping’s fight against corruption: is it a drag on growth?

The scars of Mr Xi’s campaign are visible in Jieyang. At a Comhope complex down by the river, bamboo scaffolding lies in a heap at the base of what were supposed to be 30-storey towers—construction was abandoned at the 11th floor.

Across China, luxury retailers and fancy restaurants are suffering from an edict against wasteful government spending. A chill has crept into karaoke parlours and brothels; mistresses also face a hard time.

One maker of condoms estimates demand has fallen in China by1m condoms a day in recent months. In June casino revenues fell in Macau, a popular destination for cadres, for the first time in years. The government has made it harder to transfer cash to the gambling enclave.

When the economy wobbled early this year, one common explanation was that officials were reluctant to approve investment projects lest they be accused of taking backhanders. Some executives with state-owned enterprises do not want to travel abroad, for fear that enemies will portray such trips as junkets. After rising strongly for a decade, foreign direct investment by Chinese companies fell by 5% in the first six months of the year, compared with a year earlier.

Businesses are adapting to more abste-

The Economist August 2nd 2014 mious times. Five-star hotels, now virtually off-limits to officials, have downgraded themselves to four stars. Private dining clubs have opened their doors to the public. Still, the view that anti-corruption efforts are hurting the economy has become pervasive enough for leaders to confront it head-on. In July Lou Jiwei, the finance minister, said that those who think corruption helps lubricate growth are “making fools of themselves”.

He has a point. For all the short-term dislocations, the crackdown is surely good for China’s economy. Most economists these days no longer regard corruption as greasing the wheels of business in developing economies, as used to be argued.

Rather, they realise, it deters private investment, misallocates resources and generates social grievances.

China’s past anti-graft campaigns, though admittedly less extensive than the current one, hurt the economy little and may even have boosted it. Investigations directed at the local government of Beijing

in 1995 and of the port-city of Xiamen in 1999 coincided with growth slowdowns of roughly three percentage points. Both cities quickly recovered. When Shanghai’s party chief was toppled in 2006, growth accelerated the following year. Across China, counties that are strongly against corruption tend to have higher incomes than those that go easy on sleaze, according to research by Yiping Wu of the Shanghai University of Finance and Economics and Jiangnan Zhu of the University of Hong Kong.

Not that the anti-graft campaign is necessarily encouraging open and transparent behaviour. In Sihong county in Jiangsu province this month, authorities panicked when they heard that inspectors from the central government were coming. Having illegally converted farmland into highways, the bureaucrats carted in lorryloads of soil overnight to cover them up. Photos of the buried roads, now planted with soyabeans, have since become something of a hit around the country. 7

Aviation

The sky is a limit BEIJING

Military exercises contribute to dreadful airline delays

C

HINA’S airlines and airports have long been notorious for their lateness. Since mid-July they have got much, much worse as rafts of flights have been delayed or cancelled. On July 26th the country’s Civil Aviation Administration warned of “massive flight delays” in eastern and central China. Capacity would drop by 65% on some routes, the agency said. On July 28th nearly 200 flights were cancelled at Shanghai’s two airports, and 120 were delayed by more than two hours.

Frustrated travellers beg for more information. While some officials, rather

implausibly, have put it all down to bad weather, it perhaps marks an advance in transparency that others blame “airtraffic control”, and specifically the role of military drills, for the havoc. Even so, claims by the defence ministry that the live-fire drills they announced were having only “limited impact” on civilian aviation have been met with raspberries.

The problem is that less than 30% of China’s airspace is open to civil aviation, compared with more than 85% in the United States. The armed forces hog the rest. A Chinese aviation expert estimates that the air force could, by transferring a tenth of its airspace to civilian use, boost China’s GDP by over $30 billion a year.

According to Geoffrey Jackson, director of the US-China Aviation Co-operation Programme, military control of so much airspace is a big burden for an air-traffic control system that is struggling to keep up with the growth in traffic.

Flights, he says, are confined to very narrow flyways. Mr Jackson praises military officials for agreeing this year to allow commercial flights to use military airspace on a case-by-case basis in the event of severe weather. And Chinese airlines, he says, have got better at informing passengers of looming delays or cancellations. But there is a long way to go. Even in a good month only half of flights from Beijing airport leave on time, and two-fifths from Shanghai’s Pudong.

Middle East and Africa

The Economist August 2nd 2014 35 Also in this section 36 Disbelief in Ebola in west Africa 37 The Syrians’ three-sided war 37 Libya out of control 38 Egypt’s government and its mosques

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

South Africa

Up the creek JOHANNESBURG

Jacob Zuma’s government is drifting between populism and liberalism

A

WHITE woman in the fluorescent-yellow jacket of a freelance parking attendant steps into the road, gesticulating at an empty bay outside a restaurant in Johannesburg’s rich northern suburbs, as black drivers in luxurious German cars swish past, their darkened windows sealed against the chill evening air. Few scenes illustrate more starkly the erosion of white privilege since the end of apartheid two decades ago.

Inequalities remain—the median wage of whites is still four times higher than that of blacks. But a vast new black middle class has emerged. Almost half the country’s skilled workers and 40% of its senior managers are now black. Schools once reserved for whites are now filled with faces in all the hues of the rainbow nation. Absolute poverty among blacks has fallen sharply.

Most homes now have clean water and electricity.

Convergence between the races of South Africa is not just economic. They are also uniting in dissatisfaction with Jacob Zuma, who recently started his second term as president. His approval rating has fallen to 46% from a heady 77% in 2009. His government, according to Ipsos South Africa, a polling firm, is only marginally more popular.

The dissatisfaction shown in surveys is not entirely reflected at the ballot box.

Though its share of the vote fell, the African National Congress (ANC), which has ruled South Africa since the advent of de-

mocracy in 1994, still won a comfortable 62% of the vote at the general election in May. Scratch beneath the headline number, however, and two trends emerge that both rattle and divide the ruling party.

The first is a sharp erosion of its support in some of the country’s biggest industrial regions. Allied to this has been the rise of two rivals: the Democratic Alliance (DA), the liberal-leaning and still white-tinged main opposition party; and the Economic Freedom Fighters (EFF), a new black-populist party that wants to confiscate whiteowned land and nationalise the economy’s “commanding heights”.

Despite their very different platforms, both parties have found the best fishing for votes among urban, educated young blacks seeking alternatives to the corruption, cronyism and bumbling of the ANC. DA people concede that its relatively disappointing result in May was due to a loss of potential votes to the EFF, which got more than 6% of the national tally. Though the DA’s share rose from 17% to 22%, helped by a campaign fronted by Mmusi Maimane, its charismatic parliamentary leader, it was still a long way off its target of 30%.

In any event, the rise of these rivals caused the ANC’s majority to slump by about ten percentage points in Johannesburg, the country’s economic hub, and Tshwane, which encompasses Pretoria, the capital. In both cities its share of the vote fell close to or below 50%. That raises the prospect of the ANC losing these cities

in local government elections in 2016.

Also at risk for the ANC is Nelson Mandela Bay, a municipality that includes Port Elizabeth, a manufacturing centre close to the ANC’s historic heartland in the Eastern Cape. Add in Cape Town, which is already governed by the DA, and the ANC may lose sway over the country’s main economic hubs. That would be galling for a party that was swept into power in 1994 by militant trade unions and activists in sprawling industrial townships.

The second development now rattling the ANC is a rise in militancy among unionised workers and a fragmentation of support for the ANC-aligned Congress of South African Trade Unions (COSATU), the country’s biggest labour federation. In late June platinum mineworkers ended a fivemonth strike, the longest and costliest in the mining industry, that had been orchestrated by the Association of Mineworkers and Construction Union, an upstart and unaligned union.

A stream of concerns Although the striking miners did not achieve their demand for a minimum monthly wage of 12,500 rand ($1,160), about double what they were earning before the strike, their wishlist is being echoed elsewhere. Workers in gold mines and industries such as forestry and farming, where the minimum wage is below 2,500 rand, are also demanding 12,500. Smaller protests against the government over largely local issues have also risen in number.

The South African Institute of Race Relations, a think-tank, reckons the country is averaging four or five violent anti-government protests a day.

A dismal economy stokes much of the discontent. After a brief spurt of growth in the years leading up to the global financial crisis of 2008, South Africa has expanded at an anaemic rate of little more than 2% 1

36 Middle East and Africa

advice that could save their lives.

But mistrust of the state is well founded.

Since independence from Britain in 1961, Sierra Leone has been ruled by a string of corrupt governments, including two decades of one-party rule by the All People’s Congress party. During this time Sierra Leoneans in the remote east of the country were largely ignored and their political representatives repressed. Access to state services in rural areas still barely exists. Government medical services have done little to win the confidence of people who often prefer to use traditional healers.

Since the disease broke out a few months ago some easterners say the government is trying to depopulate their part of the country, the power-base of the opposition. “They’re calling it ‘eastbola’ now,” says an opposition backer in a tea shop in the eastern town of Kenema. “The lack of trust between people and government is [due to] decades of non-transparent and corrupt dealings of the state with the people,” says Mariane Ferme, an anthropologist who has lived among eastern Sierra Leone’s Mende people. “Why should people believe a government that lies about so many other things when it tells them they will die if they don’t go to hospital?”

Such suspicion has made it much harder to contain the disease. So far this year there have been more than 1,200 confirmed, suspected or probable cases of Ebola in west Africa. It has no vaccine or known cure, and kills up to 90% of those infected. It is transmitted to people by wild animals or by other infected patients. Fruit bats, often eaten by people living in the region, are thought to host the virus, which starts with flu-like symptoms but can impair the kidney and the liver and may also damage blood cells, causing external and internal bleeding. The maximum incubation period is three weeks. On July 25th Nigeria’s first probable case was reported when an American died in Lagos, its most populous city, after flying from Liberia, where he was born and had been working. 7

Death and disbelievers KAILAHUN

Many Sierra Leoneans refuse to take the advice of medical experts on Ebola

W

HEN Ebola came to the Kailahun district of eastern Sierra Leone in late May, the government put out a series of messages telling people how to recognise and avoid the disease—among other things by avoiding exposure to victims’ blood, sweat, saliva or to dead bodies. Few villagers took any notice. Instead, a string of wild theories is circulating, including suggestions that the government and aid agencies are intentionally spreading the disease.

The outbreak highlights a chronic lack of trust between ordinary Sierra Leoneans, their government and the aid-giving Western world. When a burial team including people from foreign charities recently arrived at a village in Kailahun, women and children fled at the sight of their branded vehicles. The men denied they had any bodies to be buried—and chased the team away. Events like these are common.

Some Sierra Leoneans say they fear that the government wants to sell the blood of Ebola patients, or that it will remove patients’ limbs for ritual purposes. Others think health workers will inject them with Ebola; or that the ubiquitous chlorine disinfectant spray will give them the disease; or simply that the virus is an invention to help the government bring in donations.

Such beliefs kill. Every time a community buries an Ebola victim without protective clothing or medical advice, the disease has a higher chance of spreading. The outbreak has already killed at least 670 people in Sierra Leone, Liberia and Guinea and may be gathering pace. Many health workers express frustration at what they see as villagers’ unreasonable refusal to accept

Ebola outbreaks BURKINA FASO

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SOUTH SUDAN

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Tilting with windmills To be fair, at least some of the proposed policies are being put in place. The finance minister hopes to contain spending increases to avoid further downgrades in the credit ratings of South Africa’s government debt. So bottlenecks in infrastructure are partly being unclogged by luring in private capital. One particularly successful policy is encouraging private investors to build windmills and solar-power plants.

Other ministries seem to be doing their best to deter investment, however. Gugile Nkwinti, who as minister of rural development and land reform since 2009 has effected little of either, proposed in late June that farmers be forced to give half their land to their workers.

New investment in mining has all but dried up as companies wait for the results later this year of a government review of the industry’s record of black economic empowerment, code for handing a share offirms to politically connected black businessmen. Many in the industry fret that they will be told to give away further stakes.

The ANC’s muddled politics are failing to please even its most loyal supporters, many of whom are either hardened trade unionists or are decidedly middle-class.

Until it decides which group it hopes to serve, it is likely to keep haemorrhaging votes without giving the economy the boost that is so badly needed. 7

Ebola in west Africa

O

make a serious dent in unemployment, which remains stubbornly above 25% by official estimates; some say the real figure is as high as 40%.

Among the reasons for such lacklustre growth are sclerotic labour laws and bungles by the government. One such was its failure either to open up electricity generation to private investors or to give the state monopoly the cash to build new power stations. As a result, a series of crippling power shortages may have slowed the country’s annual growth by as much as one percentage point.

Pulled between these contradictory demands to liberalise the economy to boost growth or to swing to the left to head off the EFF, Mr Zuma is trying to do both. As a result he is not doing either effectively. His new cabinet, which first met in early June, is a stew of competing ministries riven by factional and ideological differences.

Nhlanhla Nene, the new (and levelheaded) minister of finance, says he is confident the government has united behind the growth-friendly policies outlined in a national development plan issued in 2012.

Yet the ANC will struggle to enact the required reforms without fracturing its alliance with the South African Communist Party (whose members make up a big chunk of the cabinet) and COSATU.

RO

2 since. That is well below the 5% needed to

The Economist August 2nd 2014

0

*To July 23rd

The fastest growing economies in the world are in Africa.

Tomorrow’s commercial centers are already being developed across the diverse economies of Africa.

Savvy investors are a part of that growth.

The U.S. Chamber of Commerce’s Africa Business Initiative is working with its members to create jobs in the U.S. while finding new markets for our goods and services abroad.

The time to invest is now—and the place is Africa.

ENDURING INNOVATION

Advanced Experimentation Technology Development Rapid Prototyping Next-Generation Systems

www.boeing.com/innovation

The Health Care Forum 2014 A Global Business in Flux September 17th 2014 | Boston

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212.541.0539 | healthcare.economist.com

The Economist August 2nd 2014 The Syrian war

A pincer move

Middle East and Africa 37 Libya

Out of control TRIPOLI

The militias are at each others’ throats as a new parliament tries to assemble CAIRO

Iraq’s bloody mess has helped the regime in Syria and its jihadist enemy

W

HEN an alliance of disgruntled Sunnis led by the Islamic State (IS), an extremist group formerly known as the Islamic State of Iraq and Greater Syria (ISIS), streaked across Iraq in June and proclaimed a caliphate in the territory it holds on both sides of the Syrian-Iraqi border, Syrian rebels with a more national focus thought their day had come. Surely, they surmised, America and its Western allies would not sit by and allow to prosper a group that had grown out of al-Qaeda in Iraq and killed American soldiers during the war there in 2003? Bar the Americans getting involved militarily, the only way for them to push back IS in Syria would be to bolster the more moderate rebels there.

A little more weaponry, mainly anti-aircraft missiles, did indeed arrive for eight vetted groups that have been supplied by a covert programme that since last year has been run by America and states in the Gulf and Europe that want to see the back of Bashar Assad, Syria’s president. These groups have made some gains in the northern part of Hama province and the southern part of Idleb, near the regime’s stronghold in western Syria (see map on next page). But the main picture has not changed. Syria’s regime and IS both gain from the mess next door in Iraq, whereas the more moderate rebels are increasingly being squeezed. “The aid is for a plan to deal with a 2012 problem, not a 2014 one,” says Noah Bonsey, an American Syriawatcher at the International Crisis Group, a Brussels-based think-tank.

After transferring some of their new and extensive haul of money and weapons from Iraq back to Syria, IS has set about eradicating other rebels from the eastern Syrian province ofDeir ez-Zor. In a string of attacks in early July, it took control of a series of towns along the Euphrates river.

Hitherto the Syrian regime had co-existed with IS, as it provides a useful spectre of what the regime says would replace Mr Assad, were he to fall. But more recently IS has also clashed with the regime. On July 25th it captured Division 17, a long-contested army base in Raqqa. A day later it took a second base in the north-eastern province of Hasaka.

In response, Syria’s regime has carried out more air strikes on IS targets. On July 26th it snatched back an IS-held oilfield in the centre of the country. But it still concentrates on quashing the mainstream opposition. Mr Assad’s troops, backed by foreign

T

HE evacuation, when it came, was not by helicopter from the embassy roof but in a convoy of cars from its front gate. Yet the effect of America’s withdrawal from Tripoli, Libya’s capital, on July 26th was almost as grim. It was a signal that for the moment international diplomacy to stem Libya’s strife had ground to a halt.

The embassy had endured two weeks of rockets landing close to its fortified building near Tripoli’s international airport. Efforts to persuade the militias to stop fighting had got nowhere. A brief ceasefire held while the diplomats drove the 170km (106 miles) or so westwards to the border with Tunisia.

The fighting, which had worsened after a battle to control the airport erupt-

Why Tripoli is short of petrol Shia fighters, are still making slow, steady gains against the non-jihadist rebels. The regime has been focusing on Aleppo, the northern hub that has been racked by war since July 2012, squeezing the rebels’ main supply route in the north-east of the city.

The fighting gets ever grimmer. One seven-day spell in July was the bloodiest so far in the three-and-a-half-year conflict: 1,700 people, including 270 regime soldiers, are reported to have been killed. Mr Assad, who shows no sign of falling, continues to target civilians. Human Rights Watch, a New York-based group, says the regime’s use of crude barrel bombs has increased of late, with 650 dropped since February in Aleppo alone, killing at least 1,500 people.

The UN, which this month made its first

ed on July 13th, soon resumed. Chaos spread. Two giant fuel tanks were set on fire by rockets, aggravating Tripoli’s petrol shortage.

The polarisation of forces has sharpened in the run-up to the convening of a newly elected parliament on August 4th.

The country’s many militias fall roughly into two camps: Islamists, who are strong in Tripoli and the centre of the country, and an array of opponents, who tend to dominate the east and west.

In Tripoli Islamists including those from the Libya Shield alliance, led among others by Salah Badi, a commander from Misrata, a three-hour drive east of the capital, are trying to evict nationalist militias from Zintan, a mountain town two hours south-west of Tripoli. The Zintan lot has hitherto controlled the airport and much of the capital’s southwestern suburbs. In the eastern city of Benghazi, a former general, Khalifa Haftar, has been trying to eradicate Islamist militias since he launched an offensive on May 16th, backed by some regular army and air-force units.

No one has prevailed. All sides have been scrambling to bolster their positions before the new parliament sits. The previous one was dominated by Islamists and their allies. But they are reckoned to have lost ground in the recent election, held on June 25th.

Western diplomats had urged all sides to accept a dialogue plan proposed by the UN. But the UN mission was evacuated a few weeks ago, followed more recently by the European Union’s. A handful of doughty ambassadors, including those of Britain and Italy, are staying on to keep their flags flying—so far to no avail. cross-border delivery of aid into rebel-held Syria (a measure hitherto blocked by Syria and Russia), says the regime has stepped up the bombing of medical facilities. The refugee tally is about to exceed 3m. In another example of its hallmark brutality, meanwhile, IS released footage of its beheading of soldiers after it took Division 17.

Amid such stresses, more cracks are appearing between the remaining rebel forces that banded together at the start of the year to force ISIS, as it then was, from territory in north-western Syria. A tape leaked on July 11th suggested that Jabhat alNusra, another extremist group recognised by al-Qaeda as the holder of its franchise in Syria, appears to be debating whether to set up its own small emirate to rival the one 1

38 Middle East and Africa 200 km

TURKEY HASAKA

Aleppo

Mosul

Raqqa

IDLEB HAMA

LEB.

The Economist August 2nd 2014

Erbil Kirkuk

Deir ez-Zor

S YRIA

Tikrit

Beirut Damascus GOLAN HEIGHTS

Ramadi

IRAQ

Amman

JORDAN

SAUDI ARABIA

Area of Islamic State (IS) control

Samarra Baghdad Tigr is Euph rates

IS activity

Kurdish control

Sources: Institute for the Study of War; The Economist

2 declared by IS. It has been clashing with

other rebel groups in parts of Idleb. The group denied such an intention, but relations with others, in particular the Islamic Front, the most powerful coalition of rebel forces, have become increasingly tense.

Syria’s war is likely to continue along this trajectory. A $500m package of lethal aid to the rebels proposed by Barack Obama is unlikely to be endorsed by Congress. In a year or two, the rebels may be seen as bit-players in a Syria divided between IS and Mr Assad’s lot. After repeated Western calls for Mr Assad to go, and after more than a trillion dollars have been spent by the West in Iraq, Western governments, especially America’s, must face two big questions, says Mr Bonsey: “Are you OK with IS holding all of rebel-held northern Syria, perhaps with odd patches controlled by Jabhat al-Nusra? And what do you say to Sunnis who want someone to back against the [Shia] regime in Baghdad, and their only option is IS?” 7

Islam in Egypt

Manipulating the minarets CAIRO

The government wants to control the mosques

T

WO months ago worshippers at AlRahman, a small mosque in the Ain Shams district in eastern Cairo, turned up for prayers on Friday, the Muslim day of rest, to find the doors shut. From now on, they were told, they would have to go to one of the city’s main mosques for the most important prayers of the week. Soon after, another restriction was added when a group that met for discussions about Islam was told to stop. Today the mosque is open for weekday prayer only.

Across the country, many small houses of worship, who appoint their own imams and are often owned and controlled by

wealthy families or groups such as Salafists (conservative Muslims who seek to emulate the lives of the Prophet Muhammad’s early followers), have been told to cease activity by the government of President Abdel Fattah al-Sisi. The move is part of a broader effort to bring civil society to heel, using harsh new laws as well as old regulations that had hitherto gone unenforced. But Mr Sisi’s attempt to control the country’s religious realm goes much further than that of any previous president.

First to be hit were imams and preachers. Those not licensed by the government are banned from preaching. The main qualification for getting a licence is having studied at Al-Azhar mosque, a respected institution for the study of Islamic law.

Anyone who defies the order risks a year’s imprisonment and fines of up to 50,000 Egyptian pounds ($7,000). In April the government said it had dismissed 12,000 imams and licensed 17,000 more to make up the shortfall. Across the country, all must give the same sermon on Fridays.

Officials have said that the aim is to clamp down on extremism, a valid concern in a region where it is flourishing. But the crackdown has a strong whiff of political expediency. The laws on mosques are plainly being used to squash dissent, which is strongest among Islamist groupings such as the Muslim Brotherhood, whose government was ousted in July 2013 by the army, then headed by Mr Sisi.

Tirades against Shia Muslims, for example, still go unchecked by the government, says Amr Ezzat, a researcher at the Egyptian Initiative for Personal Rights, an independent advocacy group in Cairo. “The government wants to control the mosques because they are gathering places,” reckons Muhammad Ali, a 26-year-old doctor who attends Al-Rahman. “It does not want to leave any space for opposition.” Worshippers also point to the security forces’ increasing role in monitoring the mosques, when that is supposed to be the job of the ministry of religious endowments and of the authorities at Al-Azhar.

Religious leaders of all faiths have often pledged allegiance to secular rulers in return for being allowed to retain control of their own sphere; for their part, rulers have tried to use the support of the religious authorities to bolster their legitimacy. Al-Azhar itself was a Shia institution when it was founded under the tenth-century Shia Fatimid dynasty, before being closed and reopened under Sunni rulers as a place for their own sect. Past presidents in Egypt have also tried to control Islam for their own ends, seeing unity among the country’s devout and overwhelmingly Sunni population as a key to stability. But small mosques were usually left alone so as not to provoke anger.

The latest clampdown does not only affect the Muslim Brotherhood, which has

already been diminished by the imprisonment of senior members and by a government ruling in December that deems it a terrorist organisation. Salafists, many of whom backed the coup against the Brotherhood and have hitherto been left alone, have been hit harder still. Popular preachers such as Yasser Borhami, deputy head of the Alexandria-based al-Dawa al-Salafiya mosque, the fount of the Salafist movement, have been banned from preaching because they did not study at Al-Azhar.

The restrictions have hamstrung Salafist activities, such as “inviting” others to join Islam and secluding themselves full-time in the mosques during the last ten days of Ramadan, which ended on July 27th.

The Muslim Brotherhood has called the government’s expanding control a “war on Islam”. But in the current climate of repression, and at a time when the Muslim Brotherhood is loathed by the army, the civil service and many ordinary Egyptians, there has been little protest. Secular opponents who have been outspoken against restrictions on activists in the past have been silent. Some Salafists, who tend not to speak out against the government, have grumbled, but most abide by the curbs.

Human-rights groups see good reason for all to be worried by the new restrictions. “This in effect kills the idea of religious freedom, since Egyptians can’t opt for any religious practice not approved of by the authorities,” says Mr Ezzat. It may be counter-productive, too. In the past, clamping down on the mosques has bred anger and forced hardliners underground. That is not what Egypt needs. 7

Let’s hope they’re saying the right prayer

The Economist August 2nd 2014 39

Europe

Also in this section 40 The war in eastern Ukraine 41 Spain’s economy 41 Turkey’s foreign policy 42 Germany’s satirical party Charlemagne is on holiday

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

The war in Ukraine (1)

This is going to hurt LONDON AND MOSCOW

The cost of Vladimir Putin’s gamble in Ukraine is going up, but he shows no sign of changing course

I

T MAY not be, as leaders in Washington and Brussels insist, the start of a new cold war. But the punitive sanctions against Russia announced by the European Union and America on July 29th bring to an end a 25-year-long quest to make Moscow a partner of the West. How long the rupture will last and whether it intensifies will depend upon the response of Russia’s president, Vladimir Putin—and above all on whether he steps back from escalating the bloody insurrection in eastern Ukraine that he has encouraged. He shows not the slightest sign of doing so. If anything, his belligerence towards the West and his preference for surly isolation are growing.

After months of disjointed action, America and Europe finally put together a tough and co-ordinated package of sanctions targeting state-owned banks and forbidding the export of technologies needed

by Russia’s oil and defence industries. On their own, the sanctions will not bring Russia to its knees. But they could do real damage to its already ailing economy.

The downing of a Malaysia Airlines jet last month, apparently by Russian-backed separatists in eastern Ukraine, hardened attitudes towards Mr Putin. His refusal to accept any responsibility, and his stepping up of military support for the rebels after the tragedy, convinced European leaders, some of whom had opposed sanctions that might harm their own economies, that

they had no choice but to punish his regime. “It didn’t have to be this way,” Barack Obama said in announcing the new American sanctions. “This is a choice that Russia and President Putin in particular made.”

The sanctions against state-controlled banks present the biggest and most immediate threat to Russia’s economy. According to Bloomberg, a news agency, VTB, Sberbank, Gazprombank and Vnesheconombank have around $15 billion in bonds denominated in dollars, euros and Swiss francs maturing in the next three years. The new sanctions make it harder for lenders such as these to raise equity and debt on Western capital markets. Without access to long-term external financing, their debts will be harder to pay.

The flow of international capital into Russia has already fallen. Dollar loans from foreign banks dropped to $7.9 billion in the first half of 2014, from $25 billion a year earlier; local firms have become more reliant on state-controlled Russian banks as a result. Although state banks can draw on domestic savings, and perhaps other sources of financing in places like China, less money will be available to finance investment. And if China does offer money, it would only be in exchange for preferential access to Russia’s natural resources.

The sanctions do not target Russia’s energy exports. But an embargo on Western technology will limit Russia’s ability to tap

new and hard-to-get-at fields in the Arctic and elsewhere, setting in motion a possible decline in hydrocarbon revenue in years to come.

Yet Russia’s economic ties to the West have not been severed. The Americans have kept Sberbank, Russia’s largest bank and the financial heart of its economy, off its sanctions list for the moment; as The Economist went to press, it was unclear whether the European Union had done the same. The restrictions on technology exports to the oil sector left the gas industry conspicuously untouched, an obvious concession to Europe’s dependence on Russian gas. Moreover, the EU has barred future, not existing, defence deals. France’s €1.2 billion ($1.6 billion) sale of Mistralclass warships can proceed as planned.

By coincidence, the day before the new sanctions were announced, a Dutch court ordered Russia to pay $50 billion to compensate former shareholders of Yukos, a now-defunct oil producer, for the expropriation of the company by the Kremlin more than ten years ago (see page 50). Russian commentators see the award and the sanctions as part of the same Western plot.

War at any price Mr Putin counted on the West’s dithering and short attention span to let him do as he pleased in Ukraine without much danger or cost. Diplomatic relations might suffer, but real pain would be absent—whatever the damage to Russia’s economy or to Mr Putin’s image abroad, the prize ofregaining Crimea and keeping Ukraine beholden to Moscow would be worth it.

It is now clear that the costs will be higher than he reckoned. But perhaps not high enough to make him relent. Dmitri Trenin of the Carnegie Moscow Centre, a thinktank, argues that Mr Putin is now fighting 1

40 Europe 2 for political survival. The president thinks

he faces a choice between galvanising support at home by remaining defiant or yielding to international pressure and possibly losing everything. In the days after the shooting down of Flight MH17, it became clear he was preparing his political supporters for a long, painful fight.

The mood in Moscow is now almost one ofembracing isolation. Deputies in the Duma, Russia’s parliament, are talking up the benefits to Russian industry of consumers having to switch to domestic products. Vladislav Inozemstev, an economist, points out that Mr Putin’s grip on power depends less on economic growth than on wages. As a result of energy exports and a bloated state sector, those may remain stable for a while, even as the economy contracts. When problems do arise, they can be blamed on the plotting of a hostile West. The Russian propaganda machine remains powerful. A poll by the Levada Cen-

The Economist August 2nd 2014 tre shows that 82% of Russians think Ukrainian forces were responsible for the crash of MH17.

Some in the business and political elite have doubts about the course Russia has set. But they depend too much on the Kremlin’s favour to say so publicly. Managers of state-run banks, for example, will be unhappy to lose sources of long-term financing in the West, but know they will need financial support from the government to make it through any bumps ahead.

Given Mr Putin’s view of what is at stake in his showdown with the West, further escalation would be unsurprising. Mr Putin believes that his own political future depends on the defence of Russia’s regional influence—that is the lesson he draws from the Soviet Union’s collapse. His nightmare would be to see the rebels defeated without Russia getting anything in return.

He would rather be a global pariah than Mikhail Gorbachev. 7

The war in Ukraine (2)

Closing in

How far will Vladimir Putin go to stave off a Ukrainian victory?

T

HE battle for eastern Ukraine may be entering a decisive phase. Since early July Ukraine’s re-energised armed forces have been on the offensive against 15,000 or so Russian-backed separatists. The Ukrainians are close to achieving two important objectives: surrounding Donetsk, the region’s biggest city, and establishing some control over border crossings through which Russia has been sending arms convoys. But the next stage of the intensifying conflict could be bloodier. Much will depend on how far Russia’s president, Vladimir Putin, is prepared to go to try to save the separatists from defeat.

Ukraine, under its newly elected president, Petro Poroshenko, used a poorly observed ten-day ceasefire in June to prepare a much more aggressive campaign, according to a senior Pentagon official. Its main elements were the use of air power to provide close support for ground troops and a new willingness both to take casualties and to put civilians at risk from shelling.

The Americans are contributing “nonlethal” help in the form of intelligence, military advice and $20m worth of kit, including Kevlar body armour.

The first breakthrough came on July 5th.

After an artillery bombardment and air strikes by Su-25s (Soviet-era ground-attack fighters), Ukrainian forces sent rebels fleeing from the strategically important towns of Sloviansk, which had been the insurrec-

tion’s military headquarters, and Kramatorsk. Confidence was high that the separatists, armed mainly with light weapons, as well as elderly tanks and artillery pieces, many of which they had left behind in their retreat, would soon be making their last stand. Most are now holed up in Donetsk and Luhansk; support from a warweary local population is ebbing.

But the fall of Sloviansk has provoked

Mr Putin to ramp up the supply of arms to his proxy forces in the Donbas region.

Since mid-July long convoys of tanks, Grad rockets and air-defence missiles have been rolling in from Novoshakhtinsk, a checkpoint 80km (50 miles) from a training and deployment site set up for the rebels near Rostov. One of these almost certainly contained the Buk missile battery that shot down Malaysia Airlines Flight MH17 on July 17th.

There is also mounting evidence that Russia is firing artillery shells and missiles from its territory. Russian fighters, helicopters and surveillance drones fly along the border and sometimes over it. On July 11th a Grad rocket attack killed 30 soldiers in the Sverdlovsk district. The Ukrainian government claims that Russia shelled its forces with Grad rockets over three days in late July. On July 27th the Pentagon released satellite images showing “ground scarring at multiple rocket-launch sites” on Russia’s side of the border.

Having taken ground both to the northeast of Donetsk around the town of Horlivka and in the south-east at SavurMohyla, a strategic height not far from the crash site of MH17 (see map), the government is now trying to cut off the flow of weapons to the separatists. The Ukrainian plan was to create a 5km buffer zone along the border. But Russian rocket fire has made that more dangerous, says Anton Mihnenko, a Kiev-based security analyst.

Even more perilous will be the task of winkling the separatists out of their defensive positions in Donetsk and Luhansk, cities with a combined population of 1.5m.

This will require some combination of street fighting and shelling, both certain to pile up the casualties.

Ukraine’s offensive already seems to have featured pretty indiscriminate use of artillery. By July 26th 1,129 people had been killed in eastern Ukraine, 799 of them civilians, the UN has reported. Mr Mihnenko says that in order to avoid killing civilians, government forces will rely more on special forces. But shells have already begun falling in the centre of Donetsk: the potential for things to go lethally wrong is great.

The biggest question is just how far Mr Putin will go to support the militants. He might settle for the insurrection evolving into a protracted insurgency that exhausts the government in Kiev enough to bring it to the negotiating table. As civilian casualties mount, the prospects for national reconciliation recede, which plays into Mr Putin’s hands.

He has already shown that he will go to considerable lengths to prevent Mr Poroshenko from declaring victory and excluding Russia from any future settlement.

Whether that means even more direct intervention—15,000 Russian troops are sitting menacingly on the border—perhaps not even Mr Putin yet knows. 7

The Economist August 2nd 2014

Europe 41

Spain’s economy

Iberian dawn MADRID

The labour market is recovering at last.

But it needs further reform

T

HIS was the news the government had been waiting for. “Spain’s labour market has made a 180-degree turn,” crowed the prime minister, Mariano Rajoy, as the country announced the first annual rise in employment in six years. The numbers show that unpopular reforms to the malfunctioning labour market are starting to work. But there is plenty left to do.

In the past year Spain has created 190,000 jobs. The unemployment rate, still one of the highest in the euro zone, fell from 26% to 24.5% (see chart), and the labour force stopped shrinking after six straight quarters of decline.

The labour reform in 2012 gave companies more flexibility to set wages and working conditions themselves rather than through sector-wide bargaining, and cut severance payments for unfair dismissals.

Those changes, buttressed by a deal between unions and employers, tempered wage growth that had far outstripped gains in productivity. How much credit do they deserve for the upturn in employment?

The answer may determine the political fate of Mr Rajoy, who defied street protests to push reform through and faces a general election by the end of next year.

The opposition Socialist Party claims that the number of unemployed has risen by more than 600,000 since Mr Rajoy took office in 2011, despite the reforms. Pedro Sanchez, the party’s new secretary-general, promises to repeal them if it regains power.

That would be a mistake. Other factors contributed to the jobs recovery, especially the “whatever it takes” pledge by the European Central Bank two years ago to save the euro. But reform played an important role, says Rafael Domenech, an economist at BBVA, a bank. One piece of evidence is

Well, it’s progreso Spanish: employed, m

unemployment rate, % 30

24 20

25

16

20

12

15

8

10

4

5 0

0 2006 07 08 09 10 11 12 13 14 Source: Spanish National Statistics Institute

Temporary toreador that Spain is creating jobs at lower rates of GDP growth than before. In previous cycles, employment rose when growth hit 2%. This time the gain came during a year when GDP expanded by just 1.2%.

To make a serious dent in unemployment, however, Spain will need to be more ambitious. Without further changes, the jobless rate will not dip below 20% until 2019, according to the IMF. The structural unemployment rate—the level reached when the economy is working at capacity—is 18%, triple that of America.

One problem is that many small companies (with ten workers or fewer) have not benefited from greater flexibility. That is because the process of opting out of sector-wide agreements can be cumbersome.

Such opt-outs could be made easier.

Another is that nearly a quarter of workers are still on temporary contracts.

This is damaging, because they are much less productive than those with permanent jobs and employers do not invest in them. One way to encourage firms to hire permanent workers would be to cut severance payments to the levels of other European countries.

Nor has much been done for the 3.5m people who have been jobless for more than a year, says Marcel Jansen of Madrid’s Autónoma University. Many are poorly educated: Spain has one of the highest school drop-out rates in the OECD. Those with qualifications often find that they are not the ones employers want.

The answers, says Mr Jansen, include spending more on retraining and overhauling state-run employment offices, which do a poor job of matching workers’ skills with local employers’ needs. The government has tightened rules for people receiving unemployment benefit to encourage them to look for work or to take training courses. But they need to be effectively enforced.

The government could lower the cost of hiring workers by cutting social-security contributions, which are high by European standards. A rise in value-added tax could pay for that. Others advocate lowering the minimum wage for unskilled workers.

Mr Rajoy says he will not let up on reform until Spain’s unemployment plague becomes merely a “sad” episode in history.

He has started talks with unions and employers on a package of job-friendly measures, to be hammered out after the summer break. But with elections looming, few expect it to be bold. 7

Turkey’s foreign policy

Nasty neighbourhood ISTANBUL AND WASHINGTON

The region’s most brutal Islamists inflict pain on its moderate ones

O

N A sunny October day in 2009 Turkey’s foreign minister, Ahmet Davutoglu, beamed with pride as he inaugurated his country’s consulate in Mosul, an Iraqi city that was once part of the Ottoman empire. “We see you as a part of ourselves; I am your minister,” Mr Davutoglu declared.

His words provided an early clue to his neo-Ottoman dreams of Turkey leading a Sunni Muslim arc spanning the Balkans, Central Asia and the Middle East.

Five years on the Turkish consulate serves as the headquarters of the Islamic State (IS), an extremist group formerly known as the Islamic State of Iraq and Greater Syria (ISIS). This fearsomely brutal group raided the building on June 10th, taking all 49 of the consulate’s Turkish staff hostage, including the consul-general, along with two toddlers. Hopes that they 1

42 Europe 2 would be freed in time for Eid al-Fitr, the

start of a holiday marking the end of the Ramadan fast, proved empty. The jihadists are said to be using the Turks as human shields against possible Western military intervention in Iraq. Mosul’s exiled governor, Atheel Al-Nujaifi, whose calls for the Turks to evacuate the consulate fell on deaf ears, says IS is unlikely to let go of them any time soon.

The Mosul debacle illustrates Turkey’s declining fortunes in the region. Until recently Turkey, a NATO member that is in membership talks with the EU, was hailed as a shining example of a Muslim country where Islam and democracy can coexist.

But a mix of hubris, pro-Sunni sectarianism and bad judgment on the part of the Islam-inspired Justice and Development (AK) party, has drained the country of its soft power.

The first signs of trouble came with its break with Israel over the killing in 2010 of eight Turks and one Turkish-American aboard the Mavi Marmara, a ship bound for Gaza. There followed a row with Egypt’s generals over the embrace by the Turkish prime minister, Recep Tayyip Erdogan, of the Muslim Brotherhood. But Syria dealt the biggest blow.

Mr Erdogan believed that Syria’s president, Bashar Assad, could be toppled in six months; even less, Mr Davutoglu claimed.

Turkey allowed the free flow of arms and rebels, jihadists included, to Syria. (Many of IS’s foreign fighters are believed to have crossed into Syria via Turkey.) IS controls two border crossings with Turkey and has its eyes on another manned by the Syrian Kurds. The Kurds insist that Turkey lets IS fighters use its territory as a back base in their battle against them.

Turkey denies these claims. But they are being examined in Washington, where Turkey’s alleged dealings with jihadists are causing worry. “There is a deep distrust of Erdogan,” says one American official. The prime minister’s most recent diatribes against Israel, comparing Israelis with Hitler, haven’t helped. But America’s leverage is fading. “Unless it came from Obama himself, any criticism will hardly be noticed by Erdogan,” says Henri Barkey of Lehigh University in Pennsylvania.

Pressure from the Americans has compelled Turkey to list IS and Jabath Al Nusra, another extremist outfit in Syria, as “terrorists”. But Turkish officials confess that they cannot fully control the border. Privately, some fret that Turkey may become IS’s next target. Takvahaber.net, a Turkish portal extolling the group’s “victories”, encourages Turks to support global jihad.

Jihad is what Mr Davutoglu once advocated for places like Chechnya and Afghanistan. He called Israel “a geopolitical tumour”. These and other pronouncements

by Mr Davutoglu were dug up by Behlul Ozkan, a political scientist at Istanbul’s

The Economist August 2nd 2014 German politics

For curvy cannons and extra sleep Berlin

The election of a satirical party to the European Parliament speaks volumes

“S

ATIRE cannot have any consequences,” argued Martin Sonneborn in his masters thesis in 1994. Almost by accident, he has proved himself wrong. Die Partei (“The Party”), the elaborate joke of a party he heads, won 0.62% of the German vote in the elections for the European Parliament in May. That was enough for Mr Sonneborn to win a seat (actually, two seats: the legislature meets in Brussels and Strasbourg).

The Party mimics the grandiosity of the Nazi and East German communist parties. Its much longer official name mentions animal rights and the “promotion of elites”. Mr Sonneborn is its GröVaZ (an acronym for “greatest chairman of all time”). The Party, he proclaims, is “always right”.

Its platform has evolved since its founding in 2004. Early on it advocated a war of aggression against Liechtenstein and the rebuilding of the Berlin Wall.

The chairman and the faux fanatics Marmara University who scanned more than 300 articles penned by his former professor in the 1990s. But Mr Davutoglu considers IS to be his ideological foes. “He is more in line with the Muslim Brotherhood,” says Mr Ozkan.

Despite his recent setbacks there is no sign that Mr Davutoglu will be ditched. He is “likely to continue to drive Turkish foreign policy so long as AK remains in pow-

Lately it has become less bellicose. It wants to get rid of daylight-saving time while continuing to set the clocks back every autumn, giving Germans an extra hour of sleep. As a member of the European Parliament Mr Sonneborn plans to revive the EU’s infamous cucumbercurvature law (scrapped, after much ridicule, in 2009). But now it will apply to weapons exports and will promote curviness rather than discouraging it: every 10cm of gun or tank barrel will have to curve by 2cm.

The Party’s big theme, though, is “the transcendence of Inhalte”, a word which translates as “issues” or “content”. Mr Sonneborn campaigns for contentlessness before standing-room-only crowds at cabaret-style book launches and at rallies of faux-fanatical supporters.

That message has a particular resonance now, with Germany’s two biggest parties—Angela Merkel’s Christian Democratic Union and the Social Democratic Party—governing together in a “grand coalition”. One calls itself centreright, the other centre-left. Normally they are fierce rivals. But in moments of honesty and inebriation even their members admit they can no longer tell the difference. Mr Sonneborn celebrates this ideological and stylistic sameness. “We do modern turbo politics, by going in no direction much faster” than the mainstream parties, he says.

Mr Sonneborn’s American equivalent is Stephen Colbert of “The Colbert Report”, a mock-news show on a comedy channel. Both assume a political persona and rarely step out of it. Unlike Mr Sonneborn’s turbo-centrist, Mr Colbert’s onscreen character is a lovably deranged right-winger who would do well with the real-life audience of Fox News if he traded his irony for earnestness. “Satire is not comedy,” says Mr Sonneborn. “It has aggressive momentum.” In America, that means mocking partisanship. In Germany, the target is the featureless blob that passes for party politics. er,” says Aaron Stein, an analyst at RUSI, a London-based think-tank. Moreover, there are strong rumours that Mr Erdogan, who is on course to become Turkey’s first popularly elected president in a first round of balloting on August10th, has picked Mr Davutoglu to succeed him as prime minister.

With luck, the Mosul disaster will banish his Ottoman fantasies. As yet, however, there is no sign of that happening. 7

The Economist August 2nd 2014 43

Britain

Also in this section 44 The reshaped economy Bagehot is on holiday

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

Prisons

Rough justice

Overcrowded and understaffed, prisons in England and Wales are deteriorating

“W

E ARE just waiting for a complete riot,” says an officer at a large prison in England. “For the first time I think we’re only in control due to the prisoners’ good will.” He has excellent reason to worry. Last year the prison service’s riot squad was called out 203 times—up from 129 in 2012. On July 26th inmates’ good will ran out in Ranby prison in Nottinghamshire as prisoners took over part of the jail. It took officers eight hours to regain control.

Conditions in men’s prisons in England and Wales are worsening, says Nick Hardwick, head of the official inspectorate.

Cells are often dirty. Prisoners tell him they feel frightened. In some prisons, including Ranby, they have taken to clambering onto 1

Fight club Assaults in prisons in England and Wales 2002=100 Assaults in 2013

200 Serious assaults on staff

356

180

8,123 160 2,278 140

Involving weapons

120 100

Total prisoner assailants

80 2002

04

06

08

Source: Ministry of Justice

10

12 13

the netting that prevents people from jumping to their deaths from upper floors.

They are punished by being separated from other prisoners and sent elsewhere— which is exactly what they want.

In the year to May 91 prisoners killed themselves, up from 60 in the 12 months to December 2012. Among men (who make up 95% of the prison population) though not among women, self-harm has become more common. Serious assaults have risen, along with attacks involving weapons (see chart 1). Officers say they see more inmates carrying weapons to protect themselves. Some are asking to be classified as “vulnerable prisoners”—a category reserved for those at risk of violence, particularly sex offenders—so that they will be moved from the main prison to a separate unit. “We’ve gone back 20 years in 12 months,” says another officer.

Michael Spurr, head of the National Offender Management System, which runs prisons in England and Wales, says inmates are a tougher bunch these days.

They are more violent than in the past and more likely to have been involved with gangs. The growing prevalence of “legal highs” in prisons makes them more unstable. But there are two more obvious explanations for the deterioration: prisons are more crowded, and officers are fewer.

Though crime has plummeted in England and Wales, stiffer sentencing has kept

prisons packed (see chart 2). Between 2003 and 2013 the average prison sentence rose from 12.6 months to 15.5 months. Since 2010 the proportion of all offenders sentenced to immediate custody has risen from 7% to 8% and community sentences, which are served outside prison, have declined (most people are fined).

The prison population in England and Wales is not the highest it has ever been.

That peak, of 88,000, was reached in December 2011. The riots in English cities that year led to almost 1,500 people being sentenced to jail. But the population still stands at 85,700—higher than when the coalition came to power promising to cut it— and is rising again. Meanwhile the government is shutting prisons: 18 have been closed or repurposed since 2010. Although new jails have opened, the total number of places has decreased. The result is a crush.

Overall, prisons in England and Wales hold 13% more people than they could decently accommodate, according to the government’s own measure. Swansea prison has almost twice as many inmates as it was designed to house. Exeter, Leicester, Lin- 1 2

Do you feel lucky?

England & Wales, ’000 Prison population†

Crimes* 20

100

15

75

10

50

5

25 0

0 1995

2000

05

Sources: Crime Survey of England & Wales; Ministry of Justice

10

14

*End-December †End-June

44 Britain 2 coln and Wandsworth are similarly burst-

ing. Prisons are now heading towards another threshold: their “operational capacity”, above which they would become unsafe. The addition of just ten prisoners would push 57 jails past that point.

At the same time, staffing has been trimmed. Forced to reduce its budget by a quarter, the prison service cut officer numbers by 30% between September 2010 and 2013, estimates the Howard League, a prison-reform charity. Since 2000 the ratio of officers to prisoners has fallen from one in three to one in five, though more jobs are being done by civilian staff. In London and the south-east, where the economy is booming, prisons struggle to fill vacancies.

Some officers who were laid off have been invited to return. Those in charge are shuffling staff around the country to share the pain, says Eoin McLennan-Murray, president of the Prison Governors’ Association.

Staff shortages make it harder to take inmates from their cells to workshops and classrooms. At Nottingham prison, workshops are sometimes less than half full because wings are locked down or staff are unavailable. In 2009 more than threequarters of prisons were doing well at providing “purposeful activity”. In 2013 only half were doing so. Rising violence exacerbates the staffing problem: breaking up serious fights requires three officers for each prisoner involved, pulling them away from dealing with peaceable convicts.

Out of touch To make room for the constant flow of new arrivals in an overcrowded estate, prisoners are regularly relocated, disrupting courses supposed to improve their chances of going straight upon release.

Contacts with the outside world are strained, too. Telephone numbers of family and friends must be approved. At one large prison, staff shortages mean that can take a fortnight. As officers have to deal with mounting paperwork, visiting orders also take longer to process.

Officers in the same prison say that, under pressure to get more inmates working, 300 full-time jobs have been split into 600 part-time ones. That creates new problems. Prisoners’ new wages do not buy enough tobacco to last a week, so they borrow from others under the “double bubble” system whereby they have to pay it back twofold. Failure to do so is leading to increased bullying and violence.

Mr Spurr says the prison system is under growing pressure, but that it is coping.

Some 2,000 prison places will be added over the next year, he points out. But those on the front line worry about getting through the next few months. With school holidays under way, many staff are taking time off. More hot, sticky weather is forecast. “It will be an interesting time,” says one officer, darkly. 7

The Economist August 2nd 2014 The economic recovery

3

This time is different

Resized and reshaped

England & Wales Insolvencies*

Liquidations

% of adult population

When it was last this size, Britain’s economy looked very different

O

N JULY 25th, more than six years after the great recession began, official data confirmed that Britain’s economy is finally bigger than its previous peak. The recovery has been slow, with Britain bringing up the rear of the G7 (of that group only Italy’s economy is smaller than it was in 2008).

And the economy emerges in a quite different shape. During six years in the doldrums, some industries have dwindled while others have burgeoned. Economic heft has shifted from workers to firms.

Between 2008 and 2009 sterling depreciated by 25%, leading economists to predict an export boom. George Osborne, Britain’s chancellor, foresaw a “march of the makers” as manufacturing firms kicked into action. All such predictions were off: exports are flat, while manufacturing and construction output are far below their 2008 levels (see chart 1). The idea that Britain would “rebalance” away from its large services sector, which accounts for 80% of GDP, proved spectacularly wrong. The only marching in Britain has been the sound of workers shuffling to the office.

Employment has shot up, with 912,000 more Britons in work than in 2008. Initial fears that a flood of labour, driven in part by immigration, would lead to mass underemployment were unfounded. The average working week was just under 33 hours in 2008, and has since crept higher.

But with many more Britons putting in more hours to produce the same as six years ago, labour productivity has tumbled (see chart 2). That explains why takehome pay has risen just 8% since 2008, compared with overall price inflation of 20%. Workers’ pay packets continue to lighten in real terms.

Yet low pay is not a pain for everyone.

% of active companies

0.4

4

0.3

3

0.2

2

0.1

1 0

0 1987 90

95

2000

05

14†

10

*Bankruptcies, debt-relief orders and individual voluntary arrangements †Year to June Source: The Insolvency Service

Companies are flush: the ratio of firms’ bank deposits to their debts rose to 77% in July, up from 45% in late 2008, according to Michael Saunders of Citigroup, a bank.

The corporate liquidation rate was 0.56% in the second quarter of 2014, the lowest level for 30 years. The early-1990s recession sent many firms to the wall. The great recession damaged household finances much more than companies (see chart 3).

That pattern will probably persist. Despite the healthy employment numbers, 2m Britons are still looking for work. With such a big pool it is hard for experienced workers to agitate for better pay. Union activity is muted: the number of working days lost to strikes dropped by 60% between 2007 and 2013. And the jobs that need filling are likely to be relatively poorly paid. In manufacturing, wages average £563 a week but there are just 45,000 vacancies. The services sector has 13 times more posts but pay is lower.

The reshaped economy means the fate of the recovery is in the hands of those running Britain’s newly enriched firms. There are reasons to be hopeful on that score.

Business investment is still far below its peak, but has been growing for over a year.

Between April and May business lending grew by 1.4%—the largest monthly expansion for more than five years. With cash in hand and available from the bank, bosses may have confidence to invest. Eventually that should justify higher pay too. 7

Hanging around the office, not getting much done Output by type, Q1 2008=100

1 110

Q1 2008=100

Services

2 105 Hours worked

Productivity

100

(GDP per hour worked)

Manufacturing

100

90 Construction

80

95

70

GDP

Mining and quarrying

90

60 2008

09

Source: ONS

10

11

12

13

14

2008

09

10

11

12

13

14

The Economist August 2nd 2014 45

International

Also in this section 46 How the first world war reshaped Europe

Commemorating the first world war

In foreign fields JOHANNESBURG, OTTAWA AND SYDNEY

How Britain’s former dominions remember the war that propelled them to independence

W

HEN Britain declared war on Germany on August 4th 1914, it was committing not only its own men, but those of its empire. The five “dominions”—Australia, Canada, Newfoundland (which joined with Canada in 1949), New Zealand and South Africa—were self-governing but had no power over foreign policy. Most entered the war willingly, proud to go to the aid of the empire, often pictured as a lion with its cubs, as in the image above. But as the war dragged on and their young men died in droves (see chart), they pressed for more say in its conduct and, after it ended, more control over their destinies. The men who came home often found that fighting for Britain had, paradoxically, made them feel more distant from it. A century later, many historians see the first world war as the former dominions’ “war of independence”.

“My three years in the British navy have…shown me how completely indifferent was the centre of the imperial faith, England, to my native land,” wrote Arthur Lower, a Canadian who became a historian on his return. “I came back from the war much more of a Canadian than I went into it.” Such sentiments across the dominions led eventually to the 1931 Statute of Westminster, which recast the British empire as a Commonwealth of Nations. “The mother lion and her cubs was a thing of the past,” writes Jonathan Vance, a Canadian historian, in his recent book, “Maple Leaf Empire”. “The new Commonwealth was an association of siblings.”

The first world war gave the dominions not only a push to independence, but also

founding myths. “It’s very hard to pinpoint the birth date of Australia, New Zealand or Canada,” says Ian McKay, a historian at Queen’s University in Ontario. “So there’s a tendency to try to find that magic moment, the big battle where it all happens.”

For Canada, that was the Battle of Vimy Ridge in 1917, when Canadian soldiers captured a German position in northern France at a cost of 10,600 lives. Perhaps because it was the first time the four Canadian divisions had fought together, or because the position had previously been held against the British and French, it has since been seen as the moment when Canada leapt in spirit from colony to nation.

“Historical narratives of violent pasts have always been useful instruments for politicians to legitimise existing orders or to try and forge national identities,” writes Maarten Van Alstein of the Flemish Peace Institute. The current Conservative government sees in Vimy Ridge a symbol of Canada as a “warrior nation” that it finds more congenial than the opposition Liberals’ emphasis on peacekeeping. On its 90th anniversary Stephen Harper, the prime minister, described the battle as a “spectacular victory, a stunning breakthrough that helped turn the war in the Allies’ favour”.

Many historians disagree. The entry for Vimy Ridge in “The Canadian Encyclopaedia” describes the battle as “strategically insignificant”. Canada’s decisive contribution came the following year, says Jack Granatstein, a historian whose new book, “The Greatest Victory”, tells how the country’s corps defeated a quarter of Ger-

many’s divisions on the western front during the war’s final hundred days. And though the war helped forge a Canadian identity it also revealed internal rifts, points out Tim Cook of the Canadian War Museum. French Canadians fiercely resisted conscription, introduced in 1917.

At least France and Britain were on the same side. For South Africa fighting for Britain was far more problematic. The Union of South Africa, only four years old in 1914, had just emerged from the bitter AngloBoer War which saw the Afrikaner minority defeated by the British. The Britisheducated General Jan Smuts had to quell a rebellion by Afrikaners who felt closer to 1

For Britain’s sake First world war Male population, m

Number of recruits, m

1911 estimates

1914-18

% who served

% killed

2.3

Australia

0.4

18.0%

3.8

14.0%

Canada

0.6 16.8%

New Zealand

0.6 3.1

8.9%

0.1

23.0% South Africa 7.4%

Sources: War Office; “International Historical Statistics” by B.R Mitchell

12.6%

0.2 3.2%

46 International

The Economist August 2nd 2014

2 Germany than Britain before he could be-

gin the task of annexing the German colony of South West Africa, now Namibia.

South Africa’s equivalent of Vimy Ridge was Delville Wood, where one of the bloodiest engagements of the 1916 Battle of the Somme took place. This patch of trees, held by a brigade ofwhite South Africans at the cost of four-fifths of its men being injured or killed, was commemorated for some decades afterwards. But during white-minority rule remembrance faded, apart from a brief interlude in the 1980s as the apartheid-era government sought to remind foreign critics of South Africa’s role in fighting for the “free world”.

Today, the site of Delville Wood is a memorial to fallen South Africans. But the battle’s status as a national symbol of bravery and sacrifice is now shared with the SS Mendi, a steamship that sank in 1917 after being accidentally rammed in the British Channel en route to France, with the loss

of 607 members of the South African Labour Corps, nine officers and all 33 crew.

Official accounts describe the men singing and performing a traditional death dance on deck as the ship slipped below the waves. (Historians are sceptical.)

Non-white South Africans could not carry weapons and served only as labourers. Under apartheid their role was ignored. But the long-overlooked tragedy is now used by the ruling African National Congress as a symbol of how far South Africa has come from its racist past. Last year its anniversary, February 21st, was named Armed Forces Day. A presidential medal, the Mendi Order for Bravery, instituted in 2003, adds to the myth-making.

The attack at dawn When the war broke out Australia’s states had been joined in federation for just 13 years and New Zealand had been a selfgoverning dominion for just seven. More

How the first world war reshaped Europe On July 28th 1914 Austria-Hungary declared war on Serbia, starting a slaughter that would leave millions dead. War redrew borders and reshaped economies, too. Europe’s debtfinanced splurge on munitions prompted a manufacturing boom in America, boosting exports and transforming it from global debtor to global creditor. Germany’s industry was hammered. Its economy only returned to the size it had been in 1913 over a decade later.

The Treaty of Versailles in 1919 was one of several to carve new countries from what remained of the pre-war empires. The Baltic states, given to Germany the previous year under the Treaty of Brest-Litovsk, which had taken Russia out of the war, became independent. Czechoslovakia and Yugoslavia were created; Romania was enlarged; and Poland was rebuilt from former Russian, German and Austro-Hungarian territories.

Exports, $bn France Italy

United Britain Germany States* 8

Inflation

Industrial production

% increase in consumer prices 1914-19

% change 1914-19 300

20

250

0

+

6

–

200

20

150

4

40

100 2 †

0

50

60

0

80

Germany France Britain‡ Italy United United Britain France Italy Germany States§ States Sources: “Monitoring the World Economy 1820-1992” by Angus Maddison; *Includes re-exports †1920 ‡1913 §Manufacturing “International Historical Statistics” by B.R. Mitchell; NBER; St Louis Federal Bank; The Economist

1914

1919

(to RUSSIAN EMPIRE)

NORWAY

1914

SWEDEN UNITED KINGDOM

DENMARK R U S S I A N E M P I R E

NETHERLANDS G E R M A N EMPIRE BELGIUM LUX.

SWITZ.

ITALY

MONT.

BIA

SPAIN

SER

AUSTROHUNGARIAN EMPIRE ROMANIA

FRANCE

BULGARIA

ALBANIA GREECE ALGERIA (to France)

TUNISIA

(to France)

400 km

FINLAND ESTONIA

NORWAY SWEDEN UNITED KINGDOM

DENMARK

LATVIA

1919

LITHUANIA

EAST RUSSIA PRUSSIA NETHER(Soviet Union (to GERMANY) LANDS from 1922) GERMANY POLAND BELGIUM LUX. CZEC HOSL OVAKIA FRANCE SWITZ. AUSTRIA HUNGARY ROMANIA

SPAIN

ITALY

YUGOSLAVIA

BULGARIA

ALBANIA GREECE

OTTOMAN EMPIRE ALGERIA (to France)

TUNISIA

(to France)

400 km

TU RKE Y

than 400,000 young Australians, and nearly 130,000 New Zealanders, served during the war—out of loyalty to Britain, a spirit of adventure, and a desire to prove their young nations’ worth. The Australian and New Zealand Army Corps (Anzac) sailed to the Gallipoli Peninsula in 1915. The disastrous eight-month campaign against Turkish forces ended with 8,700 Australians and 2,700 New Zealanders dead, 2,000 of them killed on the first day.

The death toll on the western front the following year was higher. Yet in both countries it is Gallipoli that is remembered as the defining moment. The image back home of the soldiers at Gallipoli was “tough and inventive…chivalrous, gallant and sardonic”, wrote Bill Mandle, an Australian historian who died in May. Their war commemorations will reach a peak on the centenary of the first landings on April 25th next year. Since 1916 the date has been known as Anzac Day. The alternatives for birth-of-a-nation moments for Australia, Canada and New Zealand are the long, messy negotiations on their status, first within empire and then in the Commonwealth, points out Mr McKay—or perhaps the story of the dispossession of their native peoples. One reason Gallipoli has kept its mythical status in Australia, he thinks, is that in recent years Australia Day on January 26th, which marks the start of white settlement, has seen protests over aboriginal land rights.

Australian politicians mostly endorse the place Gallipoli has come to occupy in the national consciousness. Peter Stanley of the University of New South Wales describes the commemorations as an exercise in “bipartisan nationalism”. But the consensus is not absolute. Paul Keating, prime minister for the Labor Party for five years to 1996, has described the notion that Australia was “born again or even redeemed” at Gallipoli as “utter nonsense”.

For him, the Kokoda Track in Papua New Guinea, where Australia fought the Japanese in the second world war, is where “the depth and soul of the Australian nation was confirmed”, and the country moved out of Britain’s shadow and formed the alliance with America that has underpinned its foreign policy ever since.

In his book “Anzac’s Long Shadow: the Cost of our National Obsession”, James Brown, who served for Australia in Iraq and Afghanistan, argues that the celebration ofAnzac Day has “morphed into a sort of military Halloween”. Australia’s “longest eulogy”, he says, has tended to exclude veterans of more recent wars. To his surprise, his lament has resonated with many servicemen. Similar complaints are echoed in Canada about the focus on Vimy Ridge. The first world war launched Britain’s former dominions as independent nations. But they have written many pages of their histories in the century since. 7

The Economist August 2nd 2014 47

Business

Also in this section 50 Rosneft’s grand plan foiled?

51 The boom in commercial arbitration 51 Warehouses are hot properties 52 Whole Foods Market gets squeezed 53 Schumpeter: Decluttering the company

For daily analysis and debate on business and our weekly “Money talks” podcast, visit Economist.com/business-finance

Reliance Industries

Reimagining Ambani MUMBAI

Mukesh Ambani, India’s most powerful tycoon, could make his country a better place. But he would have to change his company’s ways

T

HERE are only two Indians for whom Mumbai’s great and good will turn up en masse and on time. One is whoever is the sitting prime minister. The other is Mukesh Ambani. This is not just because he is India’s richest man, worth $23.5 billion. It is because he runs India’s biggest private firm (measured by profits), Reliance Industries—and, some say, the country, too.

One balmy night last year Mr Ambani addressed a punctual audience of bigwigs at the Taj Mahal Palace Hotel as part of a discussion on “Reimagining India”. He spoke about the impatience of the nation’s 700m living in poverty with the authority of a man raised in the city’s tenements and the sanctimony of someone who now lives in a personal skyscraper that towers above them, a 27-storey perquisite of being the world’s 26th-richest man.

At the celebratory dinner that followed, Mr Ambani circulated wearing the forbearing smile of a monarch. Though he complains that his staff are too protective and that he would like to mix with people more, he does not seem entirely at ease; his eyes dart around as he tries to anticipate

which of the throng of well-wishers, sycophants and supplicants will accost him next. And a fair number of the eyes looking back were ill-disposed. A private-equity chief confessed that he felt disgusted with himself for applauding Mr Ambani. The boss of a bank spat out his contempt for that “damn company”. To such critics, Reliance represents one of India’s besetting problems: a huge concentration of wealth and power in the hands of dynasties that determine the country’s fate.

A conglomerate spanning energy, 1

Into everything Reliance Industries’ assets by division March 2014, $bn

0 Refining Telecoms, retail and others Cash and current investments Oil and gas Petrochemicals Source: Company reports

5

10

15

20

chemicals, retail, telecoms and media (see chart 1), Reliance accounts for15% of India’s exports, 4% of its stockmarket’s value and 3% of its tax revenues. India’s other giant conglomerate, Tata, is more admired, but Reliance has better finances. Although its ownership is fiddly, its industrial assets are largely consolidated in one listed entity, rather than spread over a cascade of companies, the favoured approach of Asia’s tycoons. After India’s boom turned to bust in 2010 many of its rivals ran up debts. Reliance generates piles of cash—$8 billion last year, before capital investments. It has modest net debt and a higher credit rating than the government. It invests more in India than any other private firm.

If you believe Mr Ambani, his firm’s strategy and India’s development are synonymous. Reliance would work with “zeal and intensity” to support India, he told his shareholders recently. Reliance does not wring its hands, or throw them up in disgust; it applies them to the sort of ambitious industrial projects that India needs so badly and other companies fail to deliver.

The firm’s refinery in Jamnagar, in the western state of Gujarat, is one of the world’s ten biggest, providing 2% of global crude-oil processing capacity. Its big gas-exploration project on India’s east coast involved draining swamps and drilling deep beneath the sea. Its telecoms arm wants to bring broadband to the masses and start an e-commerce revolution.

“People don’t acknowledge how much Reliance has contributed to the country,” 1

48 Business 2 says one ofthe company’s executives. Hav-

ing started, in 1957, as a textile company, it made successive moves up the supply chain, first to making polyester, then to petrochemicals, refining and, by the early 2000s, oil and gas exploration. Each step involved huge investments. In making them, company veterans argue, the firm opened up the stuffiest, cartelised corners of India’s economy. The subsequent price wars benefited consumers. Its founder, the late Dhirubhai Ambani, became a hero for millions, hosting vast jamborees for the small shareholders he made rich.

Although he died in 2002, Dhirubhai’s legacy is unavoidable at Reliance. His portrait stares down from the bulkheads of company jets. At the annual general meeting shareholders stand by his image and wave their fingers at Mukesh, reminding him of his father’s promise to pay bigger dividends. The inheritance can also be unwholesome. As chronicled in “The Polyester Prince”, by Hamish McDonald, a journalist, Dhirubhai was the consummate crony capitalist, influencing officials and politicians in ways that let him run rings around rules. He also fought brutal turf wars with the business establishment.

Sibling rivalry Within a couple of years of Dhirubhai’s funeral (pictured), discord broke out within the family, too. In 2005-06 Mukesh and his younger brother, Anil, broke up the company: Mukesh kept Reliance Industries while Anil got the 2G telecoms, infrastructure and finance arms, collectively now known as Reliance Group. Anil’s bit has performed badly since; it is indebted, scandal-prone and has a market capitalisation about a quarter that of Reliance Industries (see chart 2).

At the time, it seemed possible that Mukesh might take advantage of the split to transform his company’s way of doing business. Asked by the New York Times in 2008 about Reliance’s legendary network of fixers in Delhi, India’s political capital, Mr Ambani said that these activities had been overseen by his younger brother, adding, “we demerged all of that”—suggesting he wanted Reliance’s reputation for cronyism to be seen as a thing of the past.

In 2009 Mr Ambani tried to buy LyondellBasell, a global chemicals firm then in bankruptcy. The deal would have catapulted Reliance Industries onto the world stage, putting it into the same multinational bracket as Tata or Samsung, a South Korean conglomerate, and positioning it as a possible rival, in time, to big Western firms such as BASF and Shell. If it had come off, the deal would have forced Reliance to adapt its insular culture to global practice. It would also have made Mr Ambani a great deal of money. Lyondell relisted in 2010 and today it is worth $55 billion, slightly more than Reliance itself.

The Economist August 2nd 2014 2

Trailing Tata Market capitalisation of selected Indian business groups, $bn 150 Tata group 120

Reliance Industries (Mukesh Ambani)

90 60

Reliance Group (Anil Ambani)

30 0

1998 2000 02

04

06

08

10

12

14

Sources: Bloomberg; The Economist

The deal, though, came to naught. A former Lyondell executive says Reliance was out of its depth. Though it conducted exhaustive due diligence it had a “nickel-anddime” approach to negotiations that might have worked in India but appeared naive and arrogant abroad. Lyondell managers found Mr Ambani tough and charming, but felt his underlings were not up to snuff.

“Their style...would not ever get them serious consideration in the boardroom of Exxon or Chevron,” says the executive.

In the aftermath of this failure (and having paid over the odds for stakes in several American shale-gas companies) Reliance cut back its investments. It eschewed buying other distressed assets during the global financial crisis. When its offshore fields came onstream in 2010 they pumped out less gas than hoped for, and perhaps Mr Ambani took his eye off the ball. Reliance’s shares fell by a third between 2009 and 2012, making it “the biggest value destroyer in India”, in the words of a tycoon a bit further down the billionaire rankings.

Though his firm remained secretive, Mr Ambani became more visible. Having invested in the Indian Premier League, a

Father and sons

cricket competition, he spent time mingling with sports stars. The completion of his new home, Antilia, a skyscraper designed by American architects, was a sensation. With storey after storey of lounges, gardens and temples, it looms over Altamount Road, the Mumbai neighbourhood once home to the business elite and the civil servants whom Dhirubhai defied.

Reliance has since recovered its poise— and in some ways this is good news for India. It is midway through a three-year, $30 billion capital-investment programme. Part of this is directed at the core petrochemicals and refining divisions.

These industries are low-margin affairs, but by making its plants more complex and efficient at using feedstock and their own byproducts, Reliance hopes to make them more profitable than the global average. It continues to invest in oil and gas production and expects profits, currently paltry, to rise—assuming India’s new government puts up the regulated gas price.

At least a quarter of the capital budget, though, will be spent on two immature consumer businesses. One is Reliance’s retail arm, which is already India’s largest chain by sales, with 1,691 shops. The other is Reliance Jio, a 4G telecoms operation started afresh after the company’s old mobile business went to Anil Ambani in the split. It will probably be launched next year, offering both mobile handsets and set-top boxes. To bolster its content and web presence, on July 7th Reliance completed the $665m purchase of Network 18, a broadcaster and e-commerce firm, giving Mr Ambani access to India’s living rooms.

These investments will increase the group’s debt, and they carry risks: the telecoms industry is fiercely competitive, with more than ten operators. But if they succeed the rewards will be big. Analysts expect the group’s profits will rise by over 60% by the year to March 2017, compared with $3.8 billion in the year to March 2014.

Despite (or perhaps having learned from) the failure with Lyondell, the firm is opening up to outsiders at an operational level, as it must do to become a global competitor. In retail it is collaborating with Western brands such as Brooks Brothers and Marks & Spencer. It has agreed to a $7 billion investment by BP in its flagging gasfields, partly to tap the British firm’s expertise. Mr Ambani, who enrolled in but did not complete an MBA course at Stanford, seems to enjoy recognition from abroad, serving on many boards and advisory bodies for institutions including the World Economic Forum (a talking-shop), McKinsey (a consulting firm) and the UN. Investment on the scale needed to make Reliance of global significance matters for the country, too. Under the lacklustre previous government the amount private firms invested dropped from 17% of GDP in 2007 to 9% last year. Some business 1

The Economist August 2nd 2014

Business 49

2 houses, such as Aditya Birla and Tata,

seemed more comfortable investing abroad. By bucking this trend Reliance now accounts for 6% of private corporate investment in India.

The catch is that India’s most enthusiastic investor is a how-not-to guide to good governance. Reliance often seems secretive and old-fashioned. Deep cultural reform of the kind that other firms keen to conquer the globe—such as Samsung—underwent in preparation is off the agenda.

Indeed, outdated governance may be one reason why foreign fund managers are wary of Reliance: they are typically “underweight”, owning fewer shares than the benchmark index suggests they should.

Start with the board. As of June 2014, the average independent director had served for 14 years; and three of the eight were aged over 80. In June Mr Ambani’s wife joined the board. Lines of responsibility are fuzzy. Many believe one of the most powerful men at the firm after Mr Ambani is Manoj Modi, an otherwise obscure university friend who is not a director of the firm and does not appear to have an official post. (Nor is he a relative of Narendra Modi, the new prime minister.)

Next, consider Reliance’s ownership.

Although the conglomerate’s operating assets are organised simply, the chain of vehicles that controls the firm is anything but.

Mr Ambani’s “promoter group”, an Indian term that refers to him and his allies, owns 45% of the company. Its holdings are split between 66 legal entities. At least some of these are invested in by a mesh of further legal vehicles. For example, in 2013 Kankhal Investments and Trading owned 4.6% of Reliance Industries and was in turn invested in, or held in the trusteeship of, at least nine further layers of holding vehicles, involving at least 50 other entities, according to The Economist’s estimates, based on regulatory filings. Some of Reliance’s holding companies use its e-mail address. Reliance says we have got all this wrong, but by the time we went to press it had declined to explain how.

Reliance says that “the ultimate ownership” of all the entities lies with Mr Ambani and his family. But shown a diagram approximating this structure, one of the firm’s main regulators admits his agency doesn’t fully understand the control chain.

“It’s an example of where people are trying to obfuscate who owns them.”

Third, some analysts worry that Reliance Industries pays too much cash to other parts of the Ambani empire. For example, the family gets payments for facilities used by Reliance. Total “related party” costs, mostly to family-owned entities, were $1.2 billion a year, equivalent to 26% of Reliance’s pre-tax profit, making this issue critical for outside shareholders. The board is responsible for ensuring these deals are at arm’s length.

Be it never so humble Finally, Reliance is accused of making an $86m illegal gain trading derivatives linked to an affiliate’s shares, in a case from 2007, which is ongoing. Reliance rejects, and says it is still contesting, this charge.

Knowledge and power Other worries focus not on the company’s internal workings, but its external influence. Ahead of the election held in May, Arvind Kejriwal, an anti-corruption campaigner, alleged that the then government planned to raise gas prices to suit Mr Ambani, and that he had undue influence over India’s two main parties. Rival telecoms firms also grumble that Reliance has too much influence over policy. Reliance rejects these allegations. It notes that gas prices in India are well below international levels.

A copy of what appears to be a draft report by India’s national auditor, which an anti-corruption campaigner says he has filed with the Supreme Court and which The Economist has seen, is critical of the process in which Reliance won its 4G spectrum in 2010. It describes the “apparent rigging and mockery of the auction” and suggests the spectrum be cancelled. Reliance denies any wrongdoing.

Some argue that it is one of a group of firms that will benefit unduly from the national-election victory of Mr Modi, formerly the chief minister of Gujarat. Reliance has perhaps a third of its assets in Gujarat and Mr Ambani is Gujarati. Their relations appear warm.

The idea that Mr Ambani covertly runs India is far-fetched. He is not successful enough for that. Even if the new government does increase gas prices, Reliance will be lucky to make a return on its share ofthe $15 billion-20 billion to be invested in its offshore gasfield over its lifetime. Many investors attribute a paltry value to his tele-

coms unit. For a firm that supposedly manipulates India for its own benefit, Reliance’s return on equity is mediocre—at 11% after tax, it is below the company’s cost of capital. Even once its new investments come to fruition, and assuming the gasprice rise, this is unlikely to rise above 16%.

Reliance has in the past been closer to the defeated Congress party than to Mr Modi and his Bharatiya Janata party. Its big bet on Gujarat predates Mr Modi’s time there. But Reliance does have an uncomfortable degree of clout. A former cabinet minister says ofMr Ambani: “His influence is huge. Whatever is happening he knows.

He is able to post [bureaucrats] to positions and get ministers appointed who are favourable to him.” That may be an exaggeration of his actual power but it illustrates how powerful he is perceived to be.

A former boss of a giant multinational, who saw Mr Ambani’s dealings with a senior politician, says: “It was not what you’d normally expect to see between an industrialist and a minister. Normally the industrialist was subservient. This was the other way around.” A former securities regulator says: “There is an enormous amount of pressure when you make decisions that influence Reliance…You get 100 telephone calls from a who’s who of India.”

Can Reliance change? Some of its executives argue that the firm will evolve naturally towards becoming a multinational with more open and modern practices. Yet tradition appears to be entrenched. Mr Ambani, who is 57 and has three children, is unlikely to retire soon but seems to be keen on dynastic control. On June 18th he told shareholders that “I want this to be a multi-generational relationship.”

The winds of change If Mr Ambani’s investments pay off, and Reliance ends up controlling large chunks not just of India’s energy supply chain and petrochemicals sector but also of its retail, telecoms and media industries, a persistently closed culture and opaque governance may clash more with the desires of a new generation of Indians which wants more transparency. Antitrust regulators may become wary. Reliance may end up being the Standard Oil of India—a giant that ultimately fails the test, not of business prowess, but of public opinion.

Mr Ambani could head off this risk by starting a deeper reform of his firm. In his speech to the great and good of Mumbai he warned them that the 700m Indians with little to their names were less tolerant of tradition and authority than ever before.

“The youth are not going to be sitting on the sidelines,” he said. He and his family should themselves bear this in mind. They have made Reliance India’s most powerful and feared company. For the sake of their fortune and their country, it is time to try to make it one that more people trust. 7

50 Business

The Economist August 2nd 2014

Rosneft

Arctic chill

Sanctions will thwart Rosneft’s ambitions to join the ranks of oil’s superpowers

T

HE close bond between Igor Sechin, Rosneft’s boss, and Vladimir Putin, Russia’s president, can work both ways. His seat in Mr Putin’s inner circle brings rebuke. Mr Sechin is on an American blacklist, and Rosneft is barred from seeking longer-term finance from American banks, over Russia’s behaviour in Ukraine. But it brings rewards too. This week an international arbitration court ordered Russia’s government to pay $50 billion to shareholders in Yukos, an oil company it destroyed (see next story). The case was a reminder that Mr Putin handed most of Yukos’s assets to Rosneft, setting it on the way to becoming the world’s biggest stockmarket-listed oil company by output.

If Mr Sechin were bothered by a travel ban and the threat of asset seizures, he has not let on. But this week’s fresh round of American and EU sanctions, partly aimed at Russia’s oil industry, threaten to do far more damage to Rosneft’s ambition of tightening its powerful grip on energy at home and Mr Putin’s aim of using energy to beef up Russian influence worldwide.

Rosneft has come a long way in a short time. By the end ofthe 1990s it pumped just 4% of the country’s oil. Its assets had been parcelled out and privatised. Mr Putin was determined to wrest back control of oil to restore the state’s leading role in the economy. And nabbing most of Yukos, then Russia’s biggest oil producer, allowed Mr Sechin to begin remaking Rosneft as a national champion along the lines of Nor-

way’s Statoil and as a serious rival to the West’s “supermajors”.

Rosneft has some way to go. Its absorption of various smaller domestic oil firms, and a deal in 2012 to buy TNK-BP from a group of oligarchs and Britain’s BP, have elevated Rosneft’s oil and gas production to the equivalent of 4.9m barrels a day (b/d).

Surpassing Exxon Mobil as the world biggest listed oil firm by production is one thing. But in terms of return on capital, stockmarket value and technical capability, it is still behind.

However, the TNK-BP deal brought more than just oil. The 20% stake in Rosneft that BP got as part of the transaction was a means of importing a supermajor’s management and engineering skills. They are sorely needed. Production has peaked at Rosneft’s older fields and will start to decline in a couple of years. To keep the barrels rolling it needs oil from reservoirs that are far more difficult to tap.

The latest sanctions are intended to stop it. Aside from its joint venture with BP, the Russian firm plans others with Exxon, Statoil and ENI of Italy to drill in the Arctic as well as other offshore fields, and to exploit Russian shale oil. Like most national oil companies, Rosneft lacks the experience and know-how to operate in the extreme conditions of the Arctic and other harsh locations. Supermajors bring not only the equipment to extract oil and gas but expertise in building and managing giant projects. Going it alone, as Petrobras

of Brazil has found in its vast new offshore fields, can pile on costs and delays.

Huge oil and gas developments typically take five years or more to get running, so Rosneft needs to start now. The latest sanctions are likely to make this impossible. All eyes will be on Exxon. A rig operated by the American giant left Norway for the remote Kara Sea two days after the downing of Flight MH17 and is set to start exploratory drilling in August. Sanctions may put future stages of the project in doubt.

A ban on importing vital technology is not the only impediment. Access to capital is likely to dry up. Sanctions already in place prevent American banks from making long-term loans to Rosneft and other Russian energy firms, including Novatek, a domestic gas producer. Wider banking restrictions will make foreign lenders even more fearful of making loans in Russia. A $9 billion fine that BNP Paribas agreed to pay in early July, for violating American sanctions against countries including Sudan and Iran, has had the desired effect.

Other obstacles also lie in Rosneft’s path. Its rise relies on dealing a blow to its fiercest domestic rival by getting Mr Putin to end Gazprom’s monopoly on gas exports. Its reasons may be more strategic than commercial. The cost of developing new gasfields is rising, whereas prices are falling. But as James Henderson of the Oxford Institute for Energy Studies points out, large-scale gas production is the mark of a diversified oil giant. Shell and Exxon both produce as much gas as oil. That said, by attacking on all fronts Rosneft risks becoming as bloated and inefficient as Gazprom, rather than a Western-style supermajor.

A new favourite Mr Putin may well acquiesce in downgrading Gazprom. Its might as a tool of foreign policy has waned. In Europe, its main export market, its influence has diminished as the EU has weakened its grip on prices by liberalising markets and through the courts. Rosneft could be a more potent long-term weapon. Oil is more profitable and traded more globally than gas. Rosneft’s management, more dynamic than Gazprom’s, could take advantage. Rosneft made a rapid pivot to the booming markets of Asia, striking deals with the likes of China National Petroleum Corp, whereas Gazprom took a decade over an export deal with China and then did so on terms that favoured Russia’s Asian neighbour.

Yet sanctions may help Gazprom to keep Rosneft at bay a little longer. Europe’s reliance on Russian gas has left the industry free of direct sanctions. If winter approaches with the crisis in Ukraine still raging, Russia may be tempted to respond to Western pressure by turning off Europe’s supplies. That would, temporarily at least, return Gazprom to the front line of Russian energy “diplomacy”. 7

The Economist August 2nd 2014 Arbitration awards

Now try collecting NEW YORK

In business disputes taken to arbitration, winning is just the start

R

USSIA breached its obligations under an energy treaty when it seized the assets of Yukos in 2006; so it must pay the former oil giant’s majority shareholders $50 billion. The award, made on July 28th by an international arbitration court in The Hague, was 20 times the previous record for such a case. The investors’ lead lawyer, Emmanuel Gaillard of Shearman & Sterling, says it shows that arbitration is “a mechanism with teeth”.

Russia has until next January to pay up, after which interest will start to accrue. It is unlikely to do so voluntarily. It called the award “politically biased”, implying it was motivated by Russia’s conflict with the West over Ukraine. Although it cannot appeal against the award itself, it may ask the Dutch domestic courts to rule that it was based on an incorrect reading of the law. In a separate case brought on behalf of all Yukos shareholders, on July 31st the European Court of Human Rights awarded them €1.9 billion ($2.6 billion) in compensation.

If Russia does not pay, the shareholders will have to persuade courts in some of the 150 countries that are signatories to a 1958 convention on the recognition of arbitral awards to “attach” any Russian assets in their jurisdictions—that is, declare that they can be seized. National sovereign-immunity laws ensure that things like embassies and military hardware are off-limits, but assets that are both part of the state apparatus and used for “commercial activity” are fair game. Yukos’s lawyers could thus

Prepare to repel boarders

Business 51 take aim at the foreign refineries and pipelines of partly state-owned Russian energy firms such as Rosneft (which bought a lot of Yukos’s assets) and Gazprom.

Creative creditors can make a nuisance of themselves. The hedge funds that won judgments against Argentina after suing over its debt restructuring briefly got an Argentine navy training ship (pictured) seized in Ghana, and stopped President Cristina Fernández de Kirchner flying her official jet abroad. They wrested $90m from a New York trustee that held shares of a privatised Argentine bank and chased the central bank’s foreign reserves.

Such cat-and-mouse games can last a decade or more and are only for the most tenacious. Those lacking the stomach for a long fight may settle for less: last year Dow Chemical waived $300m of a $2.5 billion award against a state-owned Kuwaiti group to secure payment. Another option is to sell, for a discount, into the fledgling secondary market for arbitration awards.

Around 90% of international arbitrations relate to contract disputes between private parties, says Andrew McDougall of White & Case, another law firm. The rest involve investors suing countries. The number of contract cases has risen in line with cross-border trade, while sovereign cases have grown as more countries have signed up to multilateral conventions like the one used in the Yukos case, or bilateral investment treaties (BITs), which promise investors legal redress in cases of expropriation.

There were 385 BITs in 1990. Today there are 2,700, estimates Mr Gaillard.

This is great news for the big law firms: their arbitration practices have never had it so good. Shearman & Sterling alone is working on 100 cases. Says another lawyer: “We’re finding that we do well in good times, when trade and investment boom, and also in bad times, when stressed parties turn to the courts.” 7

Commercial property

Stores of value NEW JERSEY

The rise of e-commerce has set off a boom in the market for warehouses

T

HE Manhattan skyline looms over the horizon on the northern stretch of the New Jersey Turnpike, which wends from the Philadelphia suburbs towards New York. But the glamorous skyscrapers across the Hudson River are no longer what most excites property investors. Instead, some are betting on a clump of nondescript, lowrise structures around the highway’s midpoint: warehouses that serve as “fulfilment centres”, dispatching orders for the surging online-retail business.

The advent of e-commerce—which now accounts for 6.2% of all sales in America—has shaken up the commercial-property business almost as much as it has retailing. Real-estate funds have long relied on shopping centres, and rents at well-located malls with entertainment amenities have proved resilient. But second-tier facilities are floundering, as their tenants lose market share to online rivals with wider selections and lower prices. Even at successful bricks-and-mortar retailers, goods that once sat in the back of centrally located shops are now held in suburban warehouses, as those firms expand their home delivery and click-and-collect offerings.

Such modern structures usually lie within 100km (60 miles) of a big city and are near sea- and airports, highways and sorting hubs for couriers like FedEx and UPS. They are much bigger than older types of warehouse: often more than 100,000 square metres (1.1m square feet, or 14 football pitches); and they have high ceilings to further increase their volume. At Dotcom Distribution’s cavernous New Jersey warehouse, pickers ride “reach trucks” up to three storeys above ground to fetch 50,000 different products for 15 e-commerce clients. Such fulfilment centres also employ far more people than older warehouses: around Christmas each may have up to 3,000 staff working on shifts.

These buildings have been rising at a staggering pace. Jones Lang LaSalle, a property-services firm, says that since 2012 the amount of industrial space (of which 75% is warehousing) used in America has grown at an annual rate of 14.5m square metres—double the pace in 2008, the year the property market went south. In contrast, during the same period retail usage has risen by just 6m square metres a year, half the 2008 rate. E-commerce accounts for a hefty chunkofthis growth: at Prologis, the world’s biggest industrial-property owner, 30% of projects built for specific 1

52 Business 2 tenants are tied to online sales.

All this construction could conceivably drive down prices. But for now, there is no sign of a glut. American industrial rents rose by 3.4% last year, bringing them within 6% of their 2008 level. Retail rents are still 12% off their peak.

The pattern in less mature e-commerce markets is similar. In Europe, industrial rents have barely begun to recover from the crash. But because the euro crisis crimped credit markets, yields are more attractive than in other rich regions, and cash is now pouring in. Foreign buyers have been particularly active: in 2012 Blackstone, a New York-based private-equity fund, set up a firm called Logicor to buy industrial assets in Europe. In just two years it has acquired 60m square metres, making it the continent’s second-biggest player.

Goodman, an Australian property firm, has also been active, building all eight of Amazon’s giant warehouses in Germany.

Lagging in logistics Much of this investment will simply remedy a long-standing shortage: Europe has around a fifth as much modern logistics space per person as America. But even in a stagnant economy, e-commerce is creating new demand. Internet sales in Europe are expected to grow by half by 2019, which should entail about 5m square metres of new warehousing.

That forecast could prove conservative if continental Europeans follow the lead of the British and start buying their groceries digitally. Around 4% of food in Britain is now sold online, far above the average in both America and the EU. Tesco, Europe’s third-biggest online retailer, has already opened six “dark stores” around London, just to handle home-delivery orders.

Even in comparison with such prospects, the most alluring opportunities lie in developing countries—above all in China, now the world’s biggest e-commerce market. As internet penetration and the middle class grow, online sales are rising rapidly.

Until recently, leading foreign brands had not opened shops outside the country’s richest cities. They are now rushing into the interior, but may have arrived too late to win over consumers who are used to ordering online. China’s first generation of retail websites mainly let individuals sell goods to each other. Now that businesses are also selling to consumers online, demand for logistics space is growing even faster than the overall market.

China’s local governments, which control land use, were once reluctant to authorise new warehouses, because they generate little tax revenue. But they are realising that e-commerce warehouses create lots of jobs, and are now readier to give them planning permission. GLP, a spin-off from Prologis that dominates China’s industrialproperty market, reports that firms linked

The Economist August 2nd 2014 Whole Foods Market

Victim of success NEW YORK

A peddler of pricey organic and natural foods finds it has competition

T

HE colourful chalkboards and baskets of fruit that greet customers at the entrances of Whole Foods Market’s shops paint a rosy picture. Yet shares in the American seller of organic and natural food have fallen by more than 40% since hitting a peak last October, in a period when stockmarkets have been strong.

It is not that the retailer is in immediate crisis: its latest quarterly figures, on July 30th, showed sales and profits both up a bit. And it is not that people are going off the idea of paying more for food produced without chemical fertilisers, pesticides or additives: the International Federation of Organic Agriculture Movements reckons that the industry’s worldwide revenues were a record of $63 billion in 2012; and Techsci Research, a market-research firm, predicts that the American market for such foods—the world’s largest—may grow by 14% by 2018.

The problem is that at Whole Foods, shoppers have been paying way over the cost of regular produce, and its success in

... but it’ll cost you to e-commerce occupy a quarter of its holdings there, up from just 4% in 2010.

The other big emerging markets offer healthy growth prospects too, but are a few years behind China. In Brazil, weak infrastructure and cumbersome planning rules have inhibited the growth of warehousing.

Things are much the same in Russia, where online sales are just 2% of the retail market, and India, where they are below 1%. How-

getting them to do so has now attracted a lot of competitors, from rival organics chains like Sprouts and Trader Joe’s to mass-market retailers like Walmart and Costco. As a result, the price premium for organic produce is crashing down. On a recent shopping trip, a pound of organic apples cost $2.99 at Whole Foods but just $1.99 at Sprouts and even less at Costco.

The firm has been trimming costs to keep its margins up, but the slump in its share price reflects investors’ expectation that this cannot continue, that profits will suffer and that Whole Foods’ dominance of the market is coming to an end.

That the company has had to recall a number of products—in late July it and other grocers recalled plums and peaches suspected of contamination with Listeria bacteria—has made it harder to maintain an air of superiority over its competitors.

Organic foods’ claim to superiority is questionable anyway. Both Britain’s Food Standards Agency and the Annals of Internal Medicine, a journal, concluded after reviewing the extensive studies on the issue that there is no substantial difference in the nutritiousness of organics and non-organics. In some respects organics may be bad for the environment, because growing them uses land less efficiently than non-organics.

As for “natural” foods, there is no official definition of this, in America at least; so the label, which Whole Foods also applies to many products, is close to meaningless. Alan McHughen, a botanist at the University of California, Riverside, argues that the whole industry is “99% marketing and public perception,” reeling people in through a fabricated concept of a time when food, and life in general, was simple and wholesome.

If true, the trick has worked nicely for Whole Foods. But its success has attracted so many imitators that it is losing its uniqueness. Even recent speculation about a takeover bid has failed to lift its shares. It may insist its food is sustainable. But it seems its prices are not. ever, the new Indian government’s proposed sales-tax reform would facilitate national distribution networks and could produce a new wave of construction. This week Amazon announced it would spend $2 billion opening five big new warehouses in India. The property business is famously local, but one trend now looks universal: the blandest buildings offer the most exciting returns. 7

The Economist August 2nd 2014

Business 53

Schumpeter Decluttering the company Businesses must fight a relentless battle against bureaucracy

P

ETER DRUCKER once observed that, “Much of what we call management consists of making it difficult for people to work.” Nine years after the management guru’s death, his remark is truer than ever: employees often have to negotiate a mass of clutter—from bulging inboxes to endless meetings and long lists of objectives to box-tick—before they can focus on their real work.

For the past 50 years manufacturers have battled successfully to streamline their factory floors and make them “lean”. Today, businesses of all types need to do the same in their offices.

The most debilitating form of clutter is organisational complexity. The Boston Consulting Group (BCG) has been tracking this for a representative sample of companies in the United States and Europe since 1955 (when the Fortune 500 list was created).

BCG defines complexity broadly to include everything from tiers of management to the numbers of co-ordinating bodies and corporate objectives. It reckons that, overall, the complexity of organisations has increased sixfold since then. There has been an explosion of “performance imperatives”: in 1955 firms typically embraced between four and seven of them; today, as they strain themselves to be kind to the environment, respectful of diversity, decent to their suppliers and the like, it is 25-40.

A second form of clutter is meetings. Bain & Company, another consulting firm, studied a sample of big firms, finding that their managers spent 15% of their time in meetings, a share that has risen every year since 2008. Many of these meetings have no clear purpose. The higher up you go, the worse it is. Senior executives spend two full days a week in meetings with three or more colleagues. In 22% of these meetings the participants sent three or more e-mails for every half an hour they spent sitting in the room.

These e-mails constitute the third form of clutter. Bain estimates that the number of external communications that managers receive has increased from about 1,000 a year in 1970 to around 30,000 today. Every message imposes a “time tax” on the people at either end of it; and these taxes can spiral out of control unless they are managed.

Some clutter is inevitable. The point of companies is to get people to achieve collectively what they cannot do individually, so some meetings and memos will be needed to co-ordinate them. Complexity may often be the price of success: companies

that have grown to great size and operate in many markets face far more complicated problems than smaller ones operating on home turf. But Drucker was surely right that co-ordination has a tendency to degenerate into clutter. Meetings multiply. Managers build empires. And clutter feeds on itself. Bain calculates that adding a new mid-level manager creates enough work for half an assistant. Adding a new senior vice-president creates enough work for one and a half assistants.

Clutter is taking a toll on both morale and productivity. Teresa Amabile of Harvard Business School studied the daily routines of more than 230 people who work on projects that require creativity. As might have been expected, she found that their ability to think creatively fell markedly if their working days were punctuated with meetings. They did far better if left to focus on their projects without interruption for a large chunk of the day, and had to collaborate with no more than one colleague.

One solution to clutter is a periodic spring-cleaning to sweep it out. Big companies need to have campaigns against internal complexity: Jeffrey Immelt, General Electric’s boss, is seeking to introduce a “culture of simplification”, as part of a plan to cut the giant conglomerate’s overheads from a peak of 18.5% of revenues in 2011 to 12% in 2016. Joe Kaeser, his counterpart at GE’s archrival, Siemens, is abolishing a whole management tier and reducing the number of divisions below it. When Ford’s previous boss, Alan Mulally, took over in 2006, he called for an audit of all its meetings. He replaced “meetings week”—five days each month in which executives held non-stop gatherings—with one tightly scheduled weekly meeting at which managers are under orders to cut the crap. Mr Mulally’s successor, Mark Fields, had to prove himself first by chairing those meetings efficiently.

Spring-cleaning needs to be reinforced by policies to stop clutter accumulating in the first place. Though it may seem obvious, Intel, a chipmaker, felt the need to impose a rule saying: no meetings without a clear purpose. Lenovo, a Chinese computer-maker, lets its staff halt meetings that are going off-track, in the same way as Toyota, a Japanese carmaker, gives production workers the power to stop assembly lines when they spot problems. Bain says a manufacturer it studied made savings equivalent to cutting 200 jobs by halving the default length of meetings to 30 minutes and limiting to seven the number of people who could attend.

Some employers are seeking ways to let staff at least manage the clutter, if not reduce it. Intuit and Atlassian, two software firms, offer workers a regular quota of clutter-free time. Volkswagen has spared its German staff from having to read work emails after hours—and even BCG has introduced rules on when its consultants are entitled to go “offline” in the evenings.

Wasting time, wasting money The best way to institutionalise decluttering is to force managers to justify any bureaucracy they introduce. Seagate Technology, a data-storage company, and Boeing, an aircraft-maker, both hold their executives accountable for the “organisational load” that they impose on their subordinates in terms of meetings, memos and initiatives, and measure them against their peers. As Bain points out, the most valuable resource that many companies have is the time of their employees. And yet they are typically far less professional about managing that time than they are at managing their financial assets. 7 Economist.com/blogs/schumpeter

54

Finance and economics

The Economist August 2nd 2014 Also in this section 55 Buttonwood: Whither interest rates?

56 Deleveraging in America 56 A recent history of default 57 Latin American economies 58 Free exchange: Why the ECB should adopt QE

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

Fund managers

Assets or liabilities?

Regulators worry that the asset-management industry may spawn the next financial crisis

F

INANCIAL crises may seem a familiar part of the economic cycle, but they rarely repeat themselves exactly. In the 1980s the locus was Latin America; in the late 1990s, Russia and South-East Asia; in 2007-08, American housing and banks.

Now, some worry that the next crisis could occur in the asset-management industry.

The industry manages $87 trillion, making it three-quarters the size of banks; the biggest fund manager, BlackRock, runs $4.4 trillion of assets, more than any bank has on its balance-sheet. After the crisis, regulators tightened the rules on banks, insisting that they hold more capital and have sufficient liquidity to cope with short-term pressures. But that may be a case of generals fighting the last battle. In the absence of lending from banks, many companies have turned to bonds (mainly owned by fund managers) for credit.

Fund managers have caused problems in the past. The collapse in 1998 of LongTerm Capital Management, a hedge fund run by some of the brightest minds on Wall Street and in academia, led to a rescue instigated by the Federal Reserve. Bear Stearns’s bail-out oftwo hedge funds it had been running contributed to its collapse in 2008. In the same year a money-market fund run by the Reserve group was forced to “break the buck” (impose losses on investors), setting offa run that prompted the Fed to provide a backstop yet again.

All this has made regulators nervous. In

January the Financial Stability Board (FSB), an international body which tries to guard against financial crises, published a consultation paper which asked whether fund managers might need to be designated “systemically important financial institutions” or SIFIs, a step that would involve heavier regulation. A new report from the Bank of England worries that pension funds and insurance companies are no longer playing the stabilising role in markets they used to—taking advantage of short-term market falls by buying assets that look cheap. Instead, they may be amplifying the cycle because of the need to meet more conservative accounting and regulatory requirements.

The asset-management industry has marshalled some powerful counter-arguments. First, managers act as stewards of other people’s capital, which is held in separate accounts (with third parties acting as custodians). Banks like Lehman Brothers, in contrast, were speculating on their own account. Were a fund manager to go bankrupt, the assets would simply be transferred to a competitor, with no loss for the investors concerned. Hundreds of mutual funds close each year, with minimal market impact and without needing government rescue. Second, the parallels with banks are inaccurate; with the exception of hedge funds, asset managers tend not to operate with borrowed money, or leverage. The size of BlackRock’s balance-sheet

is just $8.7 billion; HSBC’s is nearly $2.7 trillion, or more than 300 times bigger. Fund managers are thus far less vulnerable to sudden falls in asset prices than banks proved to be in 2008.

Third, there is little evidence that mainstream asset managers contribute to market panics. Retail investors are less flighty than institutions; many invest through defined-contribution pensions, called 401(k) plans in America, through which they put a bit of money into the market every month. This makes them indifferent to short-term fluctuations. The Investment Company Institute, a trade body, says that in the autumn of 2008, a low point for stockmarkets, equity sales by mutual funds comprised only 6% of total trading volume in New York.

Finally, designating fund managers as SIFIs would have perverse consequences.

The FSB paper stated that size was the key criterion, suggesting a threshold of $100 billion, which would capture 14 American mutual funds. This may miss the point: Reserve ranked only 81st among American asset managers and 14th among those running money-market funds. In any case, many big funds are low-cost trackers such as Vanguard’s 500 index fund, which allows retail investors to get a broad exposure to the stockmarket for fees of just 0.17% a year. As one of the consequences of being a SIFI, the fund might be required to hold a capital reserve; the cost of doing so would be passed on to retail investors. In addition, SIFIs could be required to support the orderly liquidation fund, a bailout vehicle for other SIFIs. In other words, when the next Lehman goes bust, small investors in Vanguard might be on the hook.

As yet, no fund manager has been designated a SIFI. But Andy Haldane of the Bank of England cautions, “As any self-respecting asset manager would tell us, past 1

The Economist August 2nd 2014 2 performance is no guide to the future. This

is especially true in an industry as large and as rapidly-changing as asset management, with asset portfolios becoming less liquid and more correlated and investor behaviour becoming more fickle and runprone.” A recent paper* from the University ofChicago concludes “The absence ofleverage may not be sufficient to ensure that monetary policy can disregard concerns for financial stability.”

The worry is that herding among fund

............................................................... * “Market tantrums and monetary policy”, by Michael Feroli and others

Finance and economics 55 managers might lead to a general sell-off, as happened with mortgage securities in 2008. The fund-management industry is becoming more concentrated, thanks to the rise of passive funds that track an index. A category known as exchange-traded funds has grown spectacularly, with $2.45 trillion of assets, up from $425 billion in 2005. These funds allow investors to trade throughout the day, comprising a quarter of all activity on America’s stockmarket.

Some ETFs, particularly those that invest in bond markets, may be more liquid than the assets they own. Since 2007 the corporate-bond market has grown sub-

stantially but banks have cut back their market-making activities, in part to conserve their capital. As a result, a study by Royal Bank of Scotland calculates, the liquidity of the American corporate-bond market has fallen by 70% since the crisis.

The bond market is inherently less liquid than equities, because it is so disparate; General Electric has just five classes of equity but has issued 1,014 different types of bonds. According to RBS, only three of the 50 most widely held bonds have a market value of more than $1 billion, a level well below the minimum needed for a stock to qualify for the S&P 500. Around a fifth of 1

Buttonwood Rate expectations When interest rates start rising, how high will they go?

I

NTEREST rates will eventually rise in the developed world, perhaps in early 2015. The markets are braced for such a possibility. But the more difficult question is how far they will rise: what is the normal level of rates in the post-crisis world?

This is a crucial question. The Federal Reserve’s benchmark rate averaged 2.96% in the first decade of the 21st century but 5.15% in the 1990s. Imagine the effect on the borrowing costs of mortgage-holders or small businesses if rates moved back to the latter level.

The general view is that rates will remain low by historical standards. The chart shows the implied yield on fiveyear government bonds five years from now (generated by comparing the yield on five-year bonds with that on ten-year issues). This yield has fallen in 2014 to around 3.25%. Given that short-term rates are normally below five-year yields, that suggests investors do not anticipate either a return to the robust economic growth of the 1990s or a resurgence in inflation.

Economists talk about the “neutral” level of interest rates, where the central bank is neither trying to stimulate the economy nor to slow it down. This is normally expressed in real (stripping out inflation) rather than nominal terms. As Stephen King, chief economist at HSBC, points out, real rates have varied a lot since the second world war.

In the 1950s and 1960, real rates were quite low. Capital controls kept investors from moving their money in search of higher returns and governments held rates down as a way of reducing their debt burdens, a technique known as financial repression. In the 1970s a sudden surge in inflation caught investors by surprise, pushing real rates into negative territory. The bond vigilantes responded in the 1980s by forcing bond yields higher.

Trends in low places US Treasuries, five-year forward rate*, % 6 5 4 3 2 1 0 2007 08

09

10

11

12

13 14

*Derived from five- and Sources: Thomson Reuters; ten-year Treasury-bond yields The Economist

As inflation declined, real rates rose sharply. Finally, the savings glut of the early 2000s, followed by the monetary response to the 2008 crisis, meant that rates plunged once more.

All this suggests that the neutral level of rates is far from set in stone and that the past may be a poor guide to the future. The rate of real economic growth is probably the most important determinant and in that respect many people are gloomy: the trend rate of growth in America may have dropped to 2% or below while pessimists put the European rate at 1%. Demographic trends mean the workforce is likely to stagnate or shrink, leaving productivity to do all the work expanding the economy. Other things being equal, a slower growth rate will mean a lower real interest rate.

But will other things be equal? An ageing population means the elderly will start to draw down their savings in retirement.

Real rates in greying Japan have been positive in recent years (thanks to deflation) despite the moribund economy. And some investors may conclude that the debt burden in the developed world is so great that the eventual result must be either default

or inflation, and will demand a higher rate to compensate for the risk.

A further factor is globalisation.

Emerging markets are growing faster than the developed world and will thus attract investors seeking higher returns. In theory, this should cause real rates to equalise around the world at a higher rate than if the developed world were the sole determinant. In practice, real rates may still be held down by a modern version of financial repression: pension funds and insurance companies have been forced, by regulations and accounting, into owning more bonds, while central banks have bought huge amounts of government debt and show no sign of selling it.

On balance, then, the neutral level of rates may be even lower than markets expect. PIMCO, a fund-management group, suggests the level of neutral rates is likely to be close to zero in real terms (so perhaps 2-3% in nominal terms if inflation targets of 2% are met).

Before homeowners and small business breathe too big a sigh of relief, remember that this discussion has concerned the neutral level of rates. Rates could go higher if central banks decide they need to rein back the economy, perhaps because inflation returns. Richard Barwell of Royal Bank of Scotland says there may be too great a belief in “the miracle of immaculate monetary exit”. This would require monetary stimulus to be withdrawn before the economy recovers, not after, and for central banks’ economic forecasts to be unerringly accurate.

Since central banks failed to anticipate the debt crisis of 2007-08, this is an attitude of the purest optimism. Given the debt burden still facing the rich world, the risks of policy failure are enormous.

Economist.com/blogs/buttonwood

56 Finance and economics 2 all corporate bonds never trade at all.

Corporate-bond funds are popular at the moment, thanks to the extra yield they offer in a world where cash pays next to nothing. But it is easy to imagine a scenario in which prices start to fall, prompting redemptions by clients, leaving asset managers to sell into an illiquid market. Asset managers do not like to underperform their peers, so they would scramble to be the first to sell. Prices could plunge, forcing the corporate-bond market to close, as it did for emerging-market issuers in the summer of 2013 when the “taper tantrum” over the prospective withdrawal of American monetary stimulus was in full swing.

The economy would suffer as a result.

One possibility would be to allow bond funds to suspend withdrawals at times of crisis (installing “gates”) or to impose redemption penalties. An American regulator has just given money-market funds such powers. Money-market funds

The Economist August 2nd 2014 can be subject to runs if investors fear they will breakthe buck; there is every incentive to exit the fund before losses are imposed.

However, the risk of allowing gates or redemption penalties is that they will provoke rather than prevent runs, as investors try to escape before they are imposed.

Regulators are stuck between a rock and a hard place. It is their job to anticipate future crises, which may not resemble those of the past. But that logic requires them to regulate parts of the industry which have not, in the past, been the source of problems. Another concern is that risk may be a game of whack-a-mole: hammer it down in one place and it pops up somewhere else. Some of the problems regulators fret about, such as the illiquidity of the corporate-bond market, are the result of regulations imposed since the crisis.

If they now bear down on funds or fund managers, they may simply create another problem somewhere else. 7

Deleveraging in America

Debt calm Washington, DC

Consumers are borrowing again, but the economy has been slow to respond

E

CONOMISTS trying to explain the feeble pace of America’s recovery regularly blame deleveraging: the multi-year process of paying off the debts accumulated before the crisis. Yet for households, at any rate, deleveraging has stopped. Mortgage debt bottomed out in the middle of last year and is now rising again. Student and car loans are rising briskly. Only homeequity and consumer loans continue to shrivel. In absolute terms, household debt is rising again (see chart). Relative to household income, it peaked at 135% in 2007, fell to 109% at the end of 2012, and has roughly stabilised around that level.

Banks, after years spent rebuilding capital and appeasing regulators, are ramping up lending. Total bank credit grew at a 7.5% annual rate in the second quarter, the fastest since 2007, with growth in most categories of loans. “There are lots of people out there, lots of banks out there with a lot of liquidity, competing for loans,” the chief financial officer of Wells Fargo, one of the country’s biggest lenders, recently told analysts. Competition to lend to car buyers has become so fierce that the Office of the Comptroller of the Currency, a regulator, has warned of deteriorating standards, with loans routinely exceeding100% of the car’s value.

That borrowing is on the rise again should come as no surprise. Two studies, one by two economists, Carmen and Vin-

cent Reinhart, and one by the McKinsey Global Institute, a think-tank within a consultancy, both found that prior episodes of post-crisis deleveraging lasted six to seven years on average—just like the present one.

In theory, deleveraging should end when debts are at a sustainable level, but that is difficult to measure. A recent working paper by three economists at the European Central Bank points out that the debt

Borrow, renege, borrow again Thirteen years after its previous default, Argentina has again stiffed its bondholders. The latest missed payment was the result of a long-running legal battle between the government and some holders of the bonds it reneged on in 2001. Yet had Argentina resolved this feud, the markets might quickly have forgotten its past misconduct. Many of the handful of countries (including several others from Latin America) that have defaulted since 2001 are now seen as surprisingly safe bets, judging by the yields on their bonds.

The speediest rehabilitation is that of Greece. It negotiated massive haircuts on over $300 billion-worth of bonds in 2012, yet returned to the market earlier this year to issue $4 billion-worth of five-year bonds at a yield of just under 5%.

Releveraging US household debt, $trn Mortgage Credit card

Student loans Home equity

Auto loans Other 14 12 10 8 6 4 2 0

1999 2001 03

05

07

09

11

14

Source: Federal Reserve Bank of New York

consumers can bear varies with interest rates, house prices, the rate of home-ownership, the share of the population aged 35-54, the deposit first-time house-buyers are required to make and the foreclosure rate. American debt exceeded the “equilibrium” level by some 25% of household income at the start of the recovery. Since then an improvement in many of these variables has raised the equilibrium even as debt has fallen, bringing the two into line.

The end of deleveraging has not stoked the economy as much as many hoped. In the first quarter of the year the economy shrank by 2.1% on an annualised basis. But there may just be a lag: growth is the second quarter was a much perkier 4%. Goldman Sachs projects that debt will rise faster than income over the next few years, keeping growth above 3%.

However, Richard Dobbs of McKinsey points out that although consumers are no longer cutting back, the public sector is only just beginning to tighten its belt and businesses never stopped adding to their debts. He reckons overall deleveraging, including firms and government, could go on for another four or five years. 7

Selected sovereign defaults

Country

Date

Current Total bond defaulted Recovery yield† debt, $bn rate* %

Argentina

Nov 2001

82.3

27

Moldova

Jun 2002

0.1

60

na

Uruguay

May 2003

5.7

66

3.7

Nicaragua

Jul 2003

0.3

na

7.4

Grenada

Dec 2004

na

65

21.9

Dom. Rep.

Apr 2005

1.6

95

5.2

Belize

Dec 2006

0.2

76

9.1

Ecuador

Dec 2008

3.2

28

7.3

Jamaica

Feb 2010

7.9

90

7.2

Greece

Mar 2012 261.5

24

5.9

Greece

Dec 2012

37

5.9

42.1

10.0

Sources: Moody’s; *Market value of defaulted debt as a % of par, Bloomberg; one month after default †July 30th, Thomson Reuters ten-year gov’t bond where available

The Economist August 2nd 2014

Finance and economics 57

Latin American economies

Passing the baton LIMA

Colombia overtakes Peru to become the region’s fastest-growing big economy

A

S HE prepared to begin a second term as Colombia’s president on August 7th, the first name that Juan Manuel Santos inked in for his cabinet was Mauricio Cardenas, who keeps his job as finance minister.

That was no surprise: helped by an investment boom, the country’s economy grew by 6.4% in the first quarter compared with the same period last year. Mr Cardenas says the second quarter was strong, too.

The government will be raising its growth forecast for this year from 4.7%.

This is a welcome exception to a regional trend: Latin America as a whole looks likely to grow by less than 2% this year, the worst figure since 2009 (see chart). The end of the commodity boom that lifted the region for more than a decade, the fading of the era of cheap money as central banks in the rich world prepare to raise interest rates and a series of home-grown factors have all taken their toll.

The fall has been especially abrupt in Peru, where the economy is suffering what Luis Miguel Castilla, the economy minister, calls a “hiccup”. Even if it rebounds in the fourth quarter as he expects, predictions of growth of more than 4% this year seem too rosy. For a country that has enjoyed Asian-style growth averaging 6.4% a year in 2003-13, the slowdown is a nasty surprise. Colombia has overtaken Peru to become the fastest-growing of the bigger Latin American economies.

Both countries are medium-sized commodity exporters with open-market economies. They are both members of the freetrading Pacific Alliance. So why is Colombia now faring better than Peru?

The answer starts with what Victor Bulmer-Thomas, a British economic historian of Latin America, has called “the commodity lottery”. Colombia’s main exports are oil and coal, whose prices have held up over the past couple ofyears. Peru depends on copper and gold for half its exports; their prices have fallen (steeply in the case of gold). So the value of Peru’s exports fell by 9% last year while that of Colombia’s slipped only slightly.

In explaining Colombia’s growth, Mr Cardenas also points to several reforms.

Last year the government arranged lower mortgage rates via an agreement among banks and a public subsidy. This helped to boost construction, which is growing at over 10% a year. The subsidy is now being withdrawn; $200m of public money leveraged housing investment totalling $2 bil-

Colombia’s lottery winnings at work lion, according to Mr Cardenas.

A law in 2012 cut onerous payroll taxes (while raising income tax on the better-off).

The result is that formal-sector jobs are growing at 8% a year, while the large informal sector has started to shrink, which ought to boost productivity. Ambitious, albeit delayed, private-public partnerships in roads and railways should see investment of up to $25 billion by 2018.

Mr Santos has also implemented a fiscal rule under which the public-sector deficit, long a drag on growth, has fallen steadily, to less than 1% of GDP. That has boosted the confidence of investors. In March J.P. Morgan, a bank, more than doubled the share of Colombian bonds in its emerging-market indices.

By contrast, Peru is suffering what Mr Castilla calls a “complicated” year. First, the sol depreciated by about 9% in 2013, a textbook consequence of deteriorating terms of trade, which raised the financing costs of some careless Peruvian companies. Further setbacks have included weather-related contractions in fishing and farming, a standstill in investment by regional governments because of corruption scandals and unexpected technical problems at two big copper mines.

In response the government is shovelling money at the economy. Extra bonuses and wage increases for state employees and extra loans for small business are worth more than 1% of GDP. Mr Castilla in-

sists that the economy will rebound in the fourth quarter and will again grow by 6% in both 2015 and 2016. With new low-cost mines starting up, copper output should rise by 20% next year while building work will start on public-private partnerships worth $18 billion, including a gas pipeline and a second metro line for Lima.

Most analysts predict that Peru will soon regain its lead over Colombia. But that is not assured. Peru’s long growth spurt was based on a mixture of catch-up after a disastrous 1980s, sound economic policies (it enacted a fiscal rule in 1999), cheap natural gas and, above all, a huge mining boom. But Peru has now caught up a lot. Francisco Rodríguez, an economist at Bank of America, argues that the fall in mineral prices, together with delays in mine development, have already driven Peru’s potential (ie, non-inflationary) rate of growth down to less than 5% and that it will fall further.

Only “ifwe do nothing,” replies Mr Castilla. The government has launched plans to cut red tape and to promote diversification away from mining. It has enacted promising reforms of the civil service and of education, though their success turns on determined implementation. Its critics decry an absence of labour-market reform.

In Colombia, Mr Cardenas is confident that all the new highways will raise the country’s potential rate of GDP growth by 0.7 percentage points over four years. Mr Santos says a peace deal with the FARC guerrillas would add another extra point of growth, by boosting agricultural and energy output and encouraging investors.

But there are risks. The biggest involves the oil industry. Guerrilla sabotage and declining reserves are threatening output and thus government revenue. Peace carries a price as well as offering a dividend. Mr Cardenas’s next task may be to push through further tax increases.

Lotteries give countries opportunities.

Development comes from using them to create more productive economies. On that score, Colombia now has an edge over Peru; both are better placed than many of their South American neighbours. 7

Andean idols Quarterly GDP, % change on a year earlier 12 Peru

F’CAST Colombia

8 4 +

0 –

Latin America

4 2008

09

10

11

12

Sources: National statistics; Bloomberg

13

14

58 Finance and economics

The Economist August 2nd 2014

Free exchange The Exceptional Central Bank The European Central Bank should adopt quantitative easing now rather than as a last resort

A

LONE among its peers, the European Central Bank (ECB) has resisted quantitative easing (QE). That policy—creating money to buy financial assets—has been used at varying times by the central banks of America, Britain and Japan to fight deflation and stimulate economies flattened by the financial crisis of 2008. Yet the ECB still shuns QE, treating it as a weapon of last resort, even though the euro zone is suffering from “lowflation”, with prices rising by just 0.5% in May and June, far below the bank’s target of almost 2%. Is it right or wrong to forgo a policy that has become standard practice elsewhere?

One reason to doubt the efficacy of QE in the euro area is that banks rather than markets dominate the provision of credit there.

In America, in contrast, companies raise much of their funding in the bond markets. One of the main ways that QE has boosted the American economy is by lowering corporate borrowing costs. As the Federal Reserve bought Treasuries and government-guaranteed mortgage securities, pushing down their yields, investors turned to corporate bonds, in turn driving down their yields. This effect would necessarily be feebler in the euro zone.

This suggests that the ECB should work through the banks in fighting lowflation. It is striving to do that in two main ways. In June it brought its main lending rate down to a new low of just 0.15% and became the first big central bank to introduce negative interest rates, which in effect charge banks that leave deposits with the ECB. This has helped lower money-market rates in the euro zone almost to zero—and cap the appreciation of the euro, which was contributing to disinflationary pressures.

As well as this general stimulus to the euro zone, the ECB is also seeking to galvanise the recovery in southern Europe, where small firms in particular remain starved of credit. Mimicking a policy invented by the Bank of England—the funding-for-lending scheme—the ECB will make funds available at dirt-cheap rates to banks until 2018 as long as they do better in lending to the private sector (excluding household mortgages).

The new funding operations, starting in September, will take time to worktheir way through to the economy, but the ECB is prepared to be patient. It has always insisted on a long horizon for meeting its inflation target. It points to inflation expectations, gauged both through the financial markets and the views of pro-

fessional forecasters. These suggest that inflation, despite its recent lows, will eventually return to the target of just under 2% and thus remains “anchored”.

Even if these forecasts are correct, however, the euro zone stands out among big economies for the depth and likely duration of its bout of low inflation. Lowflation is already hurting debtors in the euro area since their incomes are rising more slowly than they expected when they borrowed. Their plight would intensify if lowflation mutated to deflation. The real burden of debt rises when prices are falling. That effect would be especially pernicious in the euro area as levels of private and public debt are perilously high in many countries.

Moreover, the risk of deflation is greater than the ECB acknowledges. Deflation crept up on Japan in the 1990s even though inflation expectations remained positive. The ECB draws comfort from the consensus among forecasters that inflation will return to the target in five years’ time, but that view is more a vote of confidence in the ECB than a reading of the economic tea leaves. Inflation expectations over shorter horizons, as inferred from financial markets, have been falling. Consistent with this, broad money has been growing this year by only about1%, which supports the case for QE to inject more money into the economy.

There is nothing to prevent the ECB from pursuing QE as well as its funding operations to promote higher lending to the real economy. Britain also relies more on its banks than does America, but that did not dissuade the Bank of England from deploying QE between 2009 and 2012. Moreover, it also launched the fundingfor-lending scheme while it was still carrying out QE. The ECB would be a late adopter of QE, but this in itself is an advantage, in that the policy has already been road-tested by more adventurous central banks. Early foreboding that QE would debase the currency and cause a debilitating inflationary surge has been discredited.

Paroled sovereigns The real reason for the ECB’s allergy to QE lies in its unique status as a supranational central bank setting monetary policy for countries that retain fiscal sovereignty. Private-asset markets in the euro zone are not big enough for purchases to have much impact so, like the other big central banks, it would have to buy lots of government debt. But unlike its peers, it would be buying the debt of18 different countries, in amounts linked to the respective sizes of their economies. These purchases would have a much bigger impact in peripheral Europe, where credit ratings are poor, than in Germany, which retains AAA status. The Bundesbank in particular fears that QE would relieve the pressure on less creditworthy countries to overhaul their economies and to keep deficits in check. And it would mutualise within the ECB the risk of holding dodgy sovereign debt.

These risks are real, reflecting the dash for a premature monetary union before the right fiscal and political conditions were in place. But the ECB already crossed the Rubicon in 2012 when it promised, if necessary, to buy unlimited amounts of the bonds of euro-zone governments under attack by investors. That guarantee saved the euro from the fury of the markets. However, a slide down a debt-deflation spiral could also create an existential crisis. In these circumstances patience is imprudent: the ECB should get a move on. 7 Economist.com/blogs/freeexchange

Science and technology

The Economist August 2nd 2014 59 Also in this section 60 Solar-powered steam 60 Making electricity from urine 61 Independently thinking bees

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

Sex differences

The Mars and Venus question A variation in the cognitive abilities of the two sexes may be more about social development than gender stereotypes

T

HAT men and women think differently is now widely accepted. Why they do so is another matter. One possible explanation is that in the time of hunting and gathering different skills were required: men spent time away from camp, tracking animals and fighting off intruders, and women needed social skills to bring up children. Yet there are bound to be many other factors at work for this variation to survive into modern times. The latest research suggests that living standards and access to education probably bear more responsibility for cognitive disparity between men and women than genes, nursery colours or the ability to catch a ball.

Previous studies have shown that male and female brains are wired differently.

Last year Ragini Verma of the University of Pennsylvania used sophisticated imaging techniques to show variations between men and women in dominant connections in the cerebrum, the part of the brain that does the thinking. Dr Verma speculated this could help explain why women tend to have better memories, social adeptness and an improved ability to multitask.

Now Daniela Weber of the International Institute for Applied Systems Analysis in Vienna, and her colleagues, suggest why such changes come about and, importantly, how the differences can change. The

group’s analysis, reported this week in Proceedings of the National Academy of Sciences, finds that the cognitive performance of women—much more so than men— benefits from factors such as greater employment opportunities, increased economic prosperity and better health.

A case of misremembering Ms Weber and her colleagues based their work on interviews with 17,000 men and 14,000 women carried out by an initiative called the Survey of Health, Ageing and Retirement in Europe, conducted in 2006-07.

The interviewees, aged 50 to 84, lived in 13 European countries and were subjected to three tests for cognitive performance. They were grouped into three geographic regions: northern Europe, central Europe and southern Europe .

For each country a regional development index (RDI) was adopted, an amalgam of GDP, family size, infant mortality, life expectancy and national education levels. These criteria were selected to represent a country’s educational and living standards for the birth years of the interviewees, and then compared with participants’ cognitive performance.

That performance was determined using tests for episodic memory (the retention of words in memory), category fluen-

cy (naming examples of, say, animals) and numeracy. Women are expected to outperform men in episodic memory and men do better in numeracy. Neither sex is thought dominant in category fluency.

Episodic memory matters because it is linked to emotion. The brain remembers unconnected words by linking them to a memory or imagined situation. It is the emotion of the memory that supposedly helps the brain remember the word.

Whether women actually are more empathetic than men is debatable. It may be that society has expected such capacity from the principal child-carers for so long that it has become ingrained. The same goes for numeracy. Is science dominated by men because they are better at it, or because it was a career choice not widely open to women before the late 20th century?

The new study does not seek to answer these questions. But it pushes research further towards answers. As expected, in episodic-memory tests women outperformed or were equal to men in every geographic area and across almost all age groups. The results for numeracy were even starker. Men outperformed women in all areas and in all age groups. The differences in category fluency were so slight as to be statistically irrelevant. But the really startling discovery was how the results changed over time and by region.

As countries improved in RDI terms, the cognitive performance of the whole population was raised. Northern Europe rated highest across all age groups, followed by central and southern Europe. Unexpectedly, the study found that the better developed a country, the higher the rate of increase in women’s cognitive abilities.

Quite why women benefit dispropor- 1

60 Science and technology 2 tionately from societal improvements is

not known. They may be starting from a more disadvantaged level, with greater potential to catch up as the RDI score improves. Generally, the cognitive differences in numeracy between men and women are narrowing, more so in northern Europe than in southern Europe. North European women aged 50-54 are also increasing their lead over men in episodic memory, by remembering almost one more word out of ten, says Ms Weber.

Whatever the reason, this study indicates that cognitive differences between men and women are not solely inherited.

It suggests that, to a degree hitherto unacknowledged, they are learned from the roles a society expects males and females to perform, and that those differences can change as society changes. Modern times require modern thinking. 7

Solar energy

Picking up steam A carbon-based material gives solar steam-power a boost

A

NYONE who has watched a road steaming away in the sunny aftermath of a rainstorm knows that sunshine is a powerful evaporator. Using the sun’s heat to warm or evaporate water is a far older form of gathering solar energy than using photovoltaic cells to convert sunlight directly into electricity. Solar-powered steam can make electricity too, by driving a turbine. But it has many other uses—some of which are extremely handy in parts of the world where the sun is the only readily available source of energy. These include running desalination plants, refrigeration, sterilisation, chemical purification and numerous kinds of waste treatment. So there is a big incentive to make it more efficient.

The main problem is that harnessing enough solar energy to put steam to work is both hard and costly. Some existing solar-power plants use vast arrays of movable mirrors, or heliostats, to track the sun through the day and concentrate its energy more than 1,000 times onto a “receiver” that generates steam to drive turbines.

Others use rotating “parabolic troughs” to concentrate the sun’s energy 60-80 times.

One way to get sunshine to boil water more efficiently is to mix the water with something. A recent effort involves adding gold nanoparticles that swiftly get hot under the sun. But this also requires an intense concentration ofsolar power—which means using costly heliostats. And the efficiency with which the nanoparticles help the sun turn water into steam is only 24%,

The Economist August 2nd 2014 Renewable energy

Pee power Going to the loo can recharge a smartphone

“U

RINE and faeces to you”, explains a dodgy sewer-manager in one of Reginald Hill’s crime novels, “is bread and butter to me.” And he is not the only one. The BioEnergy Team, led by Ioannis Ieropoulos of the Bristol Robotics Laboratory (BRL) in Britain, are hoping to profit from working with the stuff too. They have developed a new technique to turn urine into electrical power—or “urinetricity” as they call it.

People around the world produce an estimated 6.4 trillion litres of urine every year. BRL, a collaboration between the University of Bristol and the University of the West of England, want to make the most of this abundant resource. At the core of urine-tricity are microbial fuel cells (MFCs), which contain live microbes. When urine flows through an MFC the microbes consume it as part of their normal metabolic process. This, in turn, frees electrons. Electrodes within the cell gather these electrons and when they are connected to an external circuit a current is generated.

The BRL team mounted a series of cigar-tube-sized MFCs into a single unit.

Attaching this unit to the outlet pipe from a urinal allowed a stream of fresh urine to flow through the cells. Fresh, in this context, is urine not more than a week old from a healthy individual of average height and weight. Previous experiments had fed the MFCs food scraps, dead insects and grass cuttings. But urine achieved a power output three times higher than any other waste product.

Why does urine work so well? In the earlier tests the microbes were quickly satiated on a heavy diet, Dr Ieropoulos believes. This was because the material contained a high proportion of organic matter. The low level of organic carbon in urine, combined with favourable acidity and electrical conductivity, made all the

so a great deal of energy is lost.

Now a group of researchers at the Massachusetts Institute of Technology (MIT) has come up with an alternative approach that borrows from the wet road. Steam is generated at the surface of water, but the mass of liquid below acts as a heat-sink that conspires against steam generation.

This is why sunshine can readily turn a thin layer of water on a road into steam but cannot do the same for a lake.

The MIT researchers sought to address this in a laboratory set-up that consists of a double-layered black disc floating on the

Aiming for ten more minutes on Twitter difference. Where earlier tests produced minimal power, urine had the vim to recharge commercially available batteries, including those in mobile phones.

It is early days, but the work—which is being supported by a number of organisations, including the Gates Foundation— shows that urine could have the potential to make a significant contribution to renewable energy. It might also provide a commercial incentive to build more toilets—over 2.5 billion people around the world have no access to proper sanitation. Dr Ieropoulos and his team now plan to examine the potential of faeces as a possible power source. They have a higher organic-carbon level, but the scientists think that might be an acceptable price to pay for abundant availability and a self-regulating supply chain. surface of water in an insulated beaker.

The disc’s top layer consists of graphite flakes that were treated by placing them in a domestic microwave oven and heating them up, “just like making popcorn,” says Gang Chen, head of the MIT research team.

The resulting “exfoliated” graphite forms a 5mm-thick porous matrix that absorbs and concentrates the heat from sunshine. The lower layer is a 10mm-thick porous carbon foam that floats on the water and prevents the heat in the top layer from being lost to the water below. The heat in the top layer creates a pressure gradient that slowly and 1

The Economist August 2nd 2014 2 continuously draws water up through the

disc, where the popcorned graphite easily turns the thin layer into steam.

This simple disc turns out to be a very efficient steam generator. For one thing, it produces steam when sunlight is magnified by a factor of just ten. This requires little more than cheap lenses and it increases the efficiency ofusing solar energy to make steam to 85%. With some refinement of the graphite layer, thinks Dr Chen, the technique could be made to workwith sunlight that is concentrated as little as three times.

It might also be possible to make the top

Science and technology 61 layer from even cheaper materials. One is “carbon black”, a widely available by-product of hydrocarbons that have not been completely burned.

The approach by Dr Chen and his colleagues has yet to be scaled up to demonstrate its commercial potential to make solar-steam processes more efficient. But the graphite and carbon sponges have other possible uses too. One idea is laying them like a carpet to dry out waterlogged areas for farmers. One way or another, it appears to be a new technology that is set to earn its place in the sun. 7

Entomology

It’s gotta bee me

There is a lot of individuality in bumblebee colonies

S

OCIAL insects are often dismissed as slaves to the collective mind of the hive.

But individual members of colonies do have brains and are technically capable of making their own decisions. Indeed, several studies have shown that insects such as ants and bees sometimes ignore shared information in favour of what they individually know. What drives them to act independently has been something ofa mystery. New research shows that when a tasty source of food is available the hive mentality is blatantly ignored.

The discovery was made when Ellouise Leadbeater, then of the Zoological Society of London, and Claire Florent of University College London were studying how bumblebees gathered nectar. Insects have various ways of sharing information. Ants obtain social information about food sources by following trails of chemicals left by the feet of other ants, and honeybees learn about resources by studying dances performed by their hive mates. Like them, bumblebees have their own technique.

They learn about new supplies of nectar by monitoring the floral scents in their nesting colony and then searching for the smells outside. This led Dr Leadbeater and Ms Florent to speculate that if they meddled with the scents found in these colonies, they could find out what caused bumblebees to ignore social information in favour of their own knowledge.

To do this, the researchers gave 42 individually tagged bumblebees two days to explore an experimental garden. Within this garden were seven artificial flowers in the form of yellow foam discs laced with essential oils of geraniums and a small well containing 50 microlitres of a nectarlike sugar solution. After their orientation was complete, single bees were selected at

random as they left to forage in the garden.

Half of these bees, upon their return to the colony to deposit the nectar they collected, found the colony as they left it: rich with the smell of geranium oil. The other half, however, returned to a colony that had been artificially laced with essential oils of lavender, just as it would have been if their fellow hive members had been collecting nectar from lavender plants.

The fragrant garden When the bumblebees next went out to forage in the garden they encountered not just the seven geranium-scented artificial flowers but also seven new artificial flowers laced with lavender oil. This time, only the lavender flowers contained a sugary

This one is all mine

solution. This represented a typical situation where some plant species come into bloom and others fade.

As before, all 42 bumblebees headed for the geranium-scented flowers, regardless of what scent they had encountered in their colony. Similarly, all but two of the bees made between six and eight geranium visits before deciding to take a chance with the lavender-scented ones.

As the researchers report in the July issue of Behavioural Ecology and Sociobiology, the social information gained from the colony seemed to play only a minor role in determining how quickly bumblebees switched to the lavender food source.

If the bumblebees came from the lavender-scented colony, then once they had visited their first lavender plant, 80% of the flowers they subsequently visited were lavender. That compared with a figure of 60% for bumblebees that came from a colony where the scent of lavender was absent.

Precisely why the bumblebees largely ignored social information about lavender and so steadfastly stuck with their personal knowledge about geraniums providing a bigger feast, even when it was no longer so, proved vexing. Dr Leadbeater and Ms Florent wondered if the insects might have an innate preference for geraniums over lavender, but in a follow-up experiment where bumblebees were given the chance to choose between the two, they showed no preference whatsoever.

Dr Leadbeater speculates that learning a new foraging route might expose bumblebees to risks that they would not encounter if they simply returned to flowers that they had already personally visited, and that this is why they resisted following up on new foraging information. Bumblebee nests, it appears, buzz with a lot more individuality than anyone had realised. 7

62

Books and arts American politics

Purpose and worth

The Economist August 2nd 2014 Also in this section 63 Labour in Britain 64 Europe’s nation-states 64 Cricket in Pakistan 65 Tutankhamun in Oxford

The rise of Ronald Reagan meant far more than victory for the Republicans

O

NE of Ronald Reagan’s favourite jokes, The Invisible Bridge: The Fall of Nixon loved and polished like a pebble carand the Rise of Reagan. By Rick ried for luck, told of a small boy with incurPerlstein. Simon & Schuster; 856 pages; able optimism. Shown a room heaped $37.50 and £25 with horse dung, the child gleefully began digging. “With all this manure,” the boy beamed, “there must be a pony in here near their homes at night. Congress uncovered years of lawbreaking and assassinasomewhere.”

Americans of the left did not laugh. To tions by the Central Intelligence Agency. In them—as Rick Perlstein argues in “The a bankrupt New York sacked police rioted Invisible Bridge”, a fine (if overlong) and rubbish lay in the streets. As America’s history of the late 1960s and early 1970s— 1976 bicentenary neared, the forced inteReagan’s emergence as a national leader gration of black and white schools saw was a tragedy. As seen by the left, Reagan bombings in Boston. The entire junior class lulled Americans back to sleep at the at West Point military academy was punmoment that an unhappy, failure-haunted ished for cheating. Revolutionary groups country was poised to wake and see itself such as the Weather Underground mountclearly for the first time. For such critics, ed terror attacks from coast to coast. People Reagan’s genius for cheering folk up had a wondered what there was to celebrate. cruel core. There was, it turned out, no pony.

Amid the gloom about today’s America, Mr Perlstein offers vivid reminders of the ghastliness of that time, when violence, scandals and failure buffeted the country as rarely before. His book is the third in a series. The first, “Before the Storm”, covered the 1964 presidential run of the harshly doctrinaire Barry Goldwater, whose thumping defeat concealed the swelling power of the New Right. “Nixonland” followed. The new work opens with Nixon’s fall and ends with Reagan’s narrow failure to grab the 1976 Republican presidential nomination from the hapless incumbent, Gerald Ford.

These were grim years. The horrors went beyond defeat in Vietnam and Watergate’s revelations of skulduggery in high office. Meat prices nearly doubled in the spring of 1973 (a Nixon aide lauded the “gourmet meals” that could be made with offal). An Arab oil boycott brought further inflation, alongside energy shortages. Amid talk of rationing there were shootings at petrol stations. Los Angeles outlawed high-wattage Christmas decorations. Crime soared: three-quarters of women said they were afraid to walk Bumper sticker

To millions—campus radicals on the left; conservative Democrats such as Jimmy Carter of Georgia; even many establishment Republicans—redemption could only lie in clear-eyed scrutiny of the nation’s flaws. Americans wanted to be “proud again”, Mr Carter said after receiving his party’s 1976 presidential nomination. “We just want the truth again.” Then, to the rage of those longing for America to grow up and face its flaws, along came a man capable of turning the most complex problem into a moral fable, in which bad and good might struggle for a while but American greatness and innocence would surely triumph in the end.

Watergate? The burglars sent to raid Democratic offices were “well-meaning individuals committed to the re-election of the president,” soothed Governor Reagan of California, well after other Republicans began to abandon the Nixon White House. Vietnam? America had only its pusillanimity to regret, Reagan said: the “greatest immorality” involved sending young men to fight a war America was not “willing to win”.

The legal struggles of the civil rights era? American kindliness was the key, not government bossiness or new laws.

Reagan offered taxpayers outraged by the Great Society and the growth of the welfare state a potent mix of indignation and absolution. He told them of welfare cheats living high on the hog (in vain, snippy journalists challenged his facts and statistics). He lauded a welfare-to-work scheme he had started in California (grumpy Democrats noted that it found jobs for just one welfare recipient in every 500). Most importantly, Reagan said, if welfare were to vanish overnight “no one would miss a meal” because stout-hearted Americans would “take up the slack”.

Those who tried to fight Reagan with statistics were doomed; he was offering moral perorations, while his critics looked like “pedantic asses”, the book says.

Reagan-bashing critiques of- 1

The Economist August 2nd 2014

Books and arts 63

2 ten carried a whiff of that old Marxist

standby, “false consciousness”—fancy talk by leftists who think workers are dupes, voting against their own class interests after falling for bosses’ lies. But Mr Perlstein is too rigorous a historian to paint Reagan’s success as mere trickery.

Many millions of Americans were sick of hearing their country run down—and Reagan sensed this early. The liberal elites also had overreached. Mr Perlstein is hardly a conservative cheerleader. But he is scathing about the “unthinking arrogance” of left-wingers as they passed laws to reduce parental authority (a “last vestige of slavery”, a Senate hearing was told by one witness), patronised crime victims or sneered at the pious. The left’s timing was also off. Guilt-wracked judges and bureaucrats began reserving good jobs for women and minorities at a moment of sky-high unemployment.

Enter Reagan, a man with the great advantage of believing his own edited, reordered, cheering accounts of the world.

Mr Perlstein devotes long chapters to Reagan’s life before politics, showing just how passionately the future president needed to believe that pessimism was a grave fault, because everything would workout “gloriously” in the end.

The America of 1976 was not quite ready to elect someone of such optimism.

Yet it would not take long to tire of President Carter, and his hand-wringing talk of decline and malaise. A volume on the Reagan presidency surely beckons. If it is as crammed with historical gems as this one, readers will be well served. 7

Governing Britain

A difficult truth The Blair Supremacy: A Study in the Politics of Labour’s Party Management. By Lewis Minkin. Manchester University Press; 798 pages; £90 The Too Difficult Box: The Big Issues Politicians Can’t Crack. Edited by Charles Clarke. Biteback Publishing; 352 pages; £25

“A

CHANGING world means changing policies and a changed party,” Tony Blair told a flock of die-hard supporters in London on July 21st. The former prime minister was recalling the day, precisely 20 years earlier, on which he had ascended to the leadership of the Labour Party. But what did this mean in practice? Some reckon he bulldozed his party’s internal democracy. Blairites consider him a David to the Goliath of vested interests within and beyond Labour.

The Blair kitsch project Two new books explore this topic. Both authors were there at the time: Lewis Minkin, a political scientist, is a former adviser to the party; Charles Clarke was one of Mr Blair’s most loyal cabinet ministers.

Mr Minkin argues the case for the prosecution, probably in more detail than any previous account. Over 800 pages of academic analysis, he hikes through every speech, policy forum and subcommittee meeting of note from 1994 to Mr Blair’s resignation in 2007. He tells of a “rolling coup” by which the Labour leader and his “Bolshevik” cabal seized and consolidated control of the party, ending the trade unions’ block vote, diminishing the role of MPs and punishing outspoken union bosses.

The result, Mr Minkin argues, was a substitution of the leader’s charisma and executive authority for serious consultation. In one section he cites party conferences, once venues for lively debates and votes on policy. Awards for doddery members were replaced with videos hailing the leader’s achievements to “loud thumping music”, creating a “wild zombified build-up” to his speech. Officials were stationed around the conference hall, each with copies of the text indicating the points at which they should cheer and chortle.

Mr Minkin raises valid objections to such methods: they can shut off dissent and undermine trust in politics. But he is too quick to dismiss the Blairites’ justification that, despite the excesses, a presidential leadership helped Labour ministers overhaul Britain’s public services and keep the economy competitive in the face of media pressure and noisy interested groups.

“The Too Difficult Box”, a collection of essays edited by Mr Clarke, sheds light on these challenges. Written mostly by political luminaries from the Blair era (and a dusting of other public servants), they offer

readers a brisk and accessible tour of 27 policy areas where governments struggle to make progress. The best chapters are those by former ministers like David Blunkett and Margaret Hodge, who, though upbeat in their proposed solutions, offer glimpses of the frustrations that confront would-be reformers.

Drawing on his experience as education and home secretary, for example, Mr Clarke advocates user charges to help fund public services in the future, but cryptically hints that this would be politically “difficult” (presumably thanks to angry headlines and union protests). Such solutions, however rational, therefore end up in what he calls the “too eponymous box”—postponed, fudged or abandoned.

He concludes that Britain needs more rational public debate: a closer relationship between politics and academia, better media analysis of government and more compromise in the legislature. These recommendations are sensible enough, but like Mr Minkin’s book, they skirt the observation that consultation and debate have their limits; that sometimes it takes a strong executive (albeit one subject to legislative checks) to get things done.

The matter deserves consideration, particularly within the current government. It has prevaricated on big issues like airport expansion and nuclear deterrence and, on July 15th, saw its most effective minister, Michael Gove, demoted from the education department for (it was said) being too assertive. The conclusion that a powerful executive is a good thing makes some people uncomfortable—but it should not end up in a “too difficult box” of its own. 7 Correction: In our review of Tom Wilkinson’s book, “Bricks and Mortals” (“Building societies”, July 19th), we referred to the Great Mosque of Djenné in Timbuktu instead of the Djinguereber Mosque in Timbuktu.

64 Books and arts European history

Religious warring Christendom Destroyed: Europe 1517-1648.

By Mark Greengrass. Allen Lane; 722 pages; £30

T

HE new Penguin History of Europe, edited by Sir David Cannadine, was launched more than a decade ago. With five volumes now out, it is shaping up to be the best general account available, superseding all previous ones. The latest volume covers what might be called the birth of modern Europe, from the Reformation, which broke the dominance of the Roman Catholic church, to the Treaty of Westphalia, which entrenched the idea of the nation-state. It also maps the transition from the medieval notion of Christendom to the modern concept of Europe, something that provides the main theme for Mark Greengrass, now an emeritus professor at Sheffield University.

Like the four earlier volumes in the series, this one strays far from the traditional focus on kings and wars. It is rich in the detail of ordinary life, from changes in diet (notably the arrival of new foods from America) and dress to travel and language.

Nothing, it seems, is too small to escape this omnivorous author’s attention. The influence of printing emerges as a crucial agent of change. But perhaps most significant is the role of religion and religious war, which is why Martin Luther plays such an important part in the story.

Mr Greengrass’s Christendom was, of course, under attack long before 1517, not least by the Ottoman Turks after their conquest of Constantinople in 1453. And Luther was by no means the first person to criticise the papacy. But the Reformation that he triggered profoundly changed not just all of Europe but, coming just as the continent’s overseas empires were being created, the world. It also contributed to a resurgence of national feeling, epitomised by the passing of Latin as Europe’s common language.

The two countries that came later to dominate Europe, France and Britain, play a surprisingly small role in Mr Greengrass’s period. The main actors were the papacy and the Holy Roman Empire, which under Charles V (pictured) included Spain. The centrality of the empire is made clearer by the fact that both Francis I of France and Henry VIII of England were rivals of the Habsburgs for the title that went to Charles V in 1520. But although he then bestrode the continent like no other ruler since Charlemagne, his empire was soon overstretched and fatally weakened, undermined by Spain’s propensity to

The Economist August 2nd 2014 default on its debt, by wars with France and England and, after Charles’s death, by the Dutch revolt.

Mr Greengrass pays exhaustive attention to every detail in the post-Luther battles over religious doctrine, which he rightly sees as the underlying cause of most of its wars, culminating in both the Thirty Years War and the English civil war.

Indeed, some parts of “Christendom Destroyed” are quite dense for those not already familiar with the history. But the analysis is mostly persuasive, and the decision (common to other volumes in the series) to put most of the politics and warfare at the end ofthe book, not the start, has much to commend it.

The result is a magisterial and authoritative work that merits just two complaints. The first is that the author is not an elegant stylist. The story is usually gripping, but the prose does not always live up to it. The second is the title. The implication, which also flows through much of the text, is that the overthrow of Christendom was something to regret, not celebrate. Mr Greengrass is right that the wars of religion, especially the horrendous Thirty Years War, were costly in lives and treasure. Yet the escape of much of Europe from the dead hand of a corrupt and backward-looking Catholic church was surely an essential precursor of the continent’s success over the next 300 years. The Reformation may have led to much blood being spilt, but it also made modern Europe. If the Penguin History’s coverage of the early period is anything to go by, that story will doubtless be well told in the volumes still to be published on the 19th and 20th centuries. 7

The new Charlemagne

Cricket in Pakistan

Batting for survival Wounded Tiger: A History of Cricket in Pakistan. By Peter Oborne. Simon & Schuster; 624 pages; £25

“W

HAT do they know of cricket who only cricket know?” The literary challenge posed by C.L.R. James, a Trinidadian Marxist author, has borne much fruit in recent years, especially in India. Led by Ramachandra Guha, cricket writers have produced illuminating studies of the Indian game’s socio-political context in which not only cricket, but also India, is the subject. Pakistani cricket is every bit as wonderful to enthusiasts of the world’s second most popular game and as important to an emerging Asian country’s fragile self-identity. But, compared with India, it has been relatively neglected. So Peter Oborne’s ambitious history of Pakistani cricket, “Wounded Tiger”, has been eagerly awaited. It does not disappoint.

The title refers to a team talk given by the then Pakistani cricket captain, Imran Khan, halfway through the 1992 World Cup in Australia and New Zealand. The Pakistanis were playing abysmally and on the verge of elimination. To survive, they must fight like cornered Tigers, urged Mr Khan.

What followed was spectacular: a run of flamboyant victories, including in the tournament’s final, against England.

Humiliation and triumph—all sportsmen face them. Pakistan’s mercurial cricketers often seem to do so on a weekly basis.

It is, as Mr Oborne shows, their successes that are most remarkable. At birth, in 1947, Pakistan inherited little of British India’s cricket infrastructure or tradition. The game was hardly played outside Lahore and Karachi, which had lost much of its population to India. Pakistan had few clubs, only a handful of turf wickets and no cricket administration, first-class tournament, international recognition or significant patron. Yet it had a handful of brilliant players, including Fazal Mahmood, a fast bowler with film-star looks, and A.H. Kardar, an Oxford-educated former India Test player, most of whom had grown up within walking distance of each other in the old walled city of Lahore. Amazing everyone but themselves, they soon pulled off shock victories against all cricket’s established powers, including an almost miraculous away defeat of England in 1954; it would be almost two decades before India’s cricketers managed that.

Despite having the world’s most chaotic and politicised cricket administration, the Pakistanis were, by the 1970s and into the 1980s, one of the world’s best 1

The Economist August 2nd 2014 2 teams. They were known for the fiery bril-

liance of their fast bowlers, including Sarfraz Nawaz and Mr Khan, for the exuberance of batsmen such as Zaheer Abbas and Javed Miandad, but also for an uncanny ability to produce moments of unexpected genius—including dashing tail-end partnerships. In at least two important ways, Pakistani players changed cricket: by reinventing wrist-spin and inventing, in reverse swing, a new fast-bowling art.

None of these achievements, as Mr Oborne, a British journalist and author, argues convincingly, have been fully appreciated. Perceived as an awkward, sometimes aggressive, threat to cricket’s erstwhile-white custodians, Pakistani cricketers were often viewed with suspicion or disdain. Too often, it must be said, they invited this; corruption, including bent umpiring, ball-tampering and, more recently, the blight of match-fixing, has been increasingly evident in Pakistani

Books and arts 65 cricket, as in Pakistan. Indeed, the fortunes of the country and its cricket—as Mr Oborne’s title also suggests—have never been more tragically aligned; since a Jihadist attack on the visiting Sri Lankan team in 2009, Pakistan has been a cricketing pariah, with hardly any foreign team willing to visit it. These are bitter blights. Yet they are not all unique to Pakistan; nor should they obscure its gifts to cricket.

“Wounded Tiger” celebrates the triumphs and castigates the offences fairly.

Inevitably, for a work of such scope, there are weaknesses: too many cursory match reports; perhaps too little exploration of the all-important cricketing relationship with India; a rattlebag feel to the closing chapters on finance and women’s cricket.

Yet this is a monumental telling of one of sport’s great stories, based on thorough, sometimes groundbreaking research. It deserves a place in every cricket library and beyond. 7

King Tutankhamun

Finding the pharaoh

Despite his fame, very little is known about Egypt’s boy-king

T

HE British Museum’s “Treasures of Tutankhamun” show in 1972 was the world’s first blockbuster exhibition. For nine months, more than 7,000 people queued every day, filling the museum’s forecourt in Bloomsbury, to see the wonders from the boy-king’s tomb. Since that travelling exhibition, no display of Egyptian antiquities has come close. Not that this has stopped curators from trying.

The latest effort is at the Ashmolean Museum in Oxford. By focusing on the excavation rather than the contents of the tomb, the show manages to convey the thrill of unsealing a grave still stuffed with treasure. The story begins in November 1922, when a British archaeologist, Howard Carter, sent a telegram to his patron, George Herbert, the Earl of Carnarvon, saying: “At last have made wonderful

discovery in Valley; a magnificent tomb with seals intact.”

Thanks to blow-ups of the original glass-plate negatives, visitors get to see exactly what confronted the excavation team when they entered: an antechamber piled high with chairs, boxes and beds adorned with animal heads; a painted chest filled with the pharaoh’s robes and sandals; and a rectangular stone sarcophagus containing the embalmed pharaoh himself. The displays are from Carter’s rich archive, kept at Oxford University’s Griffith Institute, which celebrates its 75th birthday this year.

Equally evocative are Carter’s diaries and record cards, and his delicate drawings of the finds, including a pencil sketch of the masked king lying in a nest of coffins. Visitors hoping to see the young pharaoh’s sumptuous gold funerary mask will find a replica behind glass. The only items on show from the tomb itself are handfuls of seeds—almonds, persea and watermelon— that were buried for the king’s spirit to use in the afterlife (and which are kept in the Royal Botanical Gardens at Kew).

The rest of the show is more patchy.

One large room is devoted to the Tutmania that took hold in the 1920s on both sides of the Atlantic. Besides press cuttings, posters, and a 1923 Bakelite record of a hit song called “Old King Tut”, it features a scattering of pharaoh-inspired items: a “Tuttoom” board game, a hand-beaded lurex jacket, a Cartier diamond brooch, a biscuit tin. One eye-catching object is a tall ritual couch ornamented with animal heads that was crafted by a sculptor in Hull. The final section, of ancient art, includes an elegant limestone head of Tutankhamun borrowed from the Metropolitan Museum of Art in New York and a granite statue of the boy-king from the British Museum. But there are no objects from the Egyptian Museum in Cairo, now the home to Tutankhamun’s treasures. The exhibition was planned at the height of Egypt’s revolution and loans proved impossible to negotiate.

Nearly a century after the Carter expedition, Tutankhamun, the boy behind the mask, remains a mystery even to Egyptologists. According to the Ashmolean’s curators, only 30 percent of the 5,398 objects found in his tomb have so far been studied; at this rate, it would take 150 years to examine them all. The famous pharaoh has become a neglected subject, scholars preferring little-known areas where they can make more of a mark.

Political turbulence in Egypt has also interrupted research. But now the government is building a Grand Egyptian Museum near the Giza Pyramids which is destined to house the Tutankhamun treasures.

Modern conservation labs are already up and running there. The new museum may well lead to more discoveries about a pharaoh of whom so little is still known. 7

66

Appointments

Courses

CHIEF EXECUTIVE REGULATORY AUTHORITY OF BERMUDA The Regulatory Authority is an independent corporate entity, created in January 2013, to regulate the electronic communications sector in Bermuda and is expected to soon be assigned the regulation of the energy sector.

The Chief Executive will be appointed by the three Commissioners of The Regulatory Authority.

They now seek a seasoned, hands-on Chief Executive to: (a) build on the solid foundation that has already been established in regulating the electronic communications sector in Bermuda, (b) lead and manage the expansion of the Authority’s functions to include the regulation of Bermuda’s energy sector, and (c) train and promote the career development of the Authority’s team members.

You will need senior executive level experience as a regulator in the electronic communications and or energy sector and be able to demonstrate a successful track record of applying intellectual skills and managerial leadership. You will also be able to show that you have delivered results in a competitive market. Your functional expertise background could be in economics, law, telecommunications or electrical engineering or finance.

The ability to adapt to different local environments and command integrity is important.

The appointment offers a competitive remuneration package. If you think you can make a real difference for Bermuda kindly send your resume in confidence, with a sample of your written work, to our retained adviser Bob Franklin.

Please email to bob@franklinexecutivesearch.co.uk

The Economist August 2nd 2014

Tenders

67

Appointments INTERNATIONAL TRIBUNAL FOR THE LAW OF THE SEA TRIBUNAL INTERNATIONAL DU DROIT DE LA MER

The International Tribunal for the Law of the Sea, an international court with its seat in Hamburg, Germany, has the following vacancy:

Legal Officer (P-4) For qualifications and experience required, as well as further details, please see the vacancy announcement on the Tribunal’s website (www.itlos.org).

REQUEST FOR EXPRESSIONS OF INTEREST (CONSULTANT SERVICES) NIGERIA

Business & Personal

The Construction/Equipping of a new 300 Bed Specialist Hospital Project in Kaduna State HEALTH SECTOR CONSULTING SERVICES Mode of Financing: Installment Sales Financing Financing No: UNI-0035 The Kaduna State Ministry of Health has received financing from the Islamic Development Bank toward the cost of the Installment Sales financing for the Equipping of a new 300-Bed specialist Hospital Project in Kaduna State, and intends to apply part of the proceeds for consultant services. The services include preparation of the list of medical and non-medical equipment, preparation tender of document and overall supervision for medical and non-medical equipment.

The Kaduna State Ministry of Health now invites eligible consultants to indicate their interest in providing the services. Interested consultants must provide specific information which demonstrates that they are fully qualified to perform the services (brochures, description of similar assignments, experience in similar conditions, availability of appropriate skills among staff, etc).

Consultants may express interests in the forms of association, validated by an agreement among members of the association which clearly specifies the type of association, i.e. a joint-venture, intermediate forms of association, or sub consultancy.

To advertise within the classified section, contact: United Kingdom Martin Cheng - Tel: (44-20) 7576 8408 martincheng@economist.com

United States Sabrina Feldman - Tel: (212) 698-9754 sabrinafeldman@economist.com

Europe Sandra Huot - Tel: (33) 153 9366 14 sandrahuot@economist.com

Middle East & Africa Mirasol Galindo - Tel: (971) 4433 4202 mirasolgalindo@economist.com

Asia David E. Smith - Tel: (852) 2585 3232 davidesmith@economist.com

The Economist August 2nd 2014

A consultant will be selected in accordance with the procedures set out in the Guidelines for the Use of Consultants under Islamic Development Bank financing (current edition).

Interested consultants may obtain further information at the address below during office hours at Project Implementation Unit, Ministry of Health, Independence Way, Kaduna.

Expressions of interest must be delivered to the office of the Project Manager, Ministry of Health, P.M.B. 2014, Independence Way, Kaduna latest by Monday, 25th August 2014 between 8.00am to 4.00pm, from Monday to Friday.

The Project Manager, Project Implementation Unit, Ministry of Health, P.M.B 2014, Independence Way, Kaduna.

Mobile No: (+234) 8037001891, (+234) 8096859203 or (+234) 8098919811 Email: musahayatuddini@yahoo.com or kadhsdpii@yahoo.co.uk

68

The Economist August 2nd 2014

Economic and financial indicators Economic data % change on year ago Gross domestic product latest qtr* 2014† United States China Japan Britain Canada Euro area Austria Belgium France Germany Greece Italy Netherlands Spain Czech Republic Denmark Hungary Norway Poland Russia Sweden Switzerland Turkey Australia Hong Kong India Indonesia Malaysia Pakistan Singapore South Korea Taiwan Thailand Argentina Brazil Chile Colombia Mexico Venezuela Egypt Israel Saudi Arabia South Africa

Industrial production latest

Current-account balance Consumer prices Unemployment latest 12 % of GDP latest 2014† rate, % months, $bn 2014†

+2.4 Q2 +3.9 +2.1 +4.3 Jun +2.1 Jun +1.9 +8.2 +7.3 +9.2 Jun +2.3 Jun +2.4 +7.5 Q2 +6.7 +1.5 +3.2 Jun +3.6 Jun +2.7 +3.0 Q1 Economic Q2 +3.2data +3.1 +2.2 May +1.9 Jun +1.7 +3.1 +1.2 +2.3 +3.9 Apr +2.4 Jun +1.9 +2.2 Q1 +0.8 +1.1 +0.5 May +0.5 Jun +0.7 +0.9 Q1 -2.5 +1.4 -2.1 May +1.9 Jun +1.7 +0.3 Q1 +0.4 +1.3 +5.2 May +0.3 Jul +0.9 +1.1 Q2 Q1 +0.2 -3.7 May plus +0.5aJuncloser +0.8look +0.7 Statistics on +0.7 42 economies, Q1 +3.3 +2.1 +1.2 May +0.8 Jul +1.0 +2.3 cover na +0.4 +1.8 May -1.1 Jun -1.1 -0.9 Q1 -0.5 +0.2 -1.8 May +0.3 Jun +0.5 -0.5 Q1 -2.4 +0.4 +0.6 May +0.9 Jun +0.8 nil Q1 +2.4 +1.0 +0.5 May -0.3 Jul +0.1 +1.2 Q2 +3.2 +2.5 +2.6 May nil Jun +0.6 +2.9 Q1 +3.4 +1.4 -2.7 May +0.5 Jun +0.9 +1.3 Q1 +4.5 +2.6 +9.5 May -0.3 Jun +0.3 +3.5 Q1 +1.3 +2.3 -6.8 May +1.9 Jun +2.0 +3.9 Q1 na +3.1 +1.7 Jun +0.3 Jun +0.6 +3.4 Q1 na +0.6 +0.4 Jun +7.8 Jun +6.7 +0.9 Q1 +1.0 +2.4 -2.2 May +0.2 Jun +0.2 +1.9 Q2 +1.9 +2.0 +0.5 Q1 nil Jun +0.2 +2.0 Q1 na +3.0 +1.6 May +9.2 Jun +8.7 +4.3 Q1 +4.5 +3.0 +5.7 Q1 +3.0 Q2 +2.7 +3.5 Q1 +1.0 +2.6 +2.1 Q1 +3.6 Jun +3.6 +2.5 Q1 +8.0 +6.0 +4.7 May +7.3 Jun +8.4 +4.6 Q1 +5.2 Q1 na +5.4 +2.9 May +6.7 Jun +6.4 na +5.7 +6.1 May +3.3 Jun +3.2 +6.2 Q1 +6.1 2013** na +5.4 +2.3 May +8.2 Jun +7.7 -0.8 +4.2 +0.4 Jun +1.8 Jun +2.2 +2.1 Q2 +2.4 +3.8 +0.6 Jun +1.7 Jun +1.7 +3.6 Q2 +5.9 +3.2 +8.6 Jun +1.6 Jun +1.6 +3.8 Q2 -8.2 +1.9 -6.6 Jun +2.4 Jun +2.5 -0.4 Q1 -3.2 -1.2 -4.9 May — *** — -0.2 Q1 +0.7 +1.0 -3.1 May +6.5 Jun +6.6 +1.9 Q1 +3.0 +3.2 +0.8 Jun +4.3 Jun +4.1 +2.6 Q1 +9.7 +5.0 +1.8 May +2.8 Jun +3.0 +6.4 Q1 +1.1 +2.4 +1.6 May +3.8 Jun +3.9 +1.8 Q1 +3.6 -2.5 +0.8 Sep +60.9 May +64.4 +1.0 Q4 na +1.8 +8.2 May +8.2 Jun +9.1 +2.5 Q1 +3.5 Q1 +2.9 +3.1 +0.8 May +0.5 Jun +0.9 +4.0 2013 na +4.0 na +2.7 Jun +2.9 -0.6 +2.3 -3.5 May +6.6 Jun +5.9 +1.6 Q1

6.1 Jun 4.1 Q2§ 3.7 Jun 6.5 Apr†† 7.1 Jun 11.6 May 4.7 May 8.5 May 10.1import May at 6.7 Jun 27.3 Apr 12.6 May 8.4 Jun 25.1 May 7.4 Jun§ 5.0 May 8.0 Jun§†† 3.2 May‡‡ 12.0 Jun§ 4.9 Jun§ 9.2 Jun§ 3.2 Jun 9.0 Apr§ 6.0 Jun 3.2 Jun‡‡ 8.8 2013 5.7 Q1§ 2.9 May§ 6.2 2013 2.0 Q2 3.5 Jun§ 4.0 Jun 0.9 May§ 7.1 Q1§ 4.9 Apr§ 6.3 May§‡‡ 8.8 May§ 4.8 Jun 7.1 Apr§ 13.4 Q1§ 5.9 May 5.6 2013 25.5 Q2§

-405.9 Q1 +163.6 Q2 +2.6 May -117.7 Q1 -54.8 Q1 +310.1 May +8.8 Q1 -5.4 Mar -44.0 May‡ +266.1 May +2.8 May +30.3 May +86.3 Q1 +4.3 Apr +0.2 Q1 +24.4 May +4.7 Q1 +60.7 Q1 -3.9 May +51.5 Q2 +36.2 Q1 +105.4 Q1 -52.6 May -40.9 Q1 +4.5 Q1 -32.4 Q1 -27.3 Q1 +14.3 Q1 -2.9 Q2 +56.3 Q1 +87.8 Jun +61.9 Q1 +4.9 Q1 -5.7 Q1 -81.2 Jun -8.4 Q1 -13.2 Q1 -23.3 Q1 +6.9 Q3 -1.9 Q1 +7.4 Q1 +132.9 Q1 -19.0 Q1

-2.3 +2.1 +0.2 -4.0 -2.7 +2.5 +2.9 -0.6 -1.3 +7.0 +0.6 +1.2 +9.9 +1.1 nil +6.6 +1.5 +13.3 -1.8 +2.0 +6.3 +12.2 -5.8 -2.1 +2.8 -2.8 -3.3 +6.3 -2.1 +19.5 +4.5 +11.9 +2.5 -1.1 -3.7 -2.5 -3.8 -1.5 +1.4 -2.5 +2.5 +11.8 -5.5

Budget Interest balance rates, % % of GDP 10-year gov't 2014† bonds, latest

Currency units, per $ Jul 30th year ago

-2.9 -3.0 -8.0 -4.6 -2.6 -2.6 -2.8 -2.6 -4.0 +0.5 -5.5 -3.0 -2.7 -5.7 -1.7 -1.5 -3.0 +12.2 -3.5 -0.6 -2.1 +0.3 -2.6 -1.2 +0.8 -5.2 -2.3 -4.0 -6.8 +0.7 +1.0 -1.4 -2.3 -1.8 -3.8 -1.3 -1.5 -3.6 -12.1 -11.9 -2.6 +2.2 -4.4

6.17 103 0.59 1.09 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 20.6 5.57 233 6.26 3.11 35.6 6.89 0.91 2.14 1.07 7.75 60.1 11,578 3.18 98.8 1.25 1,024 30.0 31.9 8.20 2.25 570 1,877 13.1 11.0 7.15 3.43 3.75 10.7

2.56 4.03§§ 0.53 2.66 2.16 1.18 1.39 1.53 1.56 1.18 5.90 2.71 1.31 2.38 1.43 1.54 4.42 2.38 3.22 9.46 1.51 0.58 8.75 3.42 2.01 8.73 na 3.88 13.15††† 2.42 3.03 1.61 3.54 na 11.94 4.61 6.66 7.75 15.81 na 2.70 na 8.07

6.13 98.0 0.65 1.03 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 19.5 5.63 225 5.92 3.18 32.8 6.48 0.93 1.92 1.10 7.76 59.4 10,273 3.23 102 1.27 1,111 29.9 31.2 5.49 2.26 509 1,889 12.7 6.29 7.00 3.58 3.75 9.81

Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. ***Official number not yet proven to be reliable; The State Street PriceStats Inflation Index, May 41.74%; year ago 17.70%. †††Dollar-denominated bonds.

The Economist August 2nd 2014

Markets % change on Dec 31st 2013 Index one in local in $ Markets Jul 30th week currency terms United States (DJIA) 16,880.4 -1.2 +1.8 +1.8 China (SSEA) 2,283.9 +4.9 +3.1 +1.2 Japan (Nikkei 225) 15,646.2 +2.1 -4.0 -1.8 Britain (FTSE 100) 6,773.4 -0.4 +0.4 +2.4 Canada (S&P TSX) 15,524.8 +0.8 +14.0 +11.0 Euro area (FTSE Euro 100) 1,036.2 -0.6 +1.6 -1.4 Euro area (EURO STOXX 50) 3,169.2 -0.7 +1.9 -1.0 Austria (ATX) 2,340.0 -1.5 -8.1 -10.8 Belgium (Bel 20) 3,124.8 -1.6 +6.9 +3.8 France (CAC 40) 4,312.3 -1.5 +0.4 -2.5 Germany (DAX)* 9,593.7 -1.6 +0.4 -2.5 Greece (Athex Comp) 1,194.8 +3.7 +2.8 -0.2 Italy (FTSE/MIB) 20,887.5 +0.3 +10.1 +6.9 Netherlands (AEX) 408.0 -0.1 +1.5 -1.4 Spain (Madrid SE) 1,116.4 +2.5 +10.3 +7.1 Czech Republic (PX) 961.8 +1.1 -2.8 -6.2 Denmark (OMXCB) 674.9 +0.3 +19.2 +15.8 Hungary (BUX) 17,823.9 -1.0 -4.0 -11.1 Norway (OSEAX) 686.4 -1.9 +13.9 +10.3 Poland (WIG) 50,394.0 -2.2 -1.7 -4.6 Russia (RTS, $ terms) 1,222.4 -3.9 -8.2 -15.3 Sweden (OMXS30) 1,398.2 nil +4.9 -2.2 Switzerland (SMI) 8,497.4 -1.3 +3.6 +1.3 Turkey (BIST) 84,218.0 +1.6 +24.2 +24.7 Australia (All Ord.) 5,615.1 +0.9 +4.9 +9.8 Hong Kong (Hang Seng) 24,732.2 +3.2 +6.1 +6.2 India (BSE) 26,087.4 -0.2 +23.2 +26.9 Indonesia (JSX) 5,088.8 -0.1 +19.1 +25.2 Malaysia (KLSE) 1,878.3 +0.3 +0.6 +3.6 Pakistan (KSE) 30,314.1 -0.5 +20.0 +27.8 Singapore (STI) 3,353.7 +0.4 +5.9 +7.3 South Korea (KOSPI) 2,082.6 +2.7 +3.5 +6.7 Taiwan (TWI) 9,447.0 -0.6 +9.7 +9.1 Thailand (SET) 1,518.8 -1.5 +16.9 +20.5 Argentina (MERV) 8,937.6 +9.8 +65.8 +31.9 Brazil (BVSP) 56,878.0 -0.9 +10.4 +16.0 Chile (IGPA) 19,069.7 -0.2 +4.6 -3.6 Colombia (IGBC) 14,042.8 +0.6 +7.4 +10.6 Mexico (IPC) 44,311.1 +0.3 +3.7 +3.4 Venezuela (IBC) 2,160.9 +0.1 -21.0 na Egypt (Case 30) 8,735.2 +2.0 +28.8 +25.2 Israel (TA-100) 1,254.2 -0.1 +3.8 +5.1 Saudi Arabia (Tadawul) 10,214.7 +0.5 +19.7 +19.7 South Africa (JSE AS) 51,770.6 -0.3 +11.9 +9.7

Economic and financial indicators 69

Import cover India’s foreign reserves have recently swollen past $300 billion, to a nearrecord high. But with imports running at $38 billion a month, India’s import cover, the number of months of imports its reserves can pay for, has fallen from around 15 months in 2008 to 8.6 by the end of June. That is not a reason to panic: typically, three months’ cover is deemed adequate. But the other BRIC countries (Brazil, China and Russia) have import cover of between 1.5 years and 2 years. In Russia’s case, import cover, though still a healthy 1.5 years, has fallen from nearly 2.5 years in 2010. Not only has the rouble weakened against the dollar, since the start of 2014 Russia’s reserves have also fallen, to below $500 billion.

Other markets Other markets Index Jul 30th United States (S&P 500) 1,970.1 United States (NAScomp) 4,462.9 China (SSEB, $ terms) 235.7 Japan (Topix) 1,292.2 Europe (FTSEurofirst 300) 1,366.5 World, dev'd (MSCI) 1,740.2 Emerging markets (MSCI) 1,078.8 World, all (MSCI) 429.3 World bonds (Citigroup) 943.5 EMBI+ (JPMorgan) 718.8 Hedge funds (HFRX) 1,243.0§ Volatility, US (VIX) 13.3 CDSs, Eur (iTRAXX)† 61.8 60.3 CDSs, N Am (CDX)† Carbon trading (EU ETS) € 6.2

End June 2014, number of months 0

5

10

15

20

25

China Brazil Russia Thailand India South Korea Hong Kong Indonesia Turkey Venezuela Mexico South Africa Argentina Sources: Haver Analytics; IMF; Thomson Reuters; The Economist

The Economist commodity-price index % change on Dec 31st 2013 one in local in $ week currency terms -0.9 +6.6 +6.6 -0.2 +6.9 +6.9 +3.7 -5.3 -7.1 +1.6 -0.8 +1.4 -0.7 +3.8 +0.8 -0.8 +4.8 +4.8 +0.1 +7.6 +7.6 -0.7 +5.1 +5.1 -0.7 +4.1 +4.1 -0.4 +10.3 +10.3 -0.1 +1.4 +1.4 +11.5 +13.7 (levels) +2.2 -13.8 -16.3 +3.0 -6.3 -6.3 -0.3 +22.5 +18.9

Sources: Markit; Thomson Reuters. *Total return index. †Credit-default-swap spreads, basis points. §Jul 29th.

Indicators for more countries and additional series, go to: Economist.com/indicators

2005=100

% change on

The Economist commodity-price indexone one Jul 22nd

Dollar Index All Items 164.4 Food 179.4 Industrials All 148.9 Nfa† 141.9 Metals 151.8 Sterling Index All items 175.3 Euro Index All items 151.8 Gold $ per oz 1,305.8 West Texas Intermediate $ per barrel 104.2

Jul 29th*

month

year

166.0 182.8

-2.1 -4.7

+1.7 -1.5

148.6 141.9 151.5

+1.3 -3.7 +3.4

+6.0 -7.6 +12.7

178.2

-1.0

-8.4

154.0

-0.2

+0.5

1,298.9

-2.3

-2.0

100.9

-4.2

-2.1

Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO; ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional †Non-food agriculturals.

70

The Economist August 2nd 2014

Obituary

Robert Panara Robert Panara, poet and pioneer of deaf studies, died on July 20th aged 94

L

IFE really began for Robert Panara on January 19th 1931, his mother’s birthday.

He was ten, and awoke in hospital. His vision was blurred. He had no feeling in his right arm. When a nurse approached his bed and spoke to him he heard nothing. An attack of spinal meningitis had permanently damaged his auditory nerves; he was completely deaf.

American attitudes to raising deaf children had been liberal in the early 1800s thanks to an enlightened French educator who developed sign language, but by the turn of the century they had hardened.

Alexander Graham Bell, appalled by the idea of “a Deaf variety of the human race”, loudly called for deaf people to be forbidden from marrying each other and for deaf children to be sterilised. The inventor of the telephone, who had a deaf mother and a deaf wife, derided sign language as “pantomime” and called for a ban on “manualism”—a disparaging word for signing. Deaf children should learn “oralism”, he insisted, even if forcing them to try to learn to talk all too often ended in failure.

The Panaras turned to specialists for a cure. One suggested injections to make the boy first hot and then cold; another strapped his head in a device that gave him electric shocks. Panara senior even arranged for his baseball-mad son to shake

hands with Babe Ruth in the hope that the excitement might shock him into hearing again, though he balked at paying $50 for Charles Lindbergh to take him up for a “Deaf Flight”. Mr Panara was lucky in that, by the time he became deaf, he could already speak and read. Eventually his father left him to adjust in his own time. He filled his silent, solitary world with a passion for poetry; Byron, with his club foot, was a particular favourite.

Blindness cuts people off from things, but deafness, as Helen Keller observed, cuts them off from people. Mr Panara muddled through school, largely educating himself; he knew no one else his age who was deaf and nothing about how deaf students might best be educated. Yet he trusted his inner ear, holding to Keats’s words, “Heard melodies are sweet, but those unheard are sweeter.” In a poem, “On His Deafness”, that was inspired by Milton, Mr Panara wrote: “My ears are deaf, and yet I seem to hear Sweet nature’s music and the songs of man, For I have learned from Fancy’s artisan How written words can thrill the inner ear Just as they move the heart, and so for me They also seem to ring out loud and free.”

His first experience of a deaf classroom, at 19, was, therefore, an epiphany. He mar-

velled at how the teacher, Lloyd Harrison, “made us learn without seeming to teach”.

As his biographer Harry Lang later wrote, Mr Panara had yet to pick up sign language and did not even know finger-spelling. But he could lip-read and he watched Harrison’s eyes. He became fascinated by his “windmill-like hands and arms—the language of body and soul”.

Signing for Mr Panara became a pas de deux between the fingers and the face, a way of shading in meaning with the lightest of movements. Another 20 years would pass before William Stokoe’s groundbreaking “Sign Language Structure” proved that what many regarded as a crude, gestural way of communicating was, in fact, a complex system with its own grammar and subtle forms of expression.

Mr Panara knew this instinctively, and he became determined to sign. Soon he was translating Shakespeare plays.

When he became a literature teacher himself, he was able to interpret in sign not just the overall meaning of a poem or a play, but also individual words, lines and quotations. “To see him”, one of his students said, “was to experience a continuous journey of discovery.” As a signer, Mr Panara made “sculptures in the air”.

The sculptor became an elegant and eloquent campaigner for a fully integrated education system for deaf people, one that mixed poetry and drama, sign and speech, hearing people and the deaf. Mr Panara had been to mainstream schools and would graduate from Gallaudet College, the first deaf college to be allowed to grant degrees. He went on to become the first deaf person to receive a master’s degree in English from New York University and was determined to tear down the wall that separated deaf and hearing people. In 1965 John Gardner, the secretary of education, asked him to help found America’s first technical college for the deaf, an idea that dated back to the 19th century.

Mr Panara was the first person hired to its faculty and became the first deaf teacher within mainstream higher education in America. Many of his students were deaf, but not all, and even the hearing ones were taught to sign and to lip-read. His wife, Shirley Fischer, became deaf when she was one year old, before she could speak. The couple communicated in sign; they used sign and speech to talk to their son, John, who could hear and who went on to teach deaf and hearing students at the National Technical Institute for the Deaf, the school his father helped start. When it opened in 1967, no more than 150 deaf students attended mainstream American universities, most of them without anyone to help them with interpreting, notetaking or tutoring. Today there are 120,000 deaf students in college in America and deaf studies has become mainstream. 7

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