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Data and the new rules of competition

Contents The Economist May 6th 2017 3

5 The world this week 29 The Supreme Court Man in the middle 29 Transport in New York Leaders On the wrong track 7 The data economy 30 School vouchers The world’s most valuable Going public resource 31 Lexington 8 Theresa May v Brussels Constant foe, fickle friend War of words 8 France decides Don’t discount Marine The Americas Le Pen 32 Venezuela South Korea’s election Politics has not kept up with 9 South Korea votes It’s up to the army social change. The government Moon mission? 33 Cannabis in Uruguay Pharmacists v criminals must become more responsive: On the cover 10 Synthetic biology leader, page 9. The political 33 French people in Canada Vast flows of data give Breaking free from cells revolution that ousted the Culture shock in Quebec internet companies great president is not complete, 34 Bello power. Antitrust authorities Letters page 18 need a new approach: leader, Peace and politics in 12 On Japan, public land, page 7. Information is giving Colombia Germany, North Korea, rise to a new economy. How India, knots, “The is it shaping up? Pages 14-17. Goodies” Middle East and Africa Price-bots can conspire against consumers. How 35 A cotton boll’s journey From shrub to shirt to shelf trustbusters might thwart Briefing 36 South Africa them: Free exchange, page 63 14 The data economy Funereal politics Fuel of the future 37 Egypt’s judiciary The Economist online Under attack Asia Daily analysis and opinion to 37 America and the 18 South Korean politics Palestinians supplement the print edition, plus Le Pen Why voters who doubt audio and video, and a daily chart Post-Park life Movement, but how much Economist.com 20 Japanese politics change? Emmanuel Macron should still An attack on pacifism cast their ballot against his E-mail: newsletters and 38 The state of Arab men opponent: leader, page 8. mobile edition 21 Timor-Leste Down and out in Cairo and Even if Marine Le Pen is Economist.com/email Wake up and sell the coffee Beirut defeated, she will have left a Print edition: available online by 22 Food safety in Pakistan deep mark on French politics, 7pm London time each Thursday Stepping up to the plate Special report: page 39 Economist.com/print 23 Banyan International banking Audio edition: available online TPP, back from the dead Ten years on to download each Friday After page 38 Economist.com/audioedition China 24 Diplomacy Europe Belt-and-road blues 39 France’s election 25 Xinjiang The rage against Macron Humiliating Muslims 40 German politics Volume 423 Number 9039 Angie’s army

Published since September 1843 United States 40 Turkey and Russia cosy up to take part in "a severe contest between Brothers in arms intelligence, which presses forward, and 26 Health care an unworthy, timid ignorance obstructing A political amputation 41 Eurovision Theresa May and the EU our progress." 27 Innovative cities War music In Brussels and at home, Editorial oﬃces in London and also: Night time turned into day 42 Housing in Russia Britain’s prime minister needs Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago, a plan: leader, page 8. Lima, Mexico City, Moscow, Mumbai, Nairobi, 28 Immigration enforcement A new kind of revolution New Delhi, New York, Paris, San Francisco, A sudden spat with the EU may Cities under siege 43 Charlemagne São Paulo, Seoul, Shanghai, Singapore, Tokyo, boost Mrs May’s election Washington DC The parable of Amiens 28 The law in Texas chances—but at the cost of No refuge making Brexit even tougher for her to negotiate, page 44

1 Contents continues overleaf 4 Contents The Economist May 6th 2017

Britain 61 Car finance in America and Britain 44 The EU and the election Subprime, anyone? When Brussels spouts 62 The euro-area economy 45 Election art Speeding up Explosive appointment 63 Free exchange 45 Euratom Algorithms and antitrust The nuclear cliff-edge 46 Bagehot One nation under May Science and technology 64 Biotechnology Banking Though the effects of Primordial gloop Message to HBS A confidential International the financial crisis in 2007-08 65 The fight against AIDS memorandum to the senior are still reverberating, banks 47 Aid and the private sector Safer sex faculty of Harvard Business Doing good, doing well are learning to live with their 66 Pollutants School: Schumpeter, page 56 new environment. But are they Fatal attraction really safer now? See our Business 66 Conservation special report, after page 38. Subscription service 49 ESPN Big is beautiful Investors are simultaneously For our full range of subscription offers, Still the champion? including digital only or print and digital bullish and skittish about combined visit valuations: Buttonwood, 50 Alphabet v Uber Books and arts Economist.com/offers page 58 No brakes You can subscribe or renew your subscription 67 The National Theatre by mail, telephone or fax at the details below: 52 The cost of cancer drugs Balancing acts Telephone: +65 6534 5166 Hard to swallow Facsimile: +65 6534 5066 68 Islamic State 52 Ride-hailing in Saudi Web: Economist.com/offers Children of jihad E-mail: [email protected] Arabia 69 Revival of cities Post: The Economist A captive market Subscription Centre, Adventures in architecture Tanjong Pagar Post Office 54 Animal waste 69 Art collecting today PO Box 671 Burning the fat Singapore 910817 Don’t be a dupe 54 Axel Springer Subscription for 1 year (51 issues)Print only 70 Alain Mabanckou Australia A$465 Metamorphosis China CNY 2,300 Africa’s Samuel Beckett Hong Kong & Macau HK$2,300 55 Street food in America India 10,000 Rules of the road 70 Tribeca film festival Japan Yen 44,300 An offering you can’t Korea KRW 375,000 56 Schumpeter Malaysia RM 780 Uber A lawsuit about self- refuse New Zealand NZ$530 Harvard Business School Singapore & Brunei S$425 driving cars shows Silicon Taiwan NT$9,000 Valley’s complicated ties, page Thailand US$300 72 Economic and financial Other countries Contact us as above 50. Saudi women are a captive Finance and economics indicators market for Uber and Careem, 57 Chinese investors Statistics on 42 economies, page 52 The Buffetts of China plus our monthly poll of Principal commercial offices: 58 Buttonwood forecasters 25 St James’s Street, London sw1a 1hg Tel: +44 20 7830 7000 Share prices, ten years on Rue de l’Athénée 32 60 Government debt Obituary 1206 Geneva, Switzerland Taking the ultra-long view 74 Albert Freedman Tel: +4122 566 2470 60 Puerto Rico That’s entertainment 750 3rd Avenue, 5th Floor, New York, NY 10017 Debt island Tel: +1212 5410500 1301Cityplaza Four, 61 Illegal-wildlife trade 12 Taikoo Wan Road, Taikoo Shing, Hong Kong On the horns Tel: +852 2585 3888 Other commercial offices: Chicago, Dubai, Frankfurt, Los Angeles, Paris, San Francisco and Singapore

Biotech A new approach could deliver the benefits of nature without the hassle of life: leader, page 10. Biological PEFC certified engineering promises to speed This copy of The Economist up innovation and simplify the is printed on paper sourced from sustainably managed production of drugs and other forests, recycled and controlled chemicals, page 64 sources certified by PEFC PEFC/01-31-162 www.pefc.org

© 2017 The Economist Newspaper Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Newspaper Limited. Published every week, except for a year-end double issue, by The Economist Newspaper Limited. The Economist is a registered trademark of The Economist Newspaper Limited. Publisher: The Economist. Printed by Times Printers (in Singapore). M.C.I. (P) No.030/09/2016 PPS 677/11/2012(022861) The world this week The Economist May 6th 2017 5

Pope Francis visited Egypt, rights, particularly the recent Puerto Rico filed forcourt Politics defying the dangers posed by persecution ofgay men in protection to shelter it from its Islamic State to visit a Coptic Chechnya, a semi-autono- creditors after failing to reach church bombed by the terrorist mous republic. Mrs Merkel an agreement on restructuring group last month. also criticised restrictions on $73bn in debt. Though not the freedom ofassembly, the technically a bankruptcy, it still The great thinker arrest ofanti-government represents the biggest failure of An official newspaper in protesters and a recent ban on a local government under China published a speech by Jehovah’s Witnesses. Mean- American law, farlarger than the chiefofstaffto the presi- while unknown assailants Detroit’s in 2013. dent, Xi Jinping, saying his doused Alexei Navalny, Rus- boss’s political philosophy sia’s leading opposition poli- Rewriting the rules formed a “complete theoretical tician, with a green dye and Venezuela’s president, Nico- system”. The official’s remarks acid, causing him to lose much lás Maduro, issued a decree to appeared to signal that revi- ofthe sight in his right eye. convene a constituent assem- sions to the Communist bly, which would write a new Party’s charter, expected later Bohuslav Sobotka, the prime constitution. The opposition The president ofthe Palestin- this year, will include a tribute minister ofthe Czech Repub- said the manoeuvre is intend- ian Authority, Mahmoud to Mr Xi’s contributions to lic, unexpectedly declared that ed to entrench the power of Abbas, visited the White Communist ideology. he would askthe president to the dictatorial regime. More House to meet Donald Trump. accept the resignation ofhis than 30 people have died in On peace between Israel and China deported an American government over unexplained weeks ofprotests against the the Palestinians, Mr Trump businesswoman who had dealings by the finance min- government. said “we will get it done”, but recently been sentenced to ister, Andrej Babis. Mr Babis offered no specifics. three-and-a-halfyears in pri- belongs to a different party to son for spying. Sandy Phan- Mr Sobotka’s centre-left social Russia announced a proposal Gillis returned to her home in democrats and is his main to create “safe zones” in Syria. the United States. political rival ahead ofa gen- But it reserves the right to eral election, which is due to attack“terrorists” in them. Donald Trump said he would be held in October. be “honoured” to meet Kim Members ofSouth Africa’s Jong Un, North Korea’s blood- Greece secured a deal with its main federation oftrades stained dictator, in the right creditors that will allow it to unions booed President Jacob circumstances. He also invited receive the next tranche of Zuma offa stage when he tried Rodrigo Duterte, the president funds from its bail-out agree- to speakat a rally, a sign ofhis ofthe Philippines, to the ment. Finance ministers in the growing unpopularity. Several White House, despite Mr euro zone will meet on May Trade unions called Brazil’s other senior figures in the Duterte’s extrajudicial killing 22nd to discuss its terms. first general strike in 21years to ruling African National Con- ofdrugs suspects that has protest against the govern- gress were similarly denied the claimed more than 7,000 lives. Everyone’s a winner! ment’s plans to reduce spend- opportunity to speakat other A $1.1 trillion spending bill, ing on pensions and liberalise meetings ofunion members Shinzo Abe, Japan’s prime running at1,665 pages, was labour laws. The strike disrupt- around the country. minister, said he would try to hammered out by Democrats ed business and traffic in sever- amend his country’s pacifist and Republicans on Capitol al cities, including São Paulo The number ofpirate attacks constitution by 2020 to clarify Hill in order to avoid a govern- and Brasília, the capital. offthe west coast ofAfrica the status ofthe Self-Defence ment shutdown. Both parties almost doubled in 2016, ac- Forces, Japan’s armed services claimed that the legislation Multiple complications cording to a new report by in all but name. reflected their priorities. The Brexit hogged the election Oceans Beyond Piracy. The Democrats maintained that limelight in Britain, as news report comes amid an uptick in The leader of the free world they had thwarted funding for leaked ofa fraught dinner attacks on ships around the Donald Trump’swall along the between Theresa May, the Horn ofAfrica, an area that border with Mexico; the Re- prime minister, and Jean- had been free ofpirates for publicans pointed to more Claude Juncker, the European several years. money fordefence. Commission president. He reportedly claimed that Mrs The first contingent ofwhat Republicans in the House of May is living “in another gal- will become a 4,000 strong UN Representatives made another axy”; she responded that the “regional protection force” effortto push their health-care “bureaucrats ofBrussels” were arrived in South Sudan to bill. A reworked version meddling in the election. bolster a peacekeeping mis- makes it easier for states to Labour faced its own embar- sion there. The new troops will withdraw from parts of rassments. Diane Abbott, the have an expanded mandate to Obamacare, which pleased shadow home secretary, use force to protect civilians, conservatives. More money fluffed hersums trying to put a which was authorised by the Angela Merkel, the chancellor was made available forinsur- price on Labour’s pledge to UN last year after fighting ofGermany, visited Russia, ance to cover people with hire an additional 10,000 between the government and where she raised concerns pre-existing conditions, one police officers. It appeared at a rebel group killed hundreds with Vladimir Putin, the Rus- part ofObamacare that has one point that she thought it ofpeople. sian president, about human proved popular with voters. would cost only a few coppers. 1 6 The world this week The Economist May 6th 2017

under the law in question, in Indiana, the home state of case was one ofthe biggest Business Miami has the legal standing Mike Pence, the vice-president. obstacles standing in the way ofan “aggrieved” person. But it ofAirbnb’s ambition to launch also sent the case backto the The euro zone’s GDP grew at a stockmarket IPO. Apple iPhone sales appeals court with an order to an annualised rate ofaround Units, m apply a much tougher stan- 2% in the first quarter. Ameri- For the second time in a de- 80 dard when assessing damages. can GDP rose by 0.7% in the cade, Alitalia filed forbank- same period, the weakest pace ruptcy protection after work- 60 * Buoyed by higher oil prices, since early 2014. ers rejected the cuts needed to 40 the world’s big oil companies underpin a capitalisation plan. 20 reported better-than-expected America’s weakeconomic The airline has been a perenni- 0 results forthe first quarter. growth at the start ofthe year al problem forItaly’s govern- 2015 16 17 Exxon Mobil made a headline played a part in the Federal ment, which has ruled out a *Q2 ends profit of$4bn, up by120% from Reserve’s decision to keep rescue. Alitalia will workout a Source: Company reports April 1st 2017 the same three months last interest rates on hold. But with restructuring plan while it is Apple chalked up a net profit year. And BP nearly tripled its wages growing at a fast clip under special administration, of$11bn forthe three months earnings, to $1.5bn. It expects to and the unemployment rate at from which it may emerge as a ending April 1st, a solid 5% rise forkout another $5bn this year a ten-year low, the central bank much smaller carrier. compared with the same in payments related to the is still on course to raise rates quarter last year. But it also Deepwater Horizon disaster of twice more this year. The fast and the furious reported a dip in sales ofthe 2010, and another $2bn next Scene: A room in Los Angeles. iPhone, caused in part by year. Britain’s economy meanwhile It is1am. The contract between another limp performance in slowed significantly in the first 12,000 television and film China, where revenue fell by Serendipity three months ofthe year, script writers and Holly- 14%. Consumers may be delay- Infosys, an Indian IT services expanding by1.2% at an annu- wood studios expired an hour ing updating their device in company that does most ofits alised rate. But manufacturing ago. Clearly agitated, the writ- anticipation ofa new model in business in the United States, grew in April at the fastest pace ers have voted forstrike action September. Apple’s cash announced that it would hire in more than three years, ifno deal is forthcoming. reserves ballooned to $257bn 10,000 American workers over according to a respected pur- White vans stand ready to take in the quarter. the next two years as it opens chasing managers’ index. volunteers to picket lines. fournew technology and Suddenly, studio executives Following a spate ofincidents innovation hubs. Last month Airbnb reached a settlement agree to most demands, in- where users posted videos of Infosys was one ofthe compa- with San Francisco over a law cluding contributing more to murders and suicides, Face- nies mentioned by the White that fined it forevery person the writers’ health plan [fade book said it would recruit House when it laid out plans to renting out their home through to jubilant union leaders]. another 3,000 people to screen reform the H1-B employment- the website who had not Possible sequel: the contract forharmful images in addition visa programme, which it registered with the city. Airbnb between actors and the stu- to the 4,500 it already employs claims is abused by foreign and other home-share sites dios expires on June 30th. to do that job. Reporting its firms bringing in cheap work- will now checkdata on hosts quarterly earnings, the social ers. Perhaps by chance, one of and remove listings that fail to Other economic data and news networksaid it had almost the new tech hubs will be built comply with the rules. The can be found on pages 72-73 reached 2bn monthly users. Revenue soared in the first quarter, to $8bn.

A regulatory ﬁling revealed that HNA, an acquisitive Chinese conglomerate, has become the biggest shareholder in Deutsche Bank, holding a stake ofalmost10%. HNA had reported an initial stake of3% only in February.

Miami vice In a closely watched case, America’s Supreme Court ruled that the city ofMiami does have the right to sue Bank of America and Wells Fargo forallegedly discriminating against blacks and Hispanics by selling them risky mortgages. Miami argues that the mortgages led to a rise in fore- closures, subsequently hitting its proceeds from property taxes. The court decided that Leaders The Economist May 6th 2017 7 The world’s most valuable resource

Vast flows ofdata give some firms unprecedented power. To keep them in check, antitrust rules must catch up NEW commodity spawns a in the first quarter, is now worth more than GM, which sold Alucrative, fast-growing in- 2.3m. Vast pools ofdata can thus act as protective moats. dustry, prompting antitrust reg- Access to data also protects companies from rivals in anoth- ulators to step in to restrain er way. The case for being sanguine about competition in the those who control its flow. A tech industry rests on the potential for incumbents to be blind- century ago, the resource in sided by a startup in a garage or an unexpected technological question was oil. Now similar shift. But both are less likely in the data age. The giants’ surveil- concerns are being raised by the lance systems span the entire economy: Google can see what giants that deal in data, the oil of the digital era. These titans— people search for, Facebook what they share, Amazon what Alphabet (Google’s parent company), Amazon, Apple, Face- theybuy. Theyown app storesand operatingsystems, and rent book and Microsoft—look unstoppable. They are the five most out computing power to startups. They have a “God’s eye valuable listed firms in the world. Their profits are surging: view” ofactivities in their own markets and beyond. They can they collectively racked up over $25bn in net profit in the first see when a new product or service gains traction, allowing quarter of 2017. Amazon captures half of all dollars spent on- them to copy it or simply buy the upstart before it becomes too line in America. Google and Facebookaccounted foralmost all great a threat. Many think Facebook’s $22bn purchase in 2014 the revenue growth in digital advertising in America last year. ofWhatsApp, a messagingapp with fewerthan 60 employees, Such dominance has prompted calls for the tech giants to falls into this category of “shoot-out acquisitions” that elimi- be broken up, as Standard Oil was in the early 20th century. nate potential rivals. By providing barriers to entry and early- This newspaper has argued against such drastic action in the warning systems, data can stifle competition. past. Size alone is not a crime. The giants’ success has benefited consumers. Few want to live without Google’s search engine, Who ya gonna call, trustbusters? Amazon’s one-day delivery or Facebook’s newsfeed. Nor do The nature ofdata makesthe antitrustremediesofthe pastless these firms raise the alarm when standard antitrust tests are useful. Breakingup a firm like Google into five Googlets would applied. Far from gouging consumers, many of their services not stop network effects from reasserting themselves: in time, are free (users pay, in effect, by handing over yet more data). one of them would become dominant again. A radical rethink Take account ofoffline rivals, and their market shares lookless is required—and as the outlines of a new approach start to be- worrying. And the emergence of upstarts like Snapchat sug- come apparent, two ideas stand out. gests that new entrants can still make waves. The first is that antitrust authorities need to move from the But there is cause for concern. Internet companies’ control industrial era into the 21st century. When consideringa merger, of data gives them enormous power. Old ways of thinking for example, they have traditionally used size to determine about competition, devised in the era of oil, look outdated in when to intervene. They now need to take into account the ex- what has come to be called the “data economy” (see page 14). A tent of firms’ data assets when assessing the impact of deals. new approach is needed. The purchase price could also be a signal that an incumbent is buying a nascent threat. On these measures, Facebook’s will- Quantity has a quality all its own ingness to pay so much for WhatsApp, which had no revenue What has changed? Smartphones and the internet have made to speakof, would have raised red flags. Trustbusters must also data abundant, ubiquitous and far more valuable. Whether become more data-savvy in their analysis of market dynam- you are going for a run, watching TV or even just sitting in traf- ics, for example by using simulations to hunt for algorithms fic, virtually every activity creates a digital trace—more raw colluding over prices or to determine how best to promote material for the data distilleries. As devices from watches to competition (see Free exchange). cars connect to the internet, the volume is increasing: some es- The second principle is to loosen the grip that providers of timate that a self-driving car will generate 100 gigabytes per online services have over data and give more control to those second. Meanwhile, artificial-intelligence (AI) techniquessuch who supply them. More transparency would help: companies as machine learning extract more value from data. Algorithms could be forced to reveal to consumers what information they can predict when a customeris ready to buy, a jet-engine needs hold and how much money they make from it. Governments servicing or a person is at risk of a disease. Industrial giants could encourage the emergence ofnewservicesbyopening up such as GE and Siemens now sell themselves as data firms. more of their own data vaults or managing crucial parts of the This abundance of data changes the nature of competition. data economy as public infrastructure, as India does with its Technology giants have always benefited from network ef- digital-identity system, Aadhaar. They could also mandate the fects: the more users Facebook signs up, the more attractive sharing of certain kinds of data, with users’ consent—an ap- signing up becomes for others. With data there are extra net- proach Europe is taking in financial services by requiring work effects. By collecting more data, a firm has more scope to banks to make customers’ data accessible to third parties. improve its products, which attracts more users, generating Rebootingantitrust forthe information age will not be easy. even more data, and so on. The more data Tesla gathersfrom its It will entail new risks: more data sharing, for instance, could self-driving cars, the better it can make them at driving them- threaten privacy. But if governments don’t want a data econ- selves—partofthe reason the firm, which sold only25,000 cars omy dominated by a few giants, they will need to act soon. 7 8 Leaders The Economist May 6th 2017

Brexit and Britain’s election Strong, stable—and short on detail

In Brussels and at home, Theresa May is being worryingly vague N MAY 3rd Theresa May attended a rally at a company in Leeds, whose employees Ogave what began as a tweeted thattheyhad been senthome before thingskicked off. speech to mark the start of the Cornish journalists were shut in a room and forbidden from general-election campaign and filming her on a visit to a factory. Mrs May has refused to take ended up sounding more like a part in televised debates; nowadays Britain is rare among de- declaration of war. “Threats mocracies in not having them as a matter ofcourse. against Britain have been issued This tight-lipped campaign is troubling. The Conservative byEuropean politiciansand offi- Party’scatchphrase of“strongand stable leadership” isalready cials,” she warned. “All of these acts have been deliberately wearingthin, though there is more than a month to go. Its posi- timed to affect the result ofthe general election.” tion on everything from Brexit to the National Health Service That is doubtful. But if this week’s war of words between seems to be simply that Mrs May is the leader who will do the Britain’s prime minister and the European Union does affect best job. The EU spat was more of the same: the episode was the vote, it will be in herfavour. Mrs May’s Conservatives were treated as just another reason to ask voters to strengthen her already the racing favourites to win a big majority against a hand in Brussels by giving her a bigger majority. Never mind feeble Labour opposition. A frosty exchange with foreigners the details; put your faith in the negotiator. over Brexit will only reinforce the image of strength that she has been trying to project to voters. The snag, for Britain and Power in need of a plan the EU alike, is that the needless deterioration in relations will A bigger majority would indeed improve Mrs May’s position, worsen the chances of the two parties signing a good—or per- chiefly by allowing her to ignore the wackiest of her own Eu- haps any—Brexit deal (see page 44). rophobe backbenchers, some of whom actually want a “no The episode is doubly worrying for Britons because it deal” outcome. But an essential part of strong and stable lead- seems to exemplify Mrs May’s approach to the election cam- ership isexplainingwhatyouare goingto do with it. Britain de- paign. Rather than explain in detail what she wants from serves a proper debate about the trade-offs involved in its Brexit, as the European side did this week, she has given little grand bargain with the EU. The government’s reply—that such away, instead simply urging voters to trust her to get the best a discussion would give away its secret negotiating position— possible deal. It is a similar story on domestic matters. The betrays its lack of experience cutting such deals. A successful weakness of Labour and its hapless leader, Jeremy Corbyn, outcome is likeliest when both sides lay out their objectives have persuaded the prime ministerto turn the campaign into a clearly. In any case, this week’s episode bears out what those contest about leadership and little else. with experience ofthe EU have longbeen tellingMrs May: that With a lead of nearly 20 percentage points, Mrs May might private talks with Brussels immediately leak. calculate that she has more to lose than to gain by committing The party manifestos will be published soon. Mrs May has herself to detailed policies. She even seems reluctant to risk already shown plenty of steel. Britons must hope that she has much interaction with voters. Last weekend she held a closed more ideas up her sleeve than she has so far let on, on Brexit event in a hall in a remote Scottish woodland. Previously she and much else. 7

France’s election Don’t discount Marine Le Pen

Why voters who doubt Emmanuel Macron should still cast theirballot against his opponent UNDITS are already looking for granted that he will, he might not. Betting on politics is Pbeyond the French presiden- banned in France, but foreign bookmakers give his populist, tial run-off that will take place nationalist opponent, Marine Le Pen, a one-in-six chance of on May 7th. Emmanuel Macron, victory—the same odds as Russian roulette. The reason is that the young liberal favourite, is 20 Ms Le Pen’s supporters will all turn out in force, so if the other points ahead in the polls. Talk side is apathetic and abstains in large numbers, she could win. has turned to the obstacles he French people cannot afford to be complacent about this elec- might face in office. The party he tion, or indifferent to the choices on offer(see page 39). founded, En Marche! (“On the Move!”), will probably not win Though hismanifesto lacksdetail, MrMacron offers reform, a majority in the legislature. How, they ask, will he handle the realism and a chance of a more dynamic France. He would delicate task of coalition-building in a country where old cer- loosen the job-killing labour code, trim the gargantuan state a tainties are going up in flames like rum on a banane flambée? little, reboot Franco-German chumminess and strengthen the Steady on. Mr Macron has not won yet. And ifvoters take it institutions that hold the euro zone together. 1 The Economist May 6th 2017 Leaders 9

2 Ms Le Pen, by contrast, offers bigotry mixed with make- (“Choose France”) with the rootless cosmopolitanism of her believe. Vote for her, she suggests, and the state will shower opponent, a former Rothschild banker. Echoing an old barb you with goodies, paid forlargely by beingless generous to im- from President François Hollande, she says that “the enemy of migrants. She promises earlier retirement, bigger pensions, a the French people is still the world of finance, but this time he short working week, tax cuts and a top-notch hospital on your has a name, he has a face, he has a party.” doorstep. In herbeliefthatFrench people can prosper bywork- This is powerful stuff. Ms Le Pen stirs deeper passions than ing less and consuming more public services (although gov- MrMacron. And even amongvoters repelled by herparty’s xe- ernment already spends 56% of GDP), she has much in com- nophobic baggage, there is an alarming ambivalence. Many mon with Jean-Luc Mélenchon, the far-left candidate who far-leftists talk of a choice between “plague and cholera”, and won a fifth of the vote in the first round last month. Her flyers urge abstention. “There is no hierarchy of unacceptability be- stress this point, hoping to poach his supporters or persuade tween Le Pen and Macron. Between xenophobia and bowing them to stay at home rather than vote for Mr Macron. Ms Le to banks,” declared Emmanuel Todd, a public intellectual. Pen is also reaching out to mainstream conservatives. To woo followers ofFrançois Fillon, a formerprime minister who also Vote forthe banker. It’s important won a fifth of the vote in the first round, she has borrowed If enough voters swallow such sophistry, Ms Le Pen could pre- some of his lines about France’s unique place in the universe vail. Her promised handouts would not materialise, since and downplayed some of her more alarming policies, such as France is already perilously indebted and her scheme to print quitting the euro and perhaps the European Union itself. francs again would spark a financial crisis. Her bid to protect To voters ofall stripes, she promises protection. Against the French jobs would lead to more unemployment. Her plan to possibility of being laid off, if they have jobs. Against foreign shut out foreign goods and ideas would make France poorer competition. Against crime: she would add 40,000 prison and less productive. But the division that she fosters and ex- beds, put15,000 more copson the streetand letthem shoot first ploits will endure, even ifshe loses. Nearly halfof voters in the if they feel threatened. Against terrorism: she would close first round backed anti-EU candidates. French Muslims and mosques suspected of radicalism and deport foreigners sus- non-Muslims are far from reaching a modus vivendi. And Ms pected of jihadist ties. And against having unfamiliar neigh- Le Pen will be backin 2022. French voters should give Mr Mac- bours: she would cut net migration from around 65,000 peo- ron a thumping majority, and a mandate to address the mal- ple a year to 10,000. She contrasts her own patriotic platform aise that makes his opponent’s demagoguery so popular. 7

South Korea Moon mission?

As the country goes to the polls, its leaders must recognise how politics is failing voters AST year millions of South military rule in the 1980s and 1990s. Its recent record ofholding LKoreans took to the streets to a sitting government to account is an example to all. secure the impeachment of Park Yetthere isa naggingsense thatpoliticshasnotkept up with Geun-hye, their conservative social change. South Koreans are increasingly disillusioned president. She is now behind (see page 18). Like disgruntled voters elsewhere, they feel that bars; her trial, on charges of cor- their political system is not working forthem. Growth is falter- ruption and abuse of power, being. Unemployment is surging, especially among the young. gan this week. On May 9th the And even those who have jobs feel that there is one set ofrules country will pick a new president in a snap election. The win- forthe elite and another, harsher one forthe masses. ner looks almost certain to be Moon Jae-in, the liberal whom Ms Parkdefeated at the last election in 2012. Tormented Seoul The scandal tested South Korea’s young, raucous democra- Ms Park’s removal has brought some comfort to the disen- cy—and it passed. No one was killed. The often cautious press chanted. She was out of touch, surrounding herself with yes- vigorously pursued the allegations that Ms Park had divulged men. Her chief-of-staffhad helped to draft the martial law that state secrets to a confidante and colluded with her in extorting underpinned the regime of her father, Park Chung-hee, a mili- large sums from private firms. Legislators, including many tary strongman who ran South Korea for18 years until he was from Ms Park’s own party, voted convincingly to impeach her. assassinated in 1979. Now her nemesis, Mr Moon, has prom- The constitutional court unanimously upheld their decision. ised a less imperious governing style. He says that, if elected, South Korea, in contrast with its northern neighbour, is an he will not live or work in the presidential mansion, the Blue inspiration to many. In 1970 less than half of South Koreans House. Ahn Cheol-soo, another liberal candidate, says he went to secondary school; now they are more likely to gradu- would shrink the president’s office and work more closely ate from university than people in any other country. In five with hisministers. But South Koreanswanttheirinstitutions to decades GDP per person has risen 20-fold, to nearly $40,000 be more responsive, so more change will be needed. (adjusted for the local cost ofliving). In a single generation, the One way to curb the “imperial presidency” would be con- country went from beggar to donor, showing that rapid stitutional reform. At the moment presidents hire and fire growth and democracy can go hand in hand. Its economy re- prime ministerschieflyin the hope ofboostingtheir own polit- mained turbo-charged throughout its transition away from ical standing. Theyhave little incentive to heed voters, because1 10 Leaders The Economist May 6th 2017

2 only one five-year term is allowed. Most leave office with rock- The anti-Park protests have allowed long-ignored voices to bottom approval ratings and mired in scandal. To force leaders be heard. Before the vote on impeachment, some 929,000 citi- to pay more attention to the public, South Korea should allow zens wrote to theirMPs—an unheard-ofengagement with poli- two-term presidenciesand give more powerto the national as- tics. A culture of impunity within corporate and political cir- sembly. That would require a two-thirds majority ofMPsand a cles is being eroded, too. Lee Jae-yong, the boss of Samsung, national referendum—but it could help mend the rift between the country’s biggest conglomerate, is behind bars for alleged- citizens and their government. ly bribing Ms Park. (He denies it.) That is a striking change: his Political parties need to shape up, too. Four-fifths of South father, who remains Samsung’s chairman, was convicted of Koreansdo notfeel thattheirMP representsthem properly. Par- graft in 2008 but received a presidential pardon. ties constantly split and coalesce around new presidential can- Outrage at Ms Parkhas united South Koreans previously di- didates. The two main ones have changed their names 14 and vided by ideology. The liberal, dovish Mr Moon has gone out ten times respectively since 1948, making it hard for voters to of his way to court conservative and hawkish voters. If he keep up. With a powerful national assembly parties might rep- wins, he hasa chance to write the nextchapterofthe South Ko- resent sets ofideas, rather than serve as vehicles for individual rean miracle. The rest of the world should wish him well, for ambition. The media could help, too, by holding all politicians South Korea matters. If, one day, the odious northern regime more fiercely to account, as they did Ms Park. collapses, the South will have to pickup the pieces. 7

Synthetic biology Breaking free from cells

A new approach could deliverthe benefits ofnature without the hassle oflife IVING creatures are jolly use- turned into the end-product that is being produced. Lful. Farmers rear animals and Living creatures are also irritatingly fragile. Genetically en- then harvest their flesh, eggs gineered bacteria can be used, for instance, to make a fuel and milk for humans to eat. called isobutenol. But it is a solvent, and kills the bacteria be- Drug companies genetically en- fore they can make very much. A cell-free system is more ro- gineer animal cells and grow bust. OrconsiderGenzyme, the makerofCerezyme and Fabra- them in vats, so they can churn zyme, drugs for treating rare genetic disorders, which are out drugs to treat disease. There produced in vats of hamster-ovary cells. In 2009 production is a catch, however. It is hard work to corral cells and higher or- was stopped for more than a month after these delicate cells ganisms to do humans’ bidding. caught a viral disease. That shutdown cost hundreds of mil- There may be a better way. Cell-free biology, an idea first lions of dollars. But because cell-free production systems are proposed about a century ago, is at last having its coming-out not alive, they cannot fall ill. party. The technique involves extracting the protein-making The second benefit of cell-free biology is that it has the po- machinery from living cells. Cell walls, useless molecules and tential to avoid some of the social and environmental draw- the organism’s own DNA are all thrown away. By addingdoses backs associated with relying on living organisms. Growing of new DNA to the resultant gloop, proteins can then be made corn (maize) as a feedstock to make ethanol occupies land that to order (see page 64). This month, in California, a 1,000-litre could otherwise be used for growing food, for example. Live- vat ofcellular machinery belonging to a company called Sutro stock farming takes up about a quarter of the planet’s ice-free Biopharma will start churning out components of a cancer land and contributes to climate change. Generating fuel or drug, which will go through tests with the Food and Drug Ad- food in vats could be an attractive alternative. ministration, America’s medical regulator, next year. It will be the first commercial product made in this way. Other firms are A cultural shift working on similar techniques to produce everything from The third reason is ethical. Animals have a capacity for suffer- plastics to pesticides. Cell-free biology could also help those ing that the cellular machinery from which they are built does trying to produce artificial meat without relying on animals. not. Modern technology has replaced many natural products It is still early days, and the commercial viability of these with synthetic alternatives. But humans still rely on animals techniques has yet to be proved. Synthetic biology smacks to for food, fabrics and a few medicines. Snake farms, crude and many of “playing God”: regulators will have a big say in how expensive, produce antivenom. Factory farming of pigs, chick- quickly the technology is adopted. But divorcing biological ens and cows has many opponents. Animals’ skins and coats, production from living things makes sense, forthree reasons. used to make leather and fur, are often the most valuable part The first is efficiency. Living organisms are shaped by evolu- oftheirfarmed carcasses. Youdo not have to be a vegetarian or tion to survive and reproduce. That wastes energy. Consider an animal-rights activist to welcome the possibility of making insulin, which used to be harvested from pig carcasses, and such products in more humane ways. these days is made in vats ofgenetically modified yeast or bac- There are many pitfalls on the road from the laboratory to teria. Those bacteria (and their porcine predecessors) use valu- mass production. But cell-free biology should be cheered on. able nutrients to build a host of other proteins besides insulin Humans will always need the bounty that nature provides, which are vital for their own survival but worthless to hu- whether in the form of nutrients, drugs or chemicals. But they mans. With cell-free biology, more of those nutrients could be may not always need living things to produce them. 7

12 Letters The Economist May 6th 2017

Japan’s new law on terror mising revenue, which stands nal and the most galling to the have to do is double-tie the in contrast to the mandate then leader, Kim Jong Il. That knot and it lasts all day even if “Nabbing imaginary federal agencies must follow suggests that your proposal of you are hiking several miles. terrorists” (April 22nd) raised that land has multiple uses. swingeing financial sanctions Job done. concerns over personal liberty A better accounting of on the North and on any bank HILARY POTTS in Japan, including a new law land-management costs is in dealing with it will have the London that would punish people who order. Any government entity most effect. North Korea’s plan to commit terrorism and can lookprofitable ifit is backer, China, will hurt. But it Youbroached a topic close to organised crime. While several allowed to bookrevenues would be better to face that my heart. But I thinkperhaps criticisms in the article deserve while pushing its costs onto problem in Sino-American by focusing on the mechanical- refuting, allow me to focus on other agencies. relations now than later. It geometric aspects ofthe shoe- the new law. PROFESSOR PAUL JAKUS would also show China that tie-unwind problem, the In 2000, the UN adopted a Department of Applied the United States still retains research team has missed a convention against trans- Economics the clout to do grave damage to pragmatic point. It has been national organised crime Utah State University China’s economy and its vault- my observation in recent years which has187 parties including Logan, Utah ing ambitions in the region, that the cords from head- G7 countries and both Belgium even ifit is reluctant to face phones are increasingly able to and Sweden, which have German productivity down China’s preposterous generate knots ofGordian recently suffered terrorist claims in the South China Sea. propensity within seconds of attacks. Although Japan signed Youranalysis ofthe shrinking PETER ROWE being left to their own devices. the convention, the lackof population in the former East Australian ambassador to South I believe the materials necessary domestic laws Germany made fora depress- and North Korea, 2006-09 scientists already have the prevent us from co-operating ing read, but one which myself Sydney answer. Were all shoelaces with other countries. This law and many other economists made from headphone cord, will eliminate those loopholes predicted (“Fading echoes”, Mind your language and vice versa, life would be and enable Japan to contribute April 15th). The article conclud- measurably freer from stress. towards preventing organised ed that productivity in the The real difficulty fore-com- NICHOLAS WARD crime and terrorism, which are former East Germany is 20% merce in India is the language Vienna genuine concerns forus as we lower than in West Germany. problem (“Delayed delivery”, prepare to host the Rugby That is a two-folded example April 6th). Most e-commerce Goody goody yum yum World Cup and Olympic and ofboth a problem and a sol- companies primarily use Paralympic Games. ution. The problem was that at English on their customer Regarding civil liberties, the the time ofunification, West interface. Yet none ofIndia’s government has carefully German unions forced wage top 20 channels or print titles drafted the bill to clarify parity on their less productive are in English. E-commerce crimes covered under the new East German workers, driving thus limits itselfto 100m law so that groups conducting unemployment up and migra- people through English rather legitimate activities will not be tion westward. The warped than the language of1.2bn punished. solution is that as more people potential users. The market for NORIO MARUYAMA leave the country, and provid- English-speaking Indians is Press secretary ing output remains constant, saturated. It is surprising that Ministry of Foreign Affairs the likelier it is that productivi- the investors in these firms Tokyo ty levels will finally converge. never asked the question WILL PAGE about using the vernacular. If State freeloaders London Flipkart had launched in I cannot allow Bagehot’s Russia it would have been peremptory traducing of“The Yourarticle on public land in Hit North Korea in the wallet given a Russian name and a Goodies” to go unchallenged the United States quoted a Russian-language website. (April 22nd). Many enjoyed the finding that state trust lands Jonathan Pollackis right to be TEJESH SRIVASTAV TV show during the 1970s and agencies return $14.51forevery sceptical about negotiating Delhi the comedy had some topical dollar spent, compared with 73 with North Korea (“The land of content. Who can forget the cents on every dollar spent by lousy options, April 8th). No Knot a problem sight ofan Icelandic gunboat federal forest and land agen- one tried harder than Bill patrolling the Serpentine in cies (“Elliott less”, April 15th). Clinton in the 1990sto negoti- While the research into the London at the time ofthe cod However, these estimates do ate a stop to Pyongyang’s causes ofa shoelace coming wars? I lookforward to a bal- not account forthe freeriding nuclear-weapons programme. undone is undoubtedly a anced analysis ofthe process behaviour ofstate trust lands. He provided lots ofinduce- valuable scientific effort, there ofdisentanglement from the Departments ofagriculture ments: a light-water reactor to is a very simple solution that common fisheries policy. at the state level provide pro solve the North’s power-gener- just requires the common RICHARD ABLETT bono range-management ation problems, free monthly sense ofa five-year-old (A Bridlington, East Yorkshire 7 expertise forgrazing lands held bunker-oil deliveries, lifting its knotty problem”, April 15th). by state trust lands. The bulk of terrorist designation and end- Tie a stopper knot at the end of wildfire suppression and ing financial sanctions against each lace. Letters are welcome and should be BILL MACRAE addressed to the Editor at mitigation costs are incurred the Kims’ family bankin Ma- The Economist, 25 St James’s Street, by the US Forest Service, re- cau. Yet the North’s weapons Red Deer, Canada London sw1A 1hg gardless ofwho manages the programme continued. E-mail: [email protected] land. Finally, state trust lands Those limited banking This research should definitely More letters are available at: often have a mission ofmaxi- sanctions were the most perso- win an Ig Nobel prize. All you Economist.com/letters Executive Focus 13

The Economist May 6th 2017 14 Brieﬁng The data economy The Economist May 6th 2017

ten unstructured data: the streams of pho- Fuel of the future tos and videos generated by users of social networks, the reams of information produced by commuters on theirway to work, the flood ofdata from hundreds ofsensors in a jet engine. From subway trains and wind turbines to toilet seats and toasters—all sorts of de- Information is giving rise to a new economy. How is it shaping up? vices are becoming sources of data. The N OIL refinery is an industrial cathe- ics. Digital information is unlike any previ- world will bristle with connected sensors, Adral, a place of power, drama and dark ous resource; it is extracted, refined, val- so that people will leave a digital trail recesses: ornate cracking towers its gothic ued, bought and sold in different ways. It wherever they go, even if they are not con- pinnacles, flaring gas its stained glass, the changes the rules for markets and it de- nected to the internet. As Paul Sondereg- stench of hydrocarbons its heady incense. mands new approaches from regulators. ger, a big-data strategist at Oracle, a soft- Data centres, in contrast, offer a less obvi- Many a battle will be fought over who ware-maker, puts it: “Data will be the ous spectacle: windowless grey buildings should own, and benefit from, data. ultimate externality: we will generate that boast no height or ornament, they There is an awful lot to scrap over. IDC, them whatever we do.” seem to stretch to infinity. a market-research firm, predicts that the Yet the two have much in common. For “digital universe” (the data created and It is what you know one thing, both are stuffed with pipes. In copied every year) will reach 180 zetta- Most important, the value of data is in- refineries these collect petrol, propane and bytes (180 followed by 21zeros) in 2025 (see creasing. Facebook and Google initially othercomponentsofcrude oil, which have chart on next page). Pumping it all through used the data they collected from users to been separated by heat. In big data centres a broadband internet connection would target advertising better. But in recent years they transport air to cool tens ofthousands take over 450m years. To speed the transfer they have discovered that data can be of computers which extract value—pat- into its data centres, Amazon, an turned into any number ofartificial-intelli- terns, predictions and other insights—from e-commerce giant with a fast-growing gence (AI) or “cognitive” services, some of raw digital information. cloud-computing arm, uses trucks pulling which will generate new sources of rev- Both also fulfil the same role: producing shipping containers each packed with stor- enue. These services include translation, crucial feedstocks for the world economy. age devices holding 100 petabytes (a mere visual recognition and assessing some- Whether cars, plastics or many drugs— 15 zeros). To ingest it all, firms are speedily one’s personality by sifting through their without the components of crude, much building data refineries. In 2016 Amazon, writings—all of which can be sold to other ofmodern life would notexist. The distilla- Alphabetand Microsofttogetherracked up firms to use in their own products. tions of data centres, for their part, power nearly $32bn in capital expenditure and Although signs ofthe data economy are all kinds ofonline services and, increasing- capital leases, up by 22% from the previous everywhere, its shape is only now becom- ly, the real world as devices become more year, according to the Wall Street Journal. ing clear. And it would look pretty familiar and more connected. The quality of data has changed, too. to J.R. Ewing. There are the data majors, a Data are to this century what oil was to They are no longer mainly stocks of digital growing number ofwildcatters and plenty the last one: a driverofgrowth and change. information—databases ofnames and oth- ofother firms trying to get a piece of the ac- Flows of data have created new infrastruc- er well-defined personal data, such as age, tion. All are out to exploit a powerful eco- ture, new businesses, new monopolies, sexand income. The neweconomyismore nomic engine called the “data-network ef- new politics and—crucially—new econom- aboutanalysingrapid real-time flows ofof- fect”—usingdata to attract more users, who1 The Economist May 6th 2017 Briefing The data economy 15

2 then generate more data, which help to im- dashcam and services, such as a detailed prove services, which attracts more users. report if they have an accident. The firm’s Byte marks The majors pump from the most boun- goal is to offerall sorts ofservices that help The digital universe Companies mentioning tiful reservoirs. The more users write com- drivers avoid accidents—and for which Zettabytes AI in earnings calls ments, “like” posts and otherwise engage they, ortheir insurers, will pay. One such is FORECAST with Facebook, for example, the more it alertsaboutpotholesorwhen a cararound 200 200 learns about those users and the better tar- a blind corner suddenly stops. geted the ads on newsfeeds become. Simi- Non-tech firms are trying to sink digital 150 150 larly, the more people search on Google, wells, too. GE, for instance, has developed the better its search results turn out. an “operating system for the industrial in- 100 100 These firms are always looking for new ternet”, called Predix, to help customers wells of information. Facebook gets its us- control their machinery. Predix is also a 50 50 ers to train some of its algorithms, for in- data-collection system: it pools data from stance when they upload and tag pictures devices it is connected to, mixes these with offriends. This explains why its computers other data, and then trains algorithms that 0 0 can now recognise hundreds ofmillions of can help improve the operations of a pow- 2013 20 25 2008 12 14 16 people with 98% accuracy. Google’s digital er plant, when to maintain a jet engine be- Sources: IDC; Bloomberg butler, called “Assistant”, gets better at per- fore it breaks down and the like. forming tasks and answering questions As in oil markets, bigger data firms keep of timeliness, for example, or how com- the more it is used. takingoversmallerones (see table). But an- plete it may be. This lackof“fungibility”, in Uber, for its part, is best known for its other aspect of the data economy would economic lingo, makes it difficult for buy- cheap taxi rides. But if the firm is worth an look strange to dealers in black gold. Oil is ers to find a specific set of data and to put a estimated $68bn, it is in part because it the world’s most traded commodity by price on it: the value of each sort is hard to owns the biggest pool ofdata about supply value. Data, by contrast, are hardly traded compare with other data. There is a disin- (drivers) and demand (passengers) for per- at all, at least not formoney. That is a farcry centive to trade as each side will worry sonal transportation. Similarly, for most from what many had in mind when they that it is getting the short end ofthe stick. people Tesla is a maker of fancy electric talked about data as a “new asset class”, as Researchers have only just begun to de- cars. But its latest models collect moun- the World Economic Forum (WEF), the Da- velop pricing methodologies, something tains of data, which allow the firm to opti- vos conference-organiser-cum-think-tank, Gartner, a consultancy, calls “infonomics”. mise its self-driving algorithms and then did in a report published in 2011. The data One of its pioneers, Jim Short of the Uni- update the software accordingly. By the economy, that term suggests, will consist versity of California in San Diego, studies end oflast year, the firm had gathered 1.3bn of thriving markets for bits and bytes. But cases where a decision has been made miles-worth of driving data—orders of as it stands, it is mostly a collection ofinde- about how much data are worth. One such magnitude more than Waymo, Alphabet’s pendent silos. involves a subsidiary ofCaesars Entertain- self-driving-car division. ment, a gamblinggroup, thatfiled for bank- “Data-driven” startups are the wildcat- Keep it to yourself ruptcy in 2015. Its most valuable asset, at ters ofthe new economy: they prospect for This absence of markets is the result of the $1bn, was determined to be the data it is digital oil, extract it and turn it into clever same factors that have given rise to firms. said to hold on the 45m customers who new services, from analysing X-rays and All sorts of “transaction costs” on mar- had joined the company’s customer-loyal- CAT scans to determining where to spray kets—searching for information, negotiat- ty programme over the previous17 years. herbicide on a field. Nexar, an Israeli starting deals, enforcing contracts and so on— The pricing difficulty is an important up, has devised a clever way to use drivers make it simpler and more efficient simply reason why one firm might find it simpler as data sources. Its app turns their smart- to bring these activities in-house. Likewise, to buy another, even if it is mainly interest- phones into dashcams that tag footage of it is often more profitable to generate and ed in data. This was the case in 2015 when their travels via actions they normally per- use data inside a company than to buy and IBM reportedly spent $2bn on the Weather form. If many unexpectedly hit the brake sell them on an open market. Company, to get its hands on mountains of at the same spot on the road, this signals a Their abundance notwithstanding, weather data as well as the infrastructure pothole oranotherobstacle. As compensa- flows of data are not a commodity: each to collect them. Another fudge is barter tion forusing Nexar’s app, drivers get a free stream of information is different, in terms deals: parts of Britain’s National Health Service and DeepMind, Alphabet’sAI division, have agreed to swap access to anony- Extracting information mous patient data for medical insights ex- Data-driven deals, selected tracted from them.

Target company (Date) Value of deal, $bn Business The fact that digital information, unlike oil, is also “non-rivalrous”, meaning that it Instagram (2012) 1.0 Photo sharing can be copied and used by more than one Facebook WhatsApp (2014) 22.0 Text/photo messaging person (or algorithm) at a time, creates fur-

Google Waze (2013) 1.2 Mapping and navigation ther complications. It means that data can easily be used for other purposes than The Weather Company (2015) 2.0 Meteorology IBM those agreed. And it adds to the confusion Truven Health Analytics (2016) 2.6 Health care about who owns data (in the case ofan au- Intel Mobileye (2017) 15.3 Self-driving cars tonomous car, it could be the carmaker, the supplier of the sensors, the passenger and, SwiftKey (2016) 0.25 Keyboard/artificial intelligence Microsoft in time, if self-driving cars become self- LinkedIn (2016) 26.2 Business networking owning ones, the vehicle itself). BlueKai (2014) 0.4 Cloud data platform “Trading data is tedious,” says Alex- Oracle ander Linden of Gartner. As a result, data Datalogix (2014) 1.0 Marketing deals are often bilateral and ad hoc. They Source: Company reports, estimates are not for the fainthearted: data contracts 1 16 Brieﬁng The data economy The Economist May 6th 2017

2 often run over dozens of pages of dense le- John D. Rockefeller in the late-19th century, come dependent on the drug of free data: galese, with language specifying allowed that speeded things up: it helped create the they have no interest in fundamentally uses and how data are to be protected. A technology and—the firm’s name was its changing the deal with their users. Paying senior executive of a big bank recently told programme—the standards that made it fordata and building expensive systems to Mr Linden that he has better things to do possible for the new resource to be traded. trackcontributions would make data refin- than sign off on such documents—even if Markets have long existed for personal ers much less profitable. the data have great value. data that are of high value or easy to stan- Data would not be the only important In the case of personal data, things are dardise. So-called “data brokers” do a swift resource which is not widely traded; wit- even more tricky. “A regulated national in- trade in certain types of data. In other ar- ness radio spectrum and water rights. But formation market could allow personal in- eas, markets, or something akin to them, fordata this is likely to create inefficiencies, formation to be bought and sold, confer- are startingto develop. Oracle, which dom- arguesMrWeyl. Ifdigital information lacks ring on the seller the right to determine inates the market for corporate databases, a price, valuable data may never be gener- how much information is divulged,” Ken- for example, is developing what amounts ated. And if data remain stuck in silos, neth Laudon of New York University to an exchange for data assets. It wants its much value may never get extracted. The wrote in an influential article entitled customers to trade data, combine them big data refineries have no monopoly on “Markets and Privacy” in 1996. More re- with sets provided by Oracle and extract innovation; other firms may be better cently, the WEF proposed the concept of a insights—all in the safe environment of the placed to find ways to exploit information. data bank account. A person’s data, it sug- firm’s computing cloud, where it can make The dearth of data markets will also gested, should “reside in an account where sure, among other things, that information make it more difficult to solve knotty poli- it would be controlled, managed, ex- is not misused. Cognitive Logic, a startup, cy problems. Three stand out: antitrust, pri- changed and accounted for”. has come up with a similar product, but vacyand social equality. The mostpressing The idea seems elegant, but neither a leaves the data in separate IT systems. one, arguably, is antitrust—as was the case market nor data accounts have material- with oil. In 1911 America’s Supreme Court ised yet. The problem is the opposite to upheld a lower-court ruling to break up that with corporate data: people give per- Standard Oil, which then controlled sonal data away too readily in return for around 90% ofoil refining in the country. “free” services. The terms of trade have be- Some are already calling for a similar come the norm almost by accident, says break-up of the likes of Google, including Glen Weyl, an economist at Microsoft Re- Jonathan Taplin of the University of search. After the dotcom bubble burst in Southern California in his new book the early 2000s, firms badly needed a way “Move Fast and Break Things”. But such a to make money. Gathering data for target- radical remedy would not really solve the ed advertising was the quickest fix. Only problem. A break-up would be highly dis- recently have they realised that data could ruptive and slow down innovation. It is be turned into any number ofAI services. likely that a Googlet or a Babyface would quickly become dominant again. Slave to the algorithm Yet calls foraction are growing. The “su- Whether this makes the trade of data for per-platforms” wield too much power, free services an unfairexchange largely de- says Ariel Ezrachi of the University of Ox- pends on the source of the value of the ford, who recently published a book enti- these services: the data or the algorithms tled “Virtual Competition” with Maurice that crunch them? Data, argues Hal Varian, Stucke of the University of Tennessee. Google’schiefeconomist, exhibit“decreas- With many more and fresher data than ing returns to scale”, meaning that each ad- others, he argues, they can quickly detect ditional piece of data is somewhat less competitive threats. Their deep pockets al- valuable and at some point collecting Other young firms hope to give con- low them to buy startups that could one more does not add anything. What matters sumers more of a stake in their data. Citi- day become rivals. They can also manipu- more, he says, is the quality of the algo- zenme allows users to pull all their online late the markets they host by, for example, rithms that crunch the data and the talent a information togetherin one place and earn having their algorithms quickly react so firm has hired to develop them. Google’s a small fee ifthey share it with brands. Da- thatcompetitorshave no chance ofgaining success “is about recipes, not ingredients.” tacoup, another startup, is selling insights customers by lowering prices (see Free ex- That may have been true in the early from personal data and passing on part of change). “The invisible hand is becoming a days of online search but seems wrong in the proceeds to its users. digital one,” says Mr Ezrachi. the brave new world of AI. Algorithms are So far none of these efforts has really increasingly self-teaching—the more and taken off; those focusing on personal data Beware the digital hand the fresher data they are fed, the better. in particular may never do so. By now con- At a minimum, trustbusters have to sharp- And marginal returns from data may actu- sumers and online giants are locked in an en their tools for the digital age. The Euro- ally go up as applications multiply, says Mr awkward embrace. People do not know pean Commission did not block the merg- Weyl. Aftera ride-hailingfirm hascollected how much their data are worth, nor do er of Facebook and WhatsApp. It argued enough data to offerone service—real-time they really want to deal with the hassle of that although these were operating the traffic information, say—more data may managing them, says Alessandro Acquisti two largest text-messaging services, there not add much value. But if it keeps collect- of Carnegie Mellon University. But they were plenty of others around and that the ing data, at some point it may be able to of- are also showing symptoms of what is deal would also notadd to Facebook’sdata fermore services, such as route planning. called “learned helplessness”: terms and hoard because WhatsApp did not collect Such debates, as well as the lack of a conditions for services are often impene- much information about its users. But Fa- thriving trade in data, may be teething pro- trable and users have no choice than to ac- cebook was buying a firm that it feared blems. It tookdecades forwell-functioning cept them (smartphone apps quit immedi- might evolve into a serious rival. It had markets for oil to emerge. Ironically, it was ately ifone does not tap on “I agree”). built an alternative “social graph”, the net- Standard Oil, the monopoly created by For their part, online firms have be- work of connections between friends, 1 The Economist May 6th 2017 Briefing The data economy 17

2 which is Facebook’s most valuable asset. blem: the tension between data markets become more valuable and the data econ- During the approval process of the merger and privacy. Ifpersonal data are traded or omy grows in importance, data refineries Facebook had pledged that it would not shared they are more likely to leak. To re- will make all the money. Those who gener- merge the two user-bases, but started do- duce this risk, the GDPR strengthens peo- ate the data may balk at an unequal ex- ing so last year, which has led the commis- ple’s control over their data: it requires that change that only sees them getting free ser- sion to threaten it with fines. firms get explicit consent for how they use vices. The first to point this out was Jaron The frustration with Facebookhelps ex- data. Fines for violations will be steep: up Lanier, who also works for Microsoft Re- plain why some countries in Europe have to 4% ofglobal revenues or €20m ($22m). search, in his book “Who Owns the Fu- already started to upgrade competition Such rules will be hard to enforce in a ture?”, published in 2014. laws. In Germany legislation is winding world in which streams of data are mixed Mr Weyl, who collaborates with Mr La- through parliament which would allow and matched. And there is another tension nier and is writing a book about renewing the Federal Cartel Office to intervene in between tighter data protection and more liberal economics with Eric Posner of the cases in which networkeffects and data as- competition: not only have big companies University of Chicago, advances another sets play a role. The agency has already tak- greater means to comply with pricey pri- version ofthisargument: ultimately, AI ser- en a special interest in the data economy. It vacy regulation, it also allows them to con- vices are not provided by algorithms but has launched an investigation into wheth- trol data more tightly. by the people who generate the raw mate- er Facebook is abusing its dominant posi- In time new technology, which goes be- rial. “Data is labour,” says Mr Weyl, who is tion to impose certain privacy policies. An- yond simple, easy-to-undo anonymisa- working on a system to measure the value dreas Mundt, its president, wants to do tion, may ease such tensions. Bitmark, an- ofindividual data contributions to create a more: “Can we further optimise our inves- other startup, uses the same “blockchain” basis for a fairer exchange. tigation techniques? How can we better in- technology behind bitcoin, a digital cur- tegrate dynamic effects into our analyses?” rency, to keep track of who has accessed Data workers of the world, unite! A good general rule for regulators is to data. But legal innovation will be needed The problem, says Mr Weyl, is getting peo- be as inventive as the companies they keep too, says Viktor Mayer-Schönberger of the ple to understand that their data have val- an eye on. In a recent paper Messrs Ezrachi UniversityofOxford. He and otherdata ex- ue and that they are due some compensa- and Stucke proposed that antitrust au- perts argue that not only the collection of tion. “We need some sort of digital labour thorities should operate what they call data should be regulated but its use. Just as movement,” he says. It will take even more “tacit collusion incubators”. To find out foodmakers are barred from using certain convincing to get the “siren servers”, as Mr whether pricing algorithms manipulate ingredients, online firms could be prohibit- Lanier calls the data giants, to change their markets or even collude, regulators should ed from using certain data or using them in ways, astheybenefithandsomelyfrom the run simulations on their own computers. such a way that could cause harm to an in- status quo. Another idea is to promote alternatives dividual. This, he argues, would shift re- A more equal geographic distribution to centralised piles of data. Governments sponsibility toward data collectors and of the value extracted from data may be could give away more of the data they col- data users who should be held account- even more difficult to achieve. Currently, lect, creating opportunities for smaller able forhow they manage data rather than most big data refineries are based in Amer- firms. They could also support “data co-op- relying on obtaining individual consent. ica or are controlled by American firms. As eratives”. In Switzerland a project called Such “use-based” regulation would be the data economy progresses, this also Midata collects health data from patients, just as hard to police as the conventional hardly seems sustainable. Past skirmishes who can then decide whether they want rules of notice and consent which cur- between America and Europe over pri- them to be included in research projects. rently govern what data are collected and vacy give a taste of things to come. In Chi- how they are used. It is also likely to wors- na draft regulations require firms to store Distributing the data en what some see as the third bigchallenge all “critical data” they collect on servers For some crucial classes of data, sharing of the data economy in its current form: based in the country. Conflicts over control may even need to be made mandatory. that some will benefit far more than oth- of oil have scarred the world for decades. Ben Thompson, who publishes Strate- ers, both socially and geographically. No one yetworriesthatwarswill be fought chery, a newsletter, recently suggested that For personal data, at least, the current over data. But the data economy has the dominant social networks should be re- model seems barely sustainable. As data same potential forconfrontation. 7 quired to allow access to their social graphs. Instagram, a photo-sharing service which has also been swallowed by Face- book, got offthe ground by having new users import the list of their followers from Twitter. “Social networks have long since made this impossible, making it that much more difficult for competitors to arise,” Mr Thompson points out. Mandatory data sharing is not unheard of: Germany requires insurers jointly to maintain a set ofstatistics, including on car accidents, which smaller firms would not be able to compile on their own. The Euro- pean Union’s new General Data Protec- tion Regulation (GDPR), which will start to apply in May 2018, requires online services to make it easy for customers to transfer their information to other providers and even competitors. But “data portability”, as well as data sharing, highlights the second policy pro- 18 Asia The Economist May 6th 2017

Also in this section 20 Japan’s paciﬁst constitution 21 Timor-Leste is running out of cash 22 Food safety in Pakistan 23 Banyan: TPP rises from the dead

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

South Korean politics poohed the demonstrations. One MP scoffed that the candles the protesters car- Post-Park life ried could be snuffed out by a gust of wind; in response, the marchers brought electric lights instead. (In Gwangju some resorted to flaming torches.) As the protests grew into the biggest since 1987, politicians be- GWANGJU gan to take notice. In the end, the National Assembly voted to impeach Ms Parkby the The political revolution that ousted the president is not complete hefty margin of 234 to 56. Many MPsfrom N A balmy Saturday afternoon, of authoritarian rule, South Koreans at last her Saenuri party voted against her. The Ocrowds cluster around an election secured the direct and free presidential eight justices of the constitutional court van on the busiest shopping street in election they had been demanding. A unanimously upheld the assembly’s deci- Gwangju. Jaunty white-gloved women, country that was already a model ofdevel- sion, even though two of them had been dressed in the blue of the liberal Minjoo opment, having sprouted huge carmaking appointed by Ms Park. party, have just performed a mincing and shipbuilding industries that were the Both Ms Park and the friend at the cen- dance number. Moon Jae-in (pictured), the envy of Asia, was now proving that break- tre of the scandal are now in jail while on party’s candidate, has come to rally the citi- neck industrialisation and democracy trial over it. Lee Jae-yong, the boss of Sam- zens of the south-western city ten days be- could complement each other—an inspira- sung, South Korea’s biggest company, is before the presidential election on May 9th. tion to political activists everywhere. hind bars too, accused of giving money to The Korean pop music blasted from organisations controlled by Ms Park’s speakers outside gleaming shopfronts Back to the barricades friend in return for government support makes the streets pulsate. As recently as Thirty years on, dogged South Korean prot- for a controversial restructuring at the con- 1980, they shookbecause ofthe tanks rum- esters have turned the country’s politics glomerate. (He denies the charges.) Mr bling down them. Paratroopers crushed an upside down once again. Mass demonstra- Moon, who has promised to stamp out cro- uprising in the city against Chun Doo- tionsspurred the National Assemblyto im- nyism, leads the presidential race. hwan, who had seized power in a coup peach the president, Park Geun-hye, pav- Yet the massive protests were about after the assassination of Park Chung-hee, ing the way for the impending election. much more than bringing Ms Parkto book. another military dictator. Hundreds of The immediate cause of the protests was A sense of injustice had been simmering Gwangju’s citizens were killed. Ms Park’s abuse of power: she shared state for years. Young South Koreans are deeply Seven years later there was another secrets with an old friend and colluded anxious. The number of graduates out of a uprising against Mr Chun’s rule—this one with her to extort money from big compa- job, or who have given up looking for one, successful. Millions flooded the streets of nies. But the scandal aroused such pas- recently exceeded 3.5m out of a total of Seoul, the capital, and other big cities to sion—several marches in Seoul attracted as roughly 14m. An educational rat-race and protest over the death of a student at the many as 1m people—because it seemed intense competition for socially respected hands of the strongman’s torturers. A emblematic of a broader concern, with jobs, concentrated in the biggest conglom- struggle that had once been the preserve of parallels all around the world: that the sys- erates, makes life for teens and 20-some- student activists and labour unions spread tem is rigged in favour of the elite, and that things stressful. Long hours and low pay to housewives and the “necktie brigade” politicians seem incapable of responding make lesser jobs a grind too. of salarymen, who came out of their of- to the grievances ofordinary people. Young Koreans have for some time fices to demonstrate. After a crippling war On the face of things, ordinary people been known as the sam-po or three-renun- with North Korea and nearlythree decades have got their way. Politicians at first pooh- ciation generation, since they have neither 1 The Economist May 6th 2017 Asia 19

2 the time nor the resources for dating, mar- on the grounds of national security. They gains of 1987 have not been built on. Kim riage or children. More recently the term formed their new, liberal ideology in stark Soon-heung of the Korea Social Research has evolved to o-po (five renunciations, opposition to it. Centre, a think-tank in Gwangju, says the adding housing and skill-building) and Today South Korea’s youth are pushing transformation to a fully fledged democra- even chil-po (seven, adding hobbies and a third narrative: despite development and cy has been delayed; compared with the hope), as young people complain that they democratisation, they feel that they are liv- country’s breakneck industrialisation, its must give up evermore just to earn a living. ing in Daehan Mangguk, the Failed State of democratisation has slowed. Many fear a They have nicknamed the country the Korea, a play on South Korea’s official comedown after the heady success of the “hellish kingdom”. name, Daehan Minguk, the RepublicofKo- protests. Some draw parallels with 1987, Their disillusion is compounded by the rea. According to Pew’s surveys, 20-some- when a split in the pro-democracy move- knowledge that those with money and thing South Koreans are the only young- ment allowed another general and former connections can evade the rat-race. In par- sters who are more pessimistic about their coup leader, Roh Tae-woo, to win the presi- allel surveys in 44 countries conducted by future income than their parents are on dency with only 37% ofthe vote. the Pew Research Centre, a think-tank, their behalf. Economic growth, after all, Mr Moon is no Mr Roh. Though certain- South Korea was the only place where the has slowed markedly of late. Only two ly a familiar face—he narrowly lost to Ms most commonly cited path to success in young South Koreans in ten are satisfied Park in 2012—he has promised voters “re- life was knowing the right people. The with the direction of their country, com- gime change” after almost a decade ofcon- friend of Ms Park at the centre of the scan- pared with fourin ten ofthose aged 50 and servative rule, including the rooting out of dal, Choi Soon-sil, is alleged to have used over—and that despite the fact that rates elite corruption. He has led national polls some of the money she extracted from big amongthe elderly ofboth poverty and sui- for four months, garnering around 40% companies to pay for her daughter’s com- cide are the highest in the rich world. support in the run-up to the one-round petitive horse-riding. She is also said to election. Another liberal, Ahn Cheol-soo, a have induced a prestigious university to Black marks software tycoon who also ran in the previ- change its admissions criteria to make skill Ms Park seemed to have no feel whatso- ous race, is in second place, with around at dressage a plus, to ensure thather daugh- ever for the public sense of disillusion. She half Mr Moon’s support. The leading con- terwon a place. These claimssentordinary ruled the country like a queen, isolated servative, Hong Joon-pyo, has climbed in families undergoing exam hell into a fury. from voters. She seldom gave interviews the polls, but still garners less than 20%. The supposedly equitable admissions pro- or press conferences, and often holed her- At Mr Moon’s rally in Gwangju, Minjoo cess for universities is one of the few ways self up in the presidential mansion, the activists promised to carry forward the that South Koreans from humble back- Blue House. Her chief-of-staff, Kim Ki- “spirit of May 18th”, a reference to the date grounds can get ahead. choon, was her father’s former spy chief. of Gwangju’s uprising in 1980. He has Ms Park won the presidency in 2012 He is now on trial fororchestrating a black- made vague promises about amendingthe thanks to older voters who remembered list under Ms Parkof10,000 artists deemed constitution to reduce the powers of the with fondness the regime of her father, anti-government or left-leaning. The gov- presidency and thus limit the scope for Park Chung-hee, South Korea’s military ernment withheld funding from exhibi- abuses like Ms Park’s. dictator from 1961 to 1979. He is credited tions, films and performances involving The “imperial presidency” is indeed a with initiating the country’s dizzying eco- anyone on the list. problem, saysLee Sook-jong, a professor of nomic ascent: since 1960 its annual GDP Another incident that fuelled public ire public administration at Sungkyunkwan per person fattened by a factor of 20, to al- was the sinking in 2014 of the Sewol, a pas- University in Seoul. The ruling party typi- most $40,000, after adjusting for inflation senger ferry. Hundreds of schoolchildren cally dominates all positions within gov- and the local cost ofliving (see chart). died because of a botched rescue; the cap- ernment; the president names the heads of Many in this conservative, older gener- tain was among the first to abandon ship. most agencies or has a strong say in their ation view demands for social and politi- Ms Park was absent for much of the crisis, appointment. Yet Ms Lee notes that despite cal change asa messy, worryingdistraction and has yet to explain fully her where- such vast powers, presidents often become from the existential threat that North Korea abouts that day. The trust of the young in lame ducks early on, because they are lim- continues to pose. But their children, born the state’s ability to protect them fell from ited to a single five-year term—a safeguard in the 1960s(and known asthe 386ers, after 47% before the accident to 8%, according to from 1987 intended to prevent a return to Intel’s then-widely-used microchip), balk a poll conducted fourmonths later. authoritarianism. at the authoritarianism that Park justified All this has sharpened a sense that the Parties, meanwhile, are constantly mu-1

On the march South Korea GDP, % change on a year earlier GDP per person*, $’000 24 40 Park Chung-hee seizes Chun Doo-hwan suppresses Further protests usher in Asian financial power in a coup protests against martial law direct presidential elections crisis 18 30 Seoul hosts the National assembly Olympic games votes to impeach 12 20 Global financial Park Geun-hye crisis 6 10 + 0 0 – Assassination of President Park 6 1960 65 70 75 80 85 90 95 2000 05 10 15 17 PRESIDENTS Liberal Conservative Independent Yun Park Choi Chun Roh Kim Kim Roh Lee Park Posun Chung-hee Kyu-hah Doo-hwan Tae-woo Young-sam Dae-jung Moo-hyun Myung-bak Geun-hye

Sources: Conference Board; IMF *2015 prices, 2011 purchasing-power parity 20 Asia The Economist May 6th 2017

Japanese politics On the oﬀensive

TOKYO Shinzo Abe sets a deadline forrevising the constitution LL this week, crowds have been waiting Ain hushed lines to view a yellowing document on display at the National Ar- chives in Tokyo. For many, Japan’s war-re- nouncing constitution, written by an occu- pyingarmyduringa fewswelteringdays in 1946, is something of a sacred text. But Ja- pan’s prime minister, Shinzo Abe, has made little secret of his desire to amend it. He chose the 70th anniversary of its entry into force, on May 3rd, to announce that he would try to secure changes to it by 2020, when Tokyo hosts the Olympics. That will require the approval of both houses of the Park may be gone but resentment lingers Diet, along with popular assent through a referendum. The inevitably contentious 2 tating to stay in power. Since the republic two crusadingliberal presidents, Roh Moo- debate will consume a huge amount ofpo- was founded in 1948, the main liberal party hyun and Kim Dae-jung, whose legacy he litical energyoverthe nextthree years, pos- has changed its name 14 times and splint- promises to uphold. But he also says he sibly at the expense of Mr Abe’s already ered 11 times; its conservative counterpart wants to win the election not just in his flagging economic reforms. hasfared little better, with ten name-swaps party’sstronghold around Gwangju, but in Mr Abe wants to end questions about and ten fractures. The endless manoeu- the conservative heartlands of the south- the legality and appropriate use of Japan’s vring makes it impossible to pursue a con- east as well, where he officially launched not-quite army, the Self-Defence Forces certed legislative agenda—and hard for vot- his campaign. He has made much of his (SDF), by amending Article 9, the constitu- ers to keep track. Citizens do not feel that military service, and abandoned his most tion’s iconic pacifist clause. This prohibits their MPs represent them, which is per- dovish stances regarding North Korea, to Japan from maintaining land, sea or air haps why they channel their anger at the appeal to nervous hawkish voters. forces, which sits a little awkwardly with president. Only 9% trust the legislature; South Koreans, meanwhile, are grow- the SDF’s 250,000-odd servicemen, 1,600 four-fifths say the previous parliament did ing more comfortable with speaking out. aircraft and a fleet boasting four large heli- a bad job, too. Ms Park dismissed the Na- In the 1980s many parents discouraged copter-carriers. It also leads to endless de- tional Assembly as “vegetative”. their children from joining anti-govern- bates about whether it is legitimate for Ja- Others point to a lack of diversity in the ment demonstrations, which often turned pan to participate in international media, which are bad at articulating public violent, leading to mass arrests. This time peacekeeping missions, forexample. 1 demands. The mainstream press is domin- they went together, sometimes with ated by “Cho-joong-dong”, a triumvirate grandparents in tow. Protesters handed of conservative newspapers that toes the flowers to riot police. Crowds sangalong to state line and self-censors on contentious celebrity performances, snacking from nationalist issues. All three are controlled food stalls set up for the occasion. Jeong by rich families. In its World Press Freedom Moon-young of The May 18 Memorial Index, Reporters without Borders placed Foundation, an NGO in Gwangju, says that South Korea in 70th position last year, be- young people want to have fun while de- low Haiti and Malawi. manding change. Yet signs of change are sprouting. South In a country with such stark genera- Koreans were taken by surprise when the tional splits, Mr Jeong says the protests most conservative ofthe three big newspa- against Ms Park should be celebrated as a pers, Chosun Ilbo, was among the outlets rare “meeting of memory and ages”. On that broke the news of Ms Park’s wrongdo- the weekend ofMr Moon’s rally, a group of ings last autumn. In March the ministry of young South Koreans gathered on the oth- culture said it would put up a bill to guar- er side of Gwangju, at Chonnam Universi- antee artists’ rights and create an indepen- ty, where the protests of 1980 began. They dent watchdog. It will provide 8.5bn won were commemorating Park Seung-hee, a ($7.5m) to revive projects starved of fund- former student. She set herself on fire in ing because ofthe blacklist. 1991 to challenge continuing police vio- Mr Moon, too, has been doing his bit to lence under President Roh. But no tears defy expectations. To many, he represents were shed; instead, students staged a play the old-school dovish liberalism of those in which her stand inspired a modern-day who fought for democracy in the 1980s; as student to join the protests against Ms Park. he spoke in Gwangju, a huge banner was An audience of classmates and parents unfurled above the crowd with pictures of cheered the newly minted protester on. 7 Just don’t call it an army The Economist May 6th 2017 Asia 21

2 Many in Mr Abe’s Liberal Democratic two-thirds of both houses—the required gas field, since its first wells were sunk in Party (LDP) have long viewed Article 9 as a strength needed to call a referendum. 2004. But this income looks set to vanish humiliation, imposed by the victorious North Korea’s frequent missile tests are entirely by 2023, as the field runs dry (see Americans. After all, says Keiji Furuya, a helping to make his case forhim. chart on next page). Although a sovereign- politician, the party was born in 1955 with Yet there is ample room for miscalcula- wealth fund worth around $16bn will pro- the explicit aim of amending the constitution. A new poll by NHK, Japan’s state vide a cushion, the government has been tion. Mr Abe’s grandfather, Nobusuke broadcaster, finds that just 25% of the pub- dipping deep into this capital lately to fund Kishi, tried hard to revise it while he was lic want Article 9 rewritten, with 57% op- investments. Last year La’o Hamutuk, a prime minister in the 1950s. (He failed.) posed. Support for constitutional change dogged local think-tank, warned that at Mr Abe has started his campaign on a peaked over a decade ago; young people, present spending rates the cash pile could forceful note. “Those members of the pub- in particular, have grown wary of foreign evaporate within ten years. lic who think of the constitution as an im- entanglements, says Eiji Oguma, a sociolo- A handful of industries could sustain mortal tome are now a small minority,” he gist. Mr Abe himself concedes that the Timor in the lean years ahead. The most told his supporters. He has some reason to economy is a bigger concern for most vot- obvious is agriculture. The coffee business be confident: his ruling coalition has a hef- ers. By pursuing unfinished family busi- provides some income to about a third of ty parliamentary majority and, with the ness too eagerly, he may end up delaying all households; coffee is the country’s only help of like-minded parties, commands its completion yet again. 7 significant export apart from oil. Yet the government reckons that around a third of the country’s coffee trees are unproduc- tive, withered by age and neglect; others yield only a fraction of what should be achievable. Coffee farmers are producing only about a quarter of the quantities that were shipped during the industry’s colonial heyday. Anotheropportunity is to draw in more tourists. A survey published in 2014 by the Asia Foundation, a charity, found that foreigners—mostly diplomats, development workers and their guests—were spending about as much on leisure as the country was earning from exporting its coffee. Ti- mor has pristine reefs, unspoilt hillsides and a compelling national story. Peeling away even a tiny fraction of the 4m holi- daymakers who visit nearby Bali each year could make a big difference to the country’s fortunes. The government is trying to foster both industries. After some missteps Timor’s tourism ministry has cooked up a natty logo and a flashy website. International outfits such as the Asian Development Bank are working to help boost coffee pro- Timor-Leste duction; some Timorese beans are sold in Starbucks. Fernando Santana of the agri- Wake up and sell the coffee culture ministry says it plans to use a mixture of education and incentives to help farmers rejuvenate some 500 hectares of coffee plants this year. The problem is that the government is DILI devoting more time and money to a few risky mega-projects than to these worthy A young republic risks running out ofmoney. Its big-spending leaders are to blame but dull schemes. A new port, the coun- OFFEE trees loom over a village in the pressive Indonesian rule. In that time its try’s first public-private partnership, is be- C hills above Dili, the capital of Timor- leaders have stitched together a relatively ing built west of Dili. It may gradually Leste. Though their fruit has provided in- stable democracy and brought electricity cheapen imports but will not immediately come for decades, Alarico Soares De Cruz, to its remote hamlets. But they have strug- boost Timor’s home-grown industries. A the local headman, says the pickings are gled to reduce widespread poverty among bigger concern is whether the government gradually growing slimmer. Some of the the 1m-odd Timorese, or to revive ailing will see a return on the hundreds of mil- trees are 40 years old, he explains, and farms. With reserves of oil and gas dwin- lions ofdollars it is ploughinginto a special ought to be pruned or completely replant- dling, the government is ploughing the economic zone (SEZ) in Oecusse, an ex- ed. But doing so would mean sacrificing country’s savings into grand development clave tucked into the Indonesian half of the next couple of harvests, and no one is schemes. But some fear they could lead to the island of Timor, forwhich the business eager for that. ruin. A general election in July provides a plan remains worryingly vague. This month marks 15 years since Timor- chance to change direction, but voters Perhaps the most alarming expense is a Leste—a former Portuguese colony, once seem unlikely to seize it. corridor of oil refining and exporting facil- known as East Timor—regained its inde- Timor-Leste has pocketed more than ities being planned just as Timor’s reserves pendence after a quarter-century of op- $18bn from Bayu-Undan, its biggest oil and are running dry. Spread along the coun-1 22 Asia The Economist May 6th 2017

Nation-building, interrupted Food in Pakistan Timor-Leste, petroleum revenues Actual and projections by year, $bn Stepping up to the plate

Actual Annual budget projections LAHORE 4 One province is beginning to take food safety seriously. Will it last? FORECAST OMETHING catches the eye on Anar- people forselling dodgy fare. She trans- 3 Actual Skali Food Street in Lahore, the capital formed the food culture ofLahore, says 2013 ofPunjab province. Bakers are pulling Yasmin Khan, a restaurant-owner. Looka- 2 nan bread out ofa tandoor oven, just as likes ofthe so-called “fearless lady” used 2014 2015 they did when the 200-year-old bazaar to send the kebab-hawkers on Anarkali 1 was founded. One detail, however, is Food Street running for cover. 2016 2017 strikingly contemporary: synthetic paper Mrs Mumtaz has 61,000 fans on Face- 0 hairnets, in a vivid shade ofgreen. “We book; the central-government minister 2003 10 15 20 25 are worried about the food inspector,” responsible for food safety has barely Source: La’o Hamutuk explains Muhammad Aslam, as he wraps 4,000. But she made enemies in the food dough around a stone. business and among politicians connect- 2 try’s south coast—perhaps forno other rea- The feared scrutineers belong to the ed with it. She was removed from her son than to give several places a share in Punjab Food Authority (PFA), the first post in October, after allegations of cor- the supposed income—these installations agency ofits kind in Pakistan. Founded in ruption involving her driver surfaced. are to be connected bya gleamingand cost- 2011, it has its workcut out: some restau- Since then, Lahoris say, there has been a ly new motorway which will bypass exist- rants use rancid cooking oil, keep raw lull in inspections. ing towns and villages. chicken on the floor or try to pass off The fear Mrs Mumtaz inspired still The idea is that this new complex will donkey as beef. Such a scandal is the state keeps some food-sellers on their toes. “If be used, in part, to process the output of ofhygiene in Pakistan’s restaurants that Ayesha Mumtaz wasn’t so strict, I Greater Sunrise, a gas field found in con- television shows about crime often wouldn’t be wearing this glove,” says a tested waters south of Timor which has feature exposés ofparticularly abhorrent cupcake-salesman who had not realised lain untapped since its discovery in the eateries, using jerky footage from hand- that she had been replaced. But as tem- 1970s. The Timorese government claims held cameras. peratures rise and inspections wane, that a treaty in 2006, in which it agreed to The PFA’s new chief, Noorul Amin others are already abandoning their split the field’s revenues equally with Aus- Mengal, says it cannot hope to keep tabs bothersome hygienic garb. tralia, is unfair; after a lengthy standoff, the on all Punjab’s food outlets. On April 17th two countries agreed in January to renego- he proposed that restaurant customers tiate it. But piping the field’s bounty to new conduct their own food inspections, plants in Timor is likely to be vastly more using a smartphone app produced by the expensive than using existing Australian PFA. But restaurants will be hostile to infrastructure. And even if Timor-Leste such intrusion: most ofthem do not gets most of what it wants from the negoti- welcome visitors to their kitchens. Your ations, the revenue from Greater Sunrise correspondent asked to enter several in will only delay the economic reckoning by Lahore, in both down-at-heel estab- a few years. lishments and ritzy ones, and was barred each time. It’s not the economy, stupid! Pakistan’s government, however, is These issues played only a minor role dur- keen on food inspections. In the past two ing campaigning for the presidential elec- months it has approved an expansion of tion, which was held in March. Since 2015 the PFA’s operations from cities to rural Timorhas been run by a coalition compris- areas, and signed offon the creation of ing its two largest parties, Fretilin and equivalent agencies in the province of CNRT. The candidate they backed, Francis- Sindh and in Islamabad, the capital. co Guterres, won easily enough to avoid a A fomer PFA official, Ayesha Mumtaz, second round. Though the media are free made it wildly popular. In just over a year and fairlydiverse, Timor’spoorlyeducated at the agency, she ordered almost 3,000 voters have little grounding in economic restaurants to close until they had made matters and broad faith in a generation of improvements, and arrested close to 400 leaders seen to have delivered the country from Indonesian occupation. Having wit- nessed violence as recently as 2006, when his time in office, began to question the been preoccupied with campaigning; in a competing political factions engaged in le- government’s schemes. The poll in March few months that will change. It is a good thal skirmishes, Timorese are generally produced one surprise: voters in Oecusse, sign that Timorese granted scholarships to happythatthe bigwigsappearto be getting site ofthe woolly but expensive SEZ, chose study abroad are generally choosing to along. not to back the government’s man. But al- come backhome to work. HalfofTimorese The worry is that this apathy will last though these may be indications of an are under 17 years old, and they will even- beyond parliamentary elections in July, eventual realignment, the chance ofan up- tually need jobs. As scores ofwomen gath- leaving Timor-Leste bereft of meaningful set in the near term looks small. erfornoisyaerobicsclasseson Dili’swater- opposition at a critical juncture. Some use- Old hands in Dili remain hopeful that front—their backs turned to a rosy ful friction could perhaps come from a Timor’s leaders can find a face-saving way twilight—the unrest ofthe past seems a dis- new party led by TaurMatan Ruak, the out- to change course. A foreign businessman tant memory. But ifthe economy crashes, it going president who, towards the end of says that so far this year ministers have could easily return. 7 The Economist May 6th 2017 Asia 23 Banyan Back from the dead

Who needs 12 members to make a team? A big trade deal may go ahead without America group in Singapore, says the remaining 11 members’ gains from TPP would still be large even without America (as are the forgone gains for America in several sectors including food and services). The gains apply even to the poorest member, Vietnam, whose garment and footwear industries, underpinned by cheap labour, would benefit from access to the markets of the other rich members. For instance, Ms Elms points out, Australia has a 9.5% tariff on swimwear. Assuming every beach-lover owns three or four costumes, Australia alone represents a big potential market for Vietnamese bikinis and budgie-smugglers. Some aspects of implementing an agreement without America might even prove easier. One example: communist Vietnam was forced to agree to a “side letter” with America insisting on higher labour standards, including allowing verifiably independent trade unions. After America’s withdrawal, this uncomfortable obligation falls away. Yet most countries have been shy about being seen to take the lead in reviving the TPP—with all respect to tiny New Zealand, always an unabashed champion of open trade. For several members, includingSingapore, Malaysia and Vietnam, a chief concern is for a revived club not to be seen as an affront to China. For Ja- pan, in contrast, that is precisely the point—though it will never HEN, three days after his inauguration, Donald Trump admit it in public. Its bigger concern, given its reliance on Ameri- Wpulled America out of the Trans-Pacific Partnership (TPP), a can security, is not to be seen as anti-Trump. 12-country free-trade deal that his predecessor, Barack Obama, Here, Mr Abe’s tour of the golf courses at Mar-a-Lago with the wanted to be his legacy in Asia, it was the fulfilment of a cam- American president in February paid dividends. Their joint state- paign promise. “Great thing for the American worker, what we ment afterwards referred to Japan “continuing to advance region- just did,” he said, as he signed away new markets for American al progress on the basis ofexisting initiatives”. In other words, Mr carmakers, farmers and drugs companies, along with the pros- Trump gave his blessing for Japan to try to keep TPP going. The pect ofover100,000 new American jobs. Hanoi gathering is a Japanese initiative. Most other members, Among the other 11members, the shock was not just over the once reassured that a revived TPP will be structured as neither new president’s hostility to America’s historical role as promoter anti-China nor anti-Trump, seem ready to follow. ofan open, rules-based tradingorder, ofwhich the Asia-Pacific re- Another set of multilateral negotiations is under way to liber- gion has been the greatest beneficiary. Without the United States, alise trade in Asia: the Regional Comprehensive Economic Part- which accounted forthree-fifths ofthe bloc’s combined GDP, TPP nership, or RCEP. Some mistakenly call it a China-led initiative, was, in the words of the Japanese prime minister, Shinzo Abe, and are suspicious of it as a consequence. In fact, as Bilahari Kau- “meaningless”. After all the sweat and political capital expended sikan, a Singaporean ambassador-at-large, underlines, it is led by in crafting the agreement, which was signed in late 2015 but the ten-member Association of Southeast Asian Nations which only Japan has ratified, TPP was, nearly everyone agreed, (ASEAN) and is intended to meld existing free-trade agreements now fit only to be buried. that ASEAN has with six other countries. One of the countries is indeed China. But fourothers—Japan, South Korea, Australia and Revival meeting New Zealand—are American allies, while the sixth, India, as Mr What a difference three months make. This week in Toronto, the Kausikan puts it, is “hardly a Chinese stooge”. survivingmembers—Australia, Brunei, Canada, Chile, Japan, Ma- Others thinkthere is scope for TPP and RCEP to come closer or laysia, Mexico, New Zealand, Peru, Singapore and Vietnam—met even merge, given their seven shared members. But RCEP is far to discuss how to move the partnership forward without Ameri- from a gold standard. TPP would open up all services to all mem- ca. At the end ofMay, they will meet again for a more substantive bers. RCEP negotiations, by contrast, take place at a snail’s pace, gathering in Hanoi. There, bet on TPP confounding the undertak- from a low base. It was seen as a breakthrough, Ms Elms points ers and rising from the dead. out, when ASEAN’s members agreed among themselves to allow That may seem strange. After all, although Mr Trump con- foreign competition in the market forfood deliveries by bicycle. vinced himself that TPP was lousy for America, it was the other Meanwhile, much needs to be done before TPP rises again. members who had to make most ofthe “concessions” in terms of Not least, the surviving team of11needs to find a form ofwords to opening markets. They did so because the American market is a deal with the fact that the agreement of 2015 speaks of 12 mem- huge prize. (Their own tariffs are bad for consumers, too, but this bers. A provisional fix ought to be possible, however. And for never seems to matter politically.) Some, including Japan, also some, one incentive is the hope that a future administration in saw TPP as a mark of America’s strategic commitment to the re- Washington, aware of the damage Mr Trump’s withdrawal has gion in the face ofa risingChina. So they promised to lowerbarri- done to American credibility, will interest itself again in Asian ers, open their service industries to investment and competition, trade. For now, as the 11 prepare to give it a go, they can console strengthen patent protection and tighten environmental stan- themselves with the thought that had it not been for American dards. It really was, as its boosters said, a “gold-standard” deal. pressure during the original negotiations, there would be no Yet Deborah Elms of the Asian Trade Centre, a trade-advisory agreement to revive now. 7 24 China The Economist May 6th 2017

Moscow Also in this section 25 Repression in Xinjiang Rotterdam Barking Land route “One Belt” Altay Bishkek Venice Urumqi Kara-Balta Almaty Istanbul Baku Kashgar Beijing XINJIANG Madrid Athens Turkmenabad Hotan Me Xi’an diterr Tehran China- anean Sea Pakistan CHINA

Chongqing Yiwu Myitsone Dam Gwadar Kunming Kolkata Zhanjiang Kyaukphyu South China Sea Economic corridors Kuala Land Sea Hambantota Lumpur China-Pakistan Rail routes Sea route Malacca Nairobi Strait Selected pipelines “One Road” Sources: Digital Silk Road Project; For daily analysis and debate on China, visit INDIAN OCEAN Project Cargo Network; The Economist 2,000 km Economist.com/china

The new silk route (1) reflect China’s struggle to make it sound palatable to foreigners. Mr Xi first talked All aboard the belt-and-road express about a “Silk Road economic belt”. That was uncontroversial, but to expand its geo- graphical scope a new term was devised: Yidai Yilu, or One [land] Belt, One [mari- BEIJING time] Road. That sounded ugly in English and, officials realised, risked implying that Xi Jinping is preparing to host a gathering ofworld leaders to discuss his most it was all about a big Chinese plan: they ambitious foreign policy. The first oftwo articles examines resistance to the scheme wanted the venture to be seen as a co-oper- N APRIL10th a freight train pulled out ish party in Beijing to celebrate the pro- ative one. So they came up with the ano- Oof Barking station in London carrying ject—the Belt and Road Forum, as the event dyne-sounding belt-and-road translation Scotch whisky, baby milk and engineering is known. On May 14th and 15th leaders (despite the unfortunate acronym it pro- equipment. It arrived in Yiwu in eastern from 28 or so countries will join the festiv- duces forthe forum: BARF). China (see map) nearly three weeks later, ities, including Russia’s Vladimir Putin and A second problem is finding enough completing the second-longest round-trip Myanmar’s de facto leader, Aung San Suu profitable projects to match the vaulting train journey ever made (after Yiwu to Ma- Kyi. Mr Xi will use the gathering to project ambition of the scheme, which aims to drid and back, a record set in 2014). It his country’s self-confidence and his own create a Eurasian trading bloc rivalling the lopped around a month off the time of a as a global leader. But looks can deceive. In American-dominated transatlantic area. It sea journey from Britain to China. reality, Mr Xi faces a backlash against his is not certain, for example, how successful A day after the train’s departure, a less project. At the forum, he will tryto reassure the London-Yiwu rail line will be, given ballyhooed but potentially more signifi- his partners that he is not attempting to that (though faster) it is more than twice as cant event took place in the port of Kyauk- stufftheir mouths with gold. costly as shipping. The Chinese hope to ex- phyu in Myanmar. Workers started transport their expertise in building high-speed ferring oil from a tanker into a new Not so fast rail. But China’s speedy construction of pipeline that runs from the Burmese port The scheme is running into three linked thousands of kilometres of it at home de- north to Kunming, the capital of Yunnan problems. First, it is unclear what its priori- pended on cheap labour and the power to province in south-western China. The ties are, or who is running it. “We haven’t evict anyone who got in the way. That may pipeline bypasses the Malacca Strait, really come up with a specific goal,” says be hard to replicate. through which 80% of Chinese oil imports Zou Tongxuan of Beijing International Belt-and-road projects are failing al- are shipped. Eventually, energy supplies to Studies University. Every province has its ready. In Kara-Balta in Kyrgyzstan, Chongqing, the largest city in the west of own belt-and-road investment plan. So do Zhongda China Petrol, a state-owned com- China, will no longer be vulnerable to po- hundreds of state-owned firms. The gov- pany, built a big oil refinery—then found it litical disruption in the strait. ernment’s strong backing has helped to get could not buy enough crude oil to run it at Both events show that Xi Jinping’s “Belt many projects up and running faster than more than 6% of capacity. The country’s and Road Initiative”, a central feature of might have happened otherwise (Mr Xi deputy prime minister called the plant’s the Chinese president’s foreign policy, is first began to talk about the idea only in construction “ridiculous”; locals are prot- establishing what generals like to call facts 2013). But no one is in day-to-day charge, so esting against its environmental impact. on the ground. Byfinancingaround $150bn thousands of financially dubious schemes China hopes the belt and road will of infrastructure spending a year in coun- have the imprimatur of a belt-and-road bring others into its orbit, including Af-1 tries to China’s south and west (along the project. And the overweening behaviour old Silk Road), Mr Xi hopes to create new of Chinese companies in some countries markets for Chinese firms and new where they operate has stoked fears in Correction: In our story last week about Guo Wengui, a tycoon (“Fox and hounds”), we incorrectly stated that spheres ofinfluence forhis government. some places ofan over-mighty China. his name was the most searched-for term on Weibo. It is The president is preparing to host a lav- The different names given to the project the most searched-for term on Freeweibo. The Economist May 6th 2017 China 25

2 ghanistan, Pakistan, Iraq, Syria and Uk- The new silk route (2) hicles have been ordered to install satellite raine. But these countries are not exactly tracking-devices. There have been several championsin the World Bank’sease-of-do- One belt, one shows of what officials call “thunderous ing-business league. According to Tom power”, involving thousands of paramili- Miller of Gavekal, a consultancy, the Chi- roadblock tary troops parading through streets. nese thinkthey will lose 80% oftheir mon- Last month, new rules came into effect ey in Pakistan, 50% in Myanmarand 30% in BEIJING that banned “abnormal” beards (such as Central Asia. Perhaps they can afford this, the one worn by the man pictured in front Humiliating Muslims will not help but it would be a costly success. of the main mosque in Kashgar in south- China build a new silkroad Third, locals in some countries are an- western Xinjiang). They also called on gry about what they view as China’s HINESE officials describe the far west- transport workers to report women wear- heavy-handedness. In parts ofAsia, demo- C ern province of Xinjiang as a “core ing face veils or full-body coverings to the cratic politics have been challenging Chi- area” in the vast swathe of territory cov- police, and prohibited “naming ofchildren na’s commonly used approach to deal- ered by the country’s grandiose “Belt and to exaggerate religious fervour”. A leaked making—cosying up to unsavoury re- Road Initiative” to boost economic ties list of banned names includes Muham- gimes. This had begun before Mr Xi with Central Asia and regions beyond. mad, Mecca and Saddam. Parents may not devised the belt-and-road scheme. In 2011 They hope that wealth generated by the be able to obtain vital household-registra- Myanmar suspended work on a vast Chi- scheme will help to make Xinjiang more tion papers for children with unapproved nese-financed dam at Myitsone, to popu- stable—for years it has been plagued by names, meaning they could be denied free lar acclaim. In Sri Lanka, the government separatist violence which China says is be- schooling and health care. elected in 2015 hasbeen engaged in endless ing fed by global jihadism. But the authori- Residents have also been asked to spy wrangling with China over the building of ties are not waiting. In recent months they on each other. In Urumqi, the region’scapi- a Chinese-invested port in the home town have intensified their efforts to stifle the Is- tal, locals can report security threats via a of the country’s autocratic former presi- lamic identity ofXinjiang’s ethnic Uighurs, new mobile app. People living in Altay in dent. In January protests against China’s fearful that any public display of their reli- northern Xinjiang have been promised re- plans there turned violent. gious beliefcould morph into militancy. wards of up to 5m yuan ($720,000) for tip- Even in Pakistan, one of China’s closest Xinjiang’s 10m Uighurs (nearly half of offs that help capture militants—over 200 friends in Asia, Mr Xi has been forced to its population) have long been used to times the local income per person. abandon his usual mantra of “non-inter- heavy-handed curbs: a ban on unautho- Across Xinjiang residents have been ference” in others’ internal affairs. Late last rised pilgrimages to Mecca, orders to stu- asked to inform the authorities of any reli- year China openly appealed to Pakistan’s dents not to fastduring Ramadan, tough re- gious activities, including weddings and opposition politicians not to resist con- strictions on Islamic garb (women with circumcisions. The government is also test- struction of the China-Pakistan Economic face-covering veils are sometimes not al- ingitsown people’sloyalty. In March an of- Corridor, a part of the belt that links Xin- lowed on buses), no entry to many ficial in Hotan in southern Xinjiang was jiang, China’s westernmost province, with mosques forpeople under18, and so on. demoted for “timidity” in “fighting against Gwadar on the Indian Ocean. Pakistan de- But since he took over last August as religious extremism” because he chose not ploys a force of around 10,000 soldiers to Xinjiang’s Communist Party chief, Chen to smoke in front ofa group ofmullahs. guard the corridor against militant attacks. Quanguo has launched even harsher mea- Mr Chen is widely rumoured to be a The problem is partly one of scale: Chi- sures—pleased, apparently, by his crushing contender for a seat in the ruling Politburo na is so vast that belt-and-road countries of dissent in Tibet where he previously in a reshuffle due late this year. Displays of fear being overwhelmed by it. Loans from served as leader. As in Tibet, many Xin- toughness may help to ingratiate him with one bank, China Eximbank, for example, jiangresidentshave been told to hand their China’s president, Xi Jinping, who has account for a third of Kyrgyzstan’s foreign passports to police and seek permission to called for“a great wall ofiron” to safeguard debt. Yunnan is one of China’s poorer travel abroad. In one partofXinjiang all ve- Xinjiang. Spending on security in Xinjiang provinces. Yet its economy is still four was nearly 20% higher in 2016 than the times bigger than that ofits more populous year before. Adverts for security-related neighbour, Myanmar. Countries both long jobs there increased more than threefold forand dread Chinese investment. last year, reckon James Leibold of La Trobe China is trying to change its ways. University and Adrian Zenz of the Euro- NGOs in South-East Asia say that Chinese pean School of Culture and Theology at firms, which had previously treated local Korntal, Germany. critics with disdain, have started to take Uighurs have been blamed for several their concerns more seriously. Chinese recentattacksin Xinjiang. In one of them in banks are asking international institu- February, in the southern prefecture of Ho- tions—sovereign-wealth funds, pension tan, three knife-wielding men killed five funds and so on—to join them in lending to people and injured several others before belt-and-road projects, in the hope that this being shot dead by police (local reports will help ensure higher standards. At the suggested the violence occurred after a Ui- forthcoming forum, China is likely to em- ghur family was punished for holding a phasise links between the belt-and-road prayer session at home). Officials may be programme and other infrastructure pro- congratulating themselves on the success jects that have been launched indepen- of their tactics; reported large-scale attacks dently of it, such as a new transport net- by Uighurs inside and outside Xinjiang work around Baku in Azerbaijan. The aim have abated in the past18 months. Yet as in will be to show that Mr Xi’s project is not a Tibet, intrusive surveillance and curbs on threat. But this will be another minor ad- cultural expression have fuelled people’s justment ofwording. The belt-and-road ex- desperation. “A community is like a fruit,” press has left the station. China is merely says a Uighur driver from Kashgar. trying to improve the on-board service. 7 Nothing abnormal “Squash it too hard and it will burst.” 7 26 United States The Economist May 6th 2017

Also in this section 27 Tulsa’s ﬁnancial troubles 28 Sanctuary cities under ﬁre 28 Texas lays down the law 29 John Roberts, swing voter? 29 The pain of Penn Station 30 School choice is working 31 Lexington: America’s jittery allies

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

Health care ing to those who had failed to maintain coverage in the past. Discouraging people Political self-amputation from waiting until they fall ill before they buy insurance is not a bad idea. But this provision could unravel the market, argues Matthew Fiedler of the Brookings Institu- tion, a think-tank. Healthy people would be keen to have their fitness taken into ac- In trying to revive health-care reform, Republicans are causing themselves great count when shopping for a plan. So they political pain might let their coverage lapse to escape the HROUGH the troubled seven-year his- earners, particularly the old, would see communal pool of buyers. With healthy Ttory of the Affordable Care Act, Barack theirbills soarifit passes (see chart). Critics people siphoning themselves off, premi- Obama’s health-care law, most Americans have instead been placated by a change ums forthe sickwould soar. have agreed on one thing. They like the that gives states more freedom to regulate Such loopholes can be closed. Yet they provision which ensures that people with insurance markets as they see fit. For exam- demonstrate the fragility ofinsurance mar- pre-existing medical conditions can buy ple, they could shorten the list of“essential kets, in which details matter enormously. health insurance at the same price as benefits” that insurers must cover without Another problem is that Republicans hope everyone else. Even when more than half ever limiting the amount they pay out. eventually to allow sales of insurance of Americans disapproved of “Obama- States could also gut protections for across state lines to increase competition. care”, more than fourin five supported this those with pre-existing conditions. To do If healthy people across the country can bit of it. That simple political fact explains so, they would need to promise to provide buyinsurance from whicheverstate makes why the latest Republican attempt to re- some other safety net. For example, they iteasiestto charge them lowerprices, insur- write the health-care law, which seemed could create a “high-risk pool”, in which ers in more regulated states will be left likely to come to a vote in the House of the sick could buy coverage that is directly with only sick customers. Representatives soon after The Economist subsidised (yet probably more expensive). The threat to health care for the vulner- went to press, is probably doomed. Such mechanisms have been woefully unable has stoked opposition among moder- When the Republicans who control the derfunded in the past. In 2011 Florida’s ate Republicans. Even congressmen who House tried to reform Obamacare in high-riskpool contained only 200 people. tried to repeal Obamacare when its author March, their bill did not even make it to a Paul Ryan, the Speaker of the House, was still in office, such as Fred Upton of vote. The fatal blow was struckby the Free- says that no insurer could turn customers Michigan, have wavered. Mr Upton said dom Caucus, a group of deeply conserva- away because of their health. In a strict that he could not support the bill without tive legislators, who thought the bill left sense, then, the rule remains intact. Yet more protection forthose with pre-existing too much of Obamacare intact. In particu- states could allow insurers to charge the conditions, only to change his mind after a larit changed, ratherthan abolished, subsi- sick prohibitively high prices, and the little more money was forthcoming. dies for those buying health insurance for healthy attractively low ones, when sell- If the reform bill scrapes through the 1 themselves (instead of getting it from an employer, as most Americans do). Obama- care’s subsidies are targeted at low- and And old people vote middle-earners. The Republican plan, by Average health-care premiums paid after subsidies*, $’000 Current law American Health Care Act† contrast, offered help to everyone; its uni- By individual 21-year-olds 40-year-olds 64-year-olds versal tax credits varied only with age. earning* 0 3 6 063 063 9 12 15 Hardline conservatives recoiled at a “new $26,500 entitlement programme”. This time round, the Freedom Caucus is $68,200 on board. The universal tax credits remain Source: CBO *Annual, individual market †At March 9th 2017 in the bill, with the result that many low- The Economist May 6th 2017 United States 27

2 House, its prospects in the Senate (which is the original version of the bill. Republican now undermined by online shopping. Mr also, barely, controlled by Republicans) senators from states which expanded Bynum’s cousin and grandfatherwere also look dubious. That was true even before Medicaid will not want to deprive their mayors of Tulsa, as, in the frontier years of the latest amendment, because the bill constituents ofhealth insurance. 1899-90, was a great-great-grandfather: the would pare back Medicaid—health insur- If, as seems likely, the health-care bill is six-shooter he carried is in a cabinet in Mr ance for the poor. Obamacare expanded rewritten by the Senate, conservatives in Bynum’s office. Not long afterwards Tulsa Medicaid in compliant states. Unwinding the House mayabandon ship yetagain. Re- became the “oil capital of the world”, me- this policy accounts for more than half of publicans will have voted against a popu- morialising its glory in skyscrapers. Mr By- the 24m rise in the ranks of the uninsured larpolicy, to no end. It is the political equiv- num wants to revive the clout lost in the oil that was projected to occur by 2026 under alent ofbloodletting. 7 and telecoms busts. Fiscal constraints make that tricky. Still, the state legislature is considering a change that would let cities raise property taxes to help pay for policing. Meanwhile Tulsa is making the best of a tough predicament through bond issues (like those in Jenks and other cities), as well as a sales-tax increase which, unlike the statewide proposal, was approved by local residents last year, when MrBynum was still a city coun- cilman. As with other successful local ref- erendums, it helped that the initiative came with concrete details about where the extra cash would go: on public transport, the police, and investments in muse- ums and other public facilities. By the time of the vote, smiles Mr Bynum, “everyone was sickofhearing about it”. Innovative cities The miniature culture wars fought between cities and states—such as North Car- Night time turned into day olina’s tussle with Charlotte over its anti- discrimination rules—are well known. The financial tensions between them are quiet- er but as important. “Money is usually the main problem,” saysLarryJonesofthe Un- TULSA ited States Conference of Mayors, and especially divisive in lean times. How a city copes when a state is almost broke In this stand-offTulsa, like other Ameri- AN ZIELINSKI, director of the plane- In Oklahoma, the squeeze is extreme. can former boomtowns, benefits from the Dtarium at Jenks High School in Okla- Cuts to income taxes, generous incentives afterglow of industrial wealth. Several homa, whizzes through his greatest hits. for fracking companies and low oil prices times its tycoons have ridden to its rescue: First he projects onto its dome a 3D image have choked revenues. Overall, this year’s to supply its water, to build a bridge to con- of a human heart; next comes the Sistine state budget is15% lower than that of 2009; nect it with oilfields, and to buy the land Chapel, then the solar system. The plane- Medicaid and welfare have been pinched for its airport. These days country-music tarium is an impressive asset for a high along with schools, as have state troopers, stars live in some of the oil barons’ grand school, as is its aquatic centre, with an whose mileage is now circumscribed. villas but, by way of compensation for the Olympic-size pool and grandstand seating. Mary Fallin, the governor, acknowledges economic pendulum, the paternalism But there is a hitch, says Bonnie Rogers of thatsomethinghasto give. She wants to ex- lives on. “Philanthropy is an industry here Jenks Public Schools: filling the new build- pand the tax base and raise rates on fuel in Tulsa,” says Mr Bynum. ings with teachers is much harder than and cigarettes. But the Republican-con- The George Kaiser Family Foundation, erecting them. trolled legislature has yet to agree on a fix. for example, has renovated several blocks At once bountiful and hard-pressed, the The state’s voters are not helping: in a refer- in the city centre, and set up a diversion school district covers a well-heeled suburb endum last year they rejected a plan to add scheme for female prisoners and an early- of Tulsa and spans the Arkansas river to a percentage point to the sales tax to boost yearseducation programme. Ithascontrib- take in part ofthe city proper. The financial education spending. Gene Perry of the uted $200m fora new100-acre park on the paradox has a simple explanation. The Oklahoma Policy Institute notes that rug- river, while raising the same amount from shiny facilities were paid for by municipal ged ideology is not the only obstacle. The other donors. Riding around the muddy bonds, but teachers are financed by the state constitution specifies that revenue construction site, Jeff Stava, the project’s state, and similar top-ups for their salaries measuresmustbe approved by75% ofboth boss, points to where the splash zone, are notallowed. In Oklahoma, state educa- legislative chambers—requiring some bi- skate parkand giantadventure playground tion funding has withered: since the crash partisan agreement—or by the people. will be, and the stretch of water where of 2008 spending per pupil has been As G.T. Bynum, Tulsa’s new, babyfaced perching pelicans will soon be ousted by slashed by 27% in real terms, the biggest fall mayor, laments, his scope for manoeuvre rafts and kayaks. After the huge growth of in America. Some districts run only four isjustasnarrow. Oklahoma setstight limits the 20th century, but a tentative start to this daysofclassesa week. Teachersearn much on cities’ use of property taxes, leaving one—the population is stagnating at more across the borderin Texas. The area is them reliant on sales taxes. That is a vola- around 400,000—the aim is to make Tulsa an extreme case of a wider trend, in which tile source of revenue—the dependence a place professionals will move to. The city cities and their residents find ways to cope can lead, for instance, to police officers be- is stumping up the money for a footbridge with miserly state governments. ing laid off during a recession—and one near the park. 7 28 United States The Economist May 6th 2017

Immigration enforcement County board, insist they will stand firm. Illinois has introduced a bill restricting co- Once bitten, forever shy Cities under siege operation with federal immigration offi- Hispanic voters in California’s governor elections cials—as have California, Maryland, Neva- % voting Democratic Republican da and New York. Yet in the past three 1994 Proposition 187 approved months at least 33 mostly Republican states 80 CHICAGO have introduced or passed laws requiring local police to comply with ICE requests to Sanctuary cities are underattack, but 60 hold a soon-to-be-released inmate for a may not have much to lose further 48 hours to work out whether he 40 OLDING signs saying “Amnistia para can be deported, according to Muzaffar HLatinos!” and “My dreams are not ille- Chishti at the Migration Policy Institute, a 20 gal”, protestersgathered in a parkon Chica- think-tank. Miami-Dade was one of the 0 go’s mostly Latino West Side on May 1st. first to retreat, ditching its sanctuary poli- 1986 90 94 98 2002 06 10 14 Chris Kennedy, who is running for gover- cies in February. Texas has passed the Party of elected governor nor of Illinois next year, joined the crowd, toughest anti-sanctuary bill in the country Source: Field Polls as did Dick Durbin, a Democratic senator. (see next story). Seeking to reassure his audience, Mr Dur- When pleading the government’s case bin noted that a spending bill now in Con- in April before William Orrick, a district The law in Texas gress stipulates “not one penny” for a new judge in San Francisco, government law- border wall, no new officers for Immigra- yers argued that the order would affect No refuge tion and Customs Enforcement (ICE), only federal funds for policing. If so, the fi- which pursues illegal immigrants, and “no nancial harm to cities like Chicago would penalty forsanctuary cities like Chicago”. be slight. Mr Chishti estimates that Cook Illegal immigrants and their defenders County risks losing just $2m in federal AUSTIN are both fearful and perplexed. In January funding, and all of California only $18m. If A draconian law in Texas may change Donald Trump signed an executive order all federal funds are affected, the loss the state’s politics for “enhancing public safety in the interior would be huge: the Better Government As- ofthe United States”. This threatens to pull sociation, a watchdog in Chicago, has esti- OE STRAUS, the Speaker of the Texas federal funding from cities and counties mated that the city alone would lose a JHouse, asked his colleagues to show re- that fail to help the federal government de- whopping $3.6bn this year. spect for each other, and a sense of civili- port illegal immigrants. For a city like Chi- On April 25th Judge Orrick ruled that ty, while debating a bill that would ban cago, which is beyond broke, that could the president had overstepped his powers sanctuary cities. Eddie Lucio III, a Demo- spell disaster. But it is not at all clear how by tying federal funds to the enforcement crat, put the point a bit differently. Republi- much money is at stake. of immigration law. MrTrump will almost canscontrol the legislature by95 seatsto 55; Police and mayors in some 300 cities certainly appeal, and the case is likely to go still, Mr Lucio warned, they should pro- and counties turned to sanctuary policies to the Supreme Court. Mr Trump could ceed with caution: “We are very emotion- forpragmatic reasons. They fear that ifoffi- win with the narrow interpretation of his ally charged. Do not mess with us today.” cers alert immigration agents when undoc- order, which will make little difference to So much for that. Early on April 27th, umented migrants are booked into their the finances ofsanctuary cities. after a fraught debate, the Texas House ap- cells—even for fingerprinting after being Above the noise of grinding legal gears, proved a remarkablystringentbill. SB4 will caught driving without a licence—then im- though, there is a chorus ofalarm from ille- penalise local officials who fail to co-oper- migrantswill cease contactwith officials of gal immigrants and officials who deal with ate with federal immigration authorities all kinds. Opponents retort that sanctuary them. At a school in California’s Central by allowing police to inquire into the legal policies protect foreign criminals from de- Valley only 75 out of 200 pupils turned up status of people who are merely detained portation, and gleefully recount crimes the day after a recent ICE raid in the com- (even in traffic stops), rather than arrested. committed by released immigrants. munity, says Lena Graber at the Immigrant Amendments that would have created ex- Rahm Emanuel, Chicago’s mayor, and Legal Resource Centre. Theirparentsfeared emptions for nurseries and women’s shel- Toni Preckwinkle, president of the Cook they would be next. 7 ters were struck down. It is perhaps the most sweeping measure of its kind since 2010, when Arizona passed a measure that came to be known as the “Show Me Your Papers” law. Republicans in Texas may come to regret their achievement. The state’s governor, Greg Abbott, had made a ban on sanctuary cities one of his priorities for the legislative session that began in January. Polls have found that roughly half of Texans—and a large majority of Republicans—are in favour of the idea. SB4 sailed through the Texas Senate in February, despite opposition from companies, police chiefs and civil-rights advocates. Republican leaders in the House had retooled the bill in committee hearings in order to address some of the worries raised. But their efforts at moderation were thwarted during the floor debate, after Knock, knock right-wing Republicans offered an amend-1 The Economist May 6th 2017 United States 29

2 ment expanding the measure’s scope. Transport in New York Art Acevedo, Houston’s police chief, has argued that SB4 will discourage illegal On the wrong immigrants from reportingcrimes and will undermine his authority to direct his force track to focus on dangerous criminals. Oppo- nents of the law are already preparing to NEW YORK challenge the measure in court (Arizona’s Local railways are in bad shape, law was gradually rendered almost tooth- threatening the region’s economy less). But the political damage may linger. Republicans in Texas have mostly N MARCH 24th an Amtrak train de- avoided antagonising Latinos, who ac- Orailed in New York’s Penn station, hit- count for 40% of the population. In 1994, ting a regional commuter-line train. The re- after California approved Proposition 187, sulting delay affected 250,000 passengers which aimed to bar illegal immigrants on the Long Island Railroad (LIRR) and from access to public services, George W. New Jersey Transit, commuter lines which Bush, then governor-elect of Texas, said: “I share Amtrak’s tunnels and tracks in and am opposed to not educating or providing around Penn Station. Ten days later anoth- social services to people who are in our er Amtrak train derailed, this time taking state.” His successor, Rick Perry, was simi- out a set of points and eight of Penn sta- larly sceptical about Arizona’s law. tion’s 21 tracks. The delays and cancella- Supporters of SB4 doubt that it will Wild and unpredictable tions lasted a week. Then on April 14th, just nudge many Latinos to vote Democratic. as the Easter weekend began, a New Jersey The experience of California, where the legal assault. He came to the health-care Transit train got stuck for three hours in an Hispanic vote swung firmly Democratic law’s rescue again three years later, this approach tunnel. This caused long delays around 1994, suggests they may be wrong time with Justice Kennedy in tow. Also in on the Northeast Corridor (NEC) the busi- (see chart). Texas is a Republican state in 2015, he abandoned his conservative col- est passenger railway line in the country. part because the local party has won more leagues to uphold campaign-finance rules On the same day a false report ofgunfire at support from Latino voters there than else- in judicial elections. His revealing opinion Penn triggered a stampede in which 16 where. Those voters, however, have sup- in that case, Williams-Yulee v Florida Bar, were hurt. New York’s tabloids now call ported Republicans who supported them. traded on a distinction between jurists and America’s dingy, claustrophobic and busi- If the party has changed, they might legislators: “Judges are not politicians,” he est railway terminus “Pain Station”. change their minds, too. 7 insisted, “even when they come to the The station’s 600,000 daily users will bench by way ofthe ballot.” soon feel more pain. Amtrak, which owns Keeping the judiciary fair in the eyes of and operates the station, tracks and tun- The Supreme Court the public has long been a priority for the nels, said last month that it will need to chief justice. During his 2005 confirmation shut down tracks to do repairs. These will Man in the middle hearings he compared a judge’s job to a take place over 44 days, mainly weekdays, baseball umpire’s, calling balls and strikes. in the summer. The Partnership for New In 2014 he decried the partisan stain the ju- York City, which represents large compa- dicial nomination process lefton the court, nies, estimates that every hour of delay to NEW YORK and last year he lamented that Americans commuters from Long Island and New Jer- fail to appreciate that the court is “different sey costs Manhattan employers $14.5m. The chiefjustice tries to tamp down from the political branches of govern- The Northeast Corridor Commission, partisanship on the bench ment”. He sharpened his tone after the created by Congress, estimates that every N MAY 1st John Roberts, America’s Senate upended its filibuster rules to seat daythe NEC isoutofservice costs $100m in Oconservative chiefjustice, listed left to Justice Gorsuch: “The new justice is not a lost economic activity. form a rare majority with the Supreme Republican and not a Democrat,” he said Yet repairs are badly needed. The two Court’s four liberal members. Cities may in April. “He is a member of the Supreme tunnels under the Hudson river, which have grounds to sue, the quintet said, Court. But it’s hard for people to under- serve the station and the main NEC arter- when banks make predatory loans to ra- stand when they see the process that leads ies, are a century old and move with the cial minorities. The timing, for some, was up to it.” tides. Like the rest ofthe network, they suf- suggestive. With Neil Gorsuch now in An- A wider look at Chief Justice Roberts’s fer from over-use and chronic under-in- tonin Scalia’s old chair and retirement ru- record does not suggest even-handedness. vestment. Damage caused by Hurricane mours flying about Anthony Kennedy, the His votes striking down spending limits by Sandy in 2012 has not yet been repaired. 80-year-old perennial swing justice who outside groups in political campaigns, gut- Another storm, a tunnel crack or a high- has spent nearly three decades on the ting the Voting Rights Act and forbidding speed derailment would be catastrophic. bench, could Chief Justice Roberts be school-desegregation plans—as well as Richard Barone of the Regional Plan Asso- emerging as the court’s new median vote? votes against gay marriage and in favour of ciation, a think-tank, puts it bluntly: “We’re The chief, who runs hearings with an abortion restrictions—show him reliably operating on borrowed time.” amiable professionalism from the middle conservative on most issues. His leftward The NEC is, however, the only part of seat on the bench, may indeed find him- lean in the cities ruling may have been in- Amtrak that turns a profit. Amtrak is an self in the ideological centre of the court— fluenced by the threat of a 4-4 split, some- odd entity, a commercial service which perhaps with the left-leaning Stephen thinghe much dislikes, since only eight jus- has its board appointed by the president Breyer, who wrote the predatory-loans rul- tices were considering that case. But in one and receives funding from Congress. Since ing—if Justice Kennedy hangs up his robe. ofthe most politicised eras ofthe Supreme the funding comes annually, Amtrakstrug- But he has been rehearsing for this part for Court’s history, the chief seems keen to gles to have a multi-year capital plan. With some time. In 2012 he infuriated the right tamp down public perceptions that the a repairs backlog estimated at $28bn, and by voting to save Obamacare from its first court, too, is bitterly partisan. 7 tunnels and track needing upgrades all 1 30 United States The Economist May 6th 2017

2 over the region, it cannot do much beyond money has been spotted yet. charter schools. In 2015-16, 45% of pupils in basic maintenance. Congress is said to be Meanwhile, the subway is still operat- public schools in the city were at charters, increasing Amtrak funding to $1.5bn this ing on a 1930s signal system; Eastside Ac- up from 24% a decade previously. year, $105m more than last year. That is cess, a plan to bring some LIRR riders to Meanwhile private schools, many of pretty small beer where railway tunnels Grand Central station, is delayed; the bus which are attached to churches, have strug- under rivers are concerned. terminal needs a complete overhaul; the gled. In America as a whole, the Catholic The proposed Gateway tunnel, a new area’s three major airports are at capacity. ones have swapped nuns for professional $24bn rail link between Newark, New Jer- But getting big projects built in New York is teachers and have been hit financially as sey and New York City under the Hudson a costly, lengthy enterprise thanks, in part, dioceses have paid compensation for his- river, would help to ease pressure on the to expensive labour and over-regulation. torical sexual-abuse cases. Competition network. Last year the federal government The Second Avenue subway, the first new from charterschools has suppressed enrol- agreed to split the cost with New York, line in decades, cost$5.5bn forfourmiles of ment, too. Good statistics are lacking, but New Jersey and Amtrak. But little federal trackand three new stations. 7 the Urban Institute, a think-tank based in Washington, estimates that the number of pupils aged between five and 17 in private School vouchers schools may have dropped by two-thirds between 1999 and 2014. Going public To survive, several Catholic schools in Washington have shed theirreligious affili- ation and converted to charter schools, thereby adding pupils to the public rolls. Overall enrolmentin publicschoolshas increased since 2008-09, from 70,919 pupils to 87,344 in 2015-16. Mostofthatgrowth was Private schools are ailing in Washington, DC. That is a good sign a result of swelling attendance at charter MAGINE you are a poor parent in Wash- had lower maths scores at the end of their schools, but traditional public schools ex- Iington, DC. You assumed you would first year than those who did not. panded, too. send your child to a public school. But you Children often take time to adjust to Between 2011 and 2015 traditional pub- have been offered a voucher worth up to new schools. Still, the results seem disap- lic schools in Washington made larger $12,000 towards tuition at a private one. pointing for advocates of school vouchers, gains in the National Assessment ofEduca- Should you use it? a group that includes many Republican go- tional Progress, a nationwide set of tests, Until recently the evidence suggested vernors and Betsy DeVos, Donald Trump’s than those in any other large city. Pupils at that you should. In 2004 Congress created education secretary. charters tend to score even higher on city- the DC Opportunity Scholarship Pro- They nevertheless suggest that other wide tests than those at other public gramme, the first school-voucher scheme education reforms are working. The rela- schools. Gentrification is one reason for directly subsidised by the federal govern- tively lacklustre performance of private the increased scores, notes Matthew Chin- ment (states and charities subsidise many schools in Washington, DC reflects im- gos of the Urban Institute. But his research others). Since then up to 2,000 families a provement in public schools. A decade ago also shows that the gains are larger than year have been handed vouchers to attend Adrian Fenty, then the mayor, took away demographics alone would suggest. private school after winning lotteries. In powers from the city’s elected board of The latest study indicates that, at least 2010 a study found that 82% of pupils of- education and installed a new schools initially, vouchers are only as effective as fered a voucher went on to graduate from chancellor, Michelle Rhee. the schools they allow children to attend. high school, compared with 70% ofsimilar She began to hold teachers at tradition- But it does not undermine the argument peers who attended public schools. al public schools accountable for pupils’ for competition, since the pressure from Studies of Milwaukee, which intro- performance. The worst were fired and the charters is one reason why public schools duced vouchers in 1990, have found simi- best earned bonuses and pay rises. The have improved. A parent with a voucher lar effects on graduation rates. A 2015 study city also encouraged the growth of inde- may increasingly think twice about using of a privately funded programme in New pendently-run public schools, known as it. That is a good choice to have. 7 York found that blacks who received vouchers had higher rates of college enrol- ment. In Vermont the value of a house is higher if it is in an area that offers school vouchers, suggesting that parents will pay to become eligible forthem. Yet evidence is piling up on the other side. In the pasttwo yearsstudiesof Louisi- ana and Ohio have found that pupils using a voucher did worse on state tests than peers at public schools. A recent literature review concluded that “the effects of vouchers have been disappointing relative to early views on their promise”. On April 27th another study put the boot in. The Institute of Education Sci- ences, the research arm of the Department of Education, analysed the results of children in Washington, DC’s scheme between 2012 and 2014. It found that, on average, pupils who attended private school The Economist May 6th 2017 United States 31 Lexington Constant foe, fickle friend

Adversaries may find Donald Trump easierto handle than his allies do cal rivalsto MrPutin. Heraim wasnotto befriend MrTrump, who as a candidate called her refugee policies “insane”, but to suggest where he might be misjudging America’s interests. Team Merkel knew that Peter Navarro, a senior White House trade adviser, holds that Germany’s success as an exporter to America is explained by manipulation ofthe European single currency and by cunning Teutonic negotiators who outsmarted Mr Obama and previous presidents. Mr Trump favours bilateral trade pacts, believing that America suffers when many countries cram into one negotiatingroom. Mrs Merkel duly explained that Germany does not negotiate trade pacts or control its currency, ceding authority on both fronts to the European Union. If Mr Trump wants trade talks with just two players, it is the EU that offers that opportunity, Mrs Merkel told him. Trump aides have warned that their boss does not respond well to detail-heavy briefings, preferring stirring stories, pictures and maps. Mrs Merkel brought a group of company bosses and apprentices to talk about vocational education. Turning to the agenda ofa G20 summit to be held in July, she engaged Mr Trump and his daughter, Ivanka, on the dire risks posed by global pan- demicsand antibioticresistance. MrsMerkel invited Ms Trump to NE question about Donald Trump obsesses foreign govern- speak at a women’s summit in Berlin. (That visit saw the First Oments more than any other: will this president, who cam- Daughter hissed by some in the audience when she called her fa- paigned as an “America First” insurgent, continue to trample ther a champion forfamilies.) norms in office? Strikingly often, foes and friends answer this in In common with other foreign visitors to the Trump White different ways. House, Mrs Merkel found the president a good listener, perhaps Such hostile or rival powers as China, Russia or Iran increas- because much ofwhat he was hearingseemed new to him. Allies inglyfind thatMrTrump’spoliciesresemble those pursued by his have begun taking advantage of this trait, conferring before visits predecessors. Candidate Trump called China a trade cheat, bent to reinforce such messages as the need to negotiate with Russia on “rape” of the American economy. President Trump now calls warily and from a position of strength. Surprisingly wonky sub- that country’s leader, Xi Jinping, a “highly respected” and indis- jects pique Mr Trump’s interest: the Danish prime minister, Lars pensable partner in efforts to curb North Korea’s nuclear ambi- Lokke Rasmussen, told him how wind power has helped Den- tions—a position notfarfrom that adopted by BarackObama, and mark reduce its carbon emissions while strengthening its econ- George W. Bush before him. Trump aides no longer talk about a omy. Allies have begun giving much thought to crafting policy grand bargain with Russia, offering President Vladimir Putin a wins that Mr Trump can call his own. free hand in Ukraine in exchange for iron-fisted support in the fight against Islamic State: a loud advocate for such a deal, Mi- When a president does not think America exceptional chael Flynn, the president’s first national security adviser, was Still, public antipathy towards Mr Trump runsdeep, which raises fired for lying about contacts with Russian envoys. Nor has Mr the costs of doing business with him. Mrs Merkel, for instance, Trump torn up an Obama-era deal to freeze Iran’s nuclear pro- saw the case forincreased German defence spending long before gramme, although he calls it a “disaster”. Instead he seems mind- Mr Trump demanded that her government pay what he claimed ed to buttress it with sanctions targeting Iranian misconduct in it “owes” to America in NATO contributions. As soon as Mr other fields: a policy that Hillary Clinton favoured. Trump made defence spending sound so personal, selling an in- Often, MrTrump’sworldview has not so much evolved as col- crease to Germans became harder. Perceptions will be hard to lided with reality. That process is welcomed in such friendly capi- change. As Norbert Röttgen, chairman of the foreign-affairs com- tals as Berlin, which Lexington visited last week. Yet maintaining mittee of the German parliament and a member of Mrs Merkel’s amicable ties with this president still feels anything but straight- Christian Democratic Party, laments, “Even if Donald Trump forward. Official Berlin is glad that Mr Trump takes a more con- turns back to a more normal foreign policy, he will remain a pro- ventional view ofAmerica’s interests than it once feared. There is vocative figure in German eyes.” A Social Democrat on that com- less confidence that he respects the values underpinning the mittee, Dagmar Freitag, is unsure that Germany and Mr Trump rules-based, Western-led international order. Germans are dis- “share common values”, making relations “more fragile”. mayed by Mr Trump’s tolerance for authoritarian strongmen, German leftists who dislike or distrust America face a differ- from the Turkish president, Recep Tayyip Erdogan, to the presi- ent puzzle, notes Boris Vormann of the Free University in Berlin. dent of the Philippines, Rodrigo Duterte (whose blood-soaked Such sceptics have traditionally raged at the hypocrisy of Ameri- campaign against drug-dealers earned him Mr Trump’spraise on can claims to moral superiority. MrTrump makes no such claims, April 29th and a White House invitation). The mood in official leaving anti-Americans oddly bereft, too. Berlin is best described as reliefmixed with real sadness. Even Mr Trump’s mercurial nature plays differently with The German chancellor, Angela Merkel, prepared meticulous- friends and foes. It can be helpful to surprise adversaries. Unpre- ly for her first meeting with Mr Trump on March 17th. Mrs Merkel dictability is harder for friends to love. But allies know now that hasspenta careerhandlingswaggeringmen, from German politi- Mr Trump is not about to change—nor sees why he should. 7 32 The Americas The Economist May 6th 2017

Also in this section 33 Chemists v criminals in Uruguay 33 Culture shock in Quebec 34 Bello: Peace and politics in Colombia

Venezuela hoods and are responsible for many of the 33 deaths in protests over the past month. It’s up to the army MrMaduro wantsto provide a half-million guns to an expanded “national militia”, a sort ofhome guard. But the armed forces, though constitu- tionally required to be apolitical, are the fi- CARACAS nal arbiters ofpower. Chavismo, the movement that guides the regime, has been The armed forces, not people power, will decide the fate ofthe regime military-led since its inception. Chávez be- EFORE Nicolás Maduro, Venezuela’s the latest stage in the president’s progres- gan his careerin politics as a left-wing com- B president, delivered his second May sive dismantling ofdemocracy. mander who attempted a coup in 1992 Day address, spelling out plans for a new The constitution Mr Maduro wants to (and won a presidential election six years constitution, he paused to acknowledge replace is the handiwork of Hugo Chávez, later). Officers or former officers run 11 of some VIP guests. A dozen generals, in full his political mentor, who died in 2013. The the 32 ministries; 11ofthe 23 state governors ceremonial uniform, were in the audience. 500 members of the constituent assembly are retired officers. Mr Maduro has been a He asked them to stand and be applauded. that will convene to write it will have al- prolific producer of generals. On one day It was a telling moment. Mr Maduro is most absolute power while they deliber- last year he promoted 195 officers to that facingthe biggest threat to his rule since he ate. Halfwill be appointed. The rest will be rank, bringing their number to more than took office in 2013. Four-fifths of the “pueb- selected by “people’s committees” similar 2,000. The United States somehow gets by lo” he claims to represent want him to to communist soviets. The whole process with no more than 900 generals. stand down. Street protests, provoked by is intended to pre-empt other meaningful The Venezuelan top brass are not a shortages of food and the regime’s thug- political activity. It will distract attention monolithic group. There are “diverse” fac- gery, erupt daily and are sometimes mas- from the regime’s subversion of the exist- tions, both between and within branches sive. The economy is in such an appalling ing constitution. It has carried this out by, ofthe armed forces, says Rocío San Miguel, state, and inflation is so high, that Venezue- forexample, deprivingthe opposition-con- a lawyer and defence specialist. A group lans greeted a rise of 60% in the minimum trolled legislature ofits rightful powers. of “originals” fought alongside Chávez in wage on May1st with shrugs of “so what?” 1992. They include Diosdado Cabello, a for- A political shift to the centre-right in sever- All eyes turn to the men in green merpresident ofthe legislature and still-in- al of Venezuela’s neighbours makes Mr The opposition is increasingly directing its fluential hardliner. An overlapping clique Maduro’s “Bolivarian” socialist regime appeals to the armed forces, or to factions helps drug-trafficking gangs through its lookever more isolated. within them. Julio Borges, the legislature’s control of ports and airports. A bigger But, for the president, none of that may president, says it is time for the men in group of non-ideological “opportunists” matter. His future will be decided by the green to “break their silence”. Henrique dabbles in that and other businesses. armed forces, not directly by the people. If Capriles, a potential challenger to Mr Ma- These divisions matter less than the they withdraw support from his belea- duro who has been banned from seeking generals’ shared interest in the regime’s guered regime, change will come soon. If office for 15 years, asked ordinary soldiers survival. Most profit handsomely from Mr not, hunger and repression will continue. to consider whether they want to “share Maduro’schaoticrule. Some have access to So far, there is little sign ofdissent in the the fate” ofthe doomed ruling party. dollars at the ridiculously cheap price in top ranks. Vladimir Padrino López, the The army is not the regime’s only prop. bolívares set by the government. The army head of the armed forces and minister of The National Guard fires tear-gas at and is in charge of the lucrative business of defence, hailed Mr Maduro’s call fora new wields truncheons against demonstrators; food distribution, a recipe for abuse. constitution as “a clear demonstration of informal gangs called colectivos enforce The lower ranks are less happy, though democratic will”. With that, he endorsed submission to the regime in neighbour- they are better housed than most Venezue-1 The Economist May 6th 2017 The Americas 33

2 lans and some profit from sidelines such as least once a year. Even then, clubs and home growers smuggling. According to Caracas Chroni- More than 6,600 people have already will cater to a niche market. The pharma- cles Political Risk Report, a journal with registered to grow cannabis at home; 51 cies’ business will build slowly. The 30 out- sources in the armed forces, DCI, an agen- clubs have opened. But Uruguayan offi- lets that have signed up cover much of the cy that snoops on the barracks, has been cials expect pharmacies to be the biggest country. But their corporate suppliers are hearing of “deepening disaffection”, espe- retailers, and are countingon them to drive allowed to grow just four tonnes a year. cially in the army’s middle ranks, since illegal dealers out of business. They will That is 15% of what Uruguayans smoke. If February, before the latest protests began. start out selling weed in 5g packets, with the country is to drive pushers off the Much of this appears linked “with mid- the concentration of THC, the active ingre- streets, pharmacies will have to sell a lot ranking officers barely bothering to sup- dient, capped at15%. With a price of $1.30 a more weed alongside the dental floss. 7 press their contempt for a general staff it gram, store-bought marijuana will be perceives as corrupt”, it reported. In April cheaper than what is available on the three lieutenants posted a video saying street. The quality will be better, says Mil- Canada they rejected Mr Maduro as commander- ton Romani, who oversaw the law’s imple- in-chief. They sought asylum in Colombia. mentation until last July. Street cannabis Parles-tu Raúl Baduel, a jailed former defence can contain 52 toxins; pharmacies will sell minister, has become an icon for dissent- purer weed. The government sought ad- québécois? ers. They share a 14-second recording in vice on potency from regular smokers. which he says he is in prison because he “They are the ones who know about this MONTREAL spurned “the scoundrels and criminals stuff,” laughs Mr Romani. Culture shockforFrench immigrants in …who give you orders”. Junior soldiers, Strait-laced pharmacists, used to selling French Canada and theirfamilies, share the privations that remedies for aching joints, are nervous drive Venezuelans onto the streets in prot- about supplying the makings of joints. N A chilly spring evening about 40 est. They are angry. But that does not mean “They would prefer not to stock a recre- OFrench immigrants gathered in the or- that they will stop following orders. 7 ational drug,” says Alejandro Antalich, nate bar ofL’Union Française, a social club vice-presidentofthe Centre forUruguayan in downtown Montreal, for what amount- Pharmacies, a trade association. “It’s a con- ed to a group-therapy session. Their Cannabis in Uruguay scientious objection.” Some fear being dreams of starting a new life in Canada dragged into competition with drug gangs. were not working out the way they had Chemists v So far, just 30 of the country’s 1,000 phar- imagined. Employers did not welcome macies have signed up. The interior minis- them, locals were at once friendly and criminals try is installing alarms connected to police aloof, the winters were awful. Cécile La- stations to reassure them. zartigues-Chartier, the group leader, coun- MONTEVIDEO Cannabis clubs have no such qualms. selled immersion in the culture, network- They can grow a wider variety of plants ing and winter sports. “Remember,” she Pharmacies are supposed to drive street than pharmacies are allowed to sell, with advised, “you are immigrants.” dealers out ofbusiness no limits on THC. They see themselves as That is not as obvious as it sounds. N THE outskirts of Libertad, a small catering to aficionados. “It’s the equivalent France ceded most of its North American Otown an hour’s drive from Montevi- of comparing a bottle of wine with a box possessions, including Quebec, to the Brit- deo, barbed wire and guard towers sur- of wine,” says Marco Algorta, a grower at ish in 1763. But French people who settle in round a ten-hectare plot of state-owned the 420 Cannabis Club in Montevideo. the French-speaking province regard it as a land. Inside, greenhouses shelter thou- “The clubs sell excellent wine.” His worry rough outpost of empire, or so some Que- sands ofmarijuana plants. These belong to is that 99 plants are not enough to supply beckers grumble. “We are cultured and ICC and Simbiosys, the two firms licensed members with their full entitlement. He educated, and they don’t see that,” com- by Uruguay’s government to grow canna- wants permission to grow more. plains one. Fred Fresh, a French singer who bis for recreational use. Uruguayans will moved to Montreal’s trendy Le Plateau dis- soon be able to sample theirproduct. Since trict in 2011, listed his neighbours’ griev- May 2nd they have been able to register at ances in a song, Y’a trop de Français sur le the post office as prospective customers for Plateau (There are too many French in Le the corporate weed, which will be sold Plateau): pushing up rents, smoking smelly through pharmacies from July. cigarettes and seducing women. “My That will be the last and most import- neighbourhood feels like it’s occupied by ant stage of a long process. In 2013 the sen- all these snobs,” he sings, channelling ate voted to legalise marijuana and regu- what he takes to be the attitude of native- late its production and sale, making born Quebeckers. Uruguaythe firstcountryto do so. (Canada Despite such laments, more French folk proposed a bill to legalise cannabis for rec- are coming. Jobs are scarce and politics is reational use on April 13th.) Uruguay’s goal fraught in France; Quebec promises oppor- is to stamp out the blackmarket, controlled tunity and stability. In 2015 France sent mainly by Paraguayan smugglers, without more migrants than any other country; in encouraging more consumption. Regis- 2016 only Syrian refugees outnumbered tered Uruguayans (but not visitors) will be them. Nearly 70,000 French citizens are able to get the drug in one of three ways. registered at the consulate in Montreal, They can grow up to six plants at home; double the number ofa decade ago. join a club, where 45 members can culti- Surprisingly, some stumble on the lan- vate as many as 99 plants; or buy it in phar- guage. Quebeckers have retained more an- macies. All consumers are restricted to 40g cient French, and adopted more English (1.4 ounces) a month, enough to roll a joint sentence structure, than have their Euro- or two a day. About10% of adults smoke at pean cousins. The local expression 1 34 The Americas The Economist May 6th 2017

2 “chauﬀerle char” (“to drive the car”) means treal for18 years. spring by baking cake in a syrup tin. “heat up the chariot” to the French. While European business relationships It takes time for newcomers to accept A bigger shock is the Canadians’ pro- start cold and then warm up, in Quebec that they have swapped not just countries miscuous use of “tu”, the familiar form of the sequence is reversed, he says. He tells but cultures. “If you go to Australia or the “you”, which French people reserve for in- clients to think of the French as coconuts, States, you know it’s a diﬀerent culture,” timates (vous is foracquaintances and peo- with hard shells and soft insides, and Que- said a recent immigrant in the therapy ple on higher rungs of hierarchy). French beckers as soft peaches with hard cores. group. It took him a while to recognise that people who stick to vous appear haughty Some French migrants seek to synthe- Quebeckers are North Americans, not to Quebeckers. The Europeans are in turn sise the two cultures. Jérôme Ferrer, a res- Europeans. Once French people under- confused by tutoyer-ing Canadians, who taurateur, has added foie gras, lobster and stand that, things get easier, says Marie- seem to be signalling openness to a friend- mushroom cream sauce to poutine, a local Claude Ducas, a Montrealer who has ship or business relationship, which then confection of chips, cheese curds and gra- worked with them in the media industry, a often does not happen. “Some people nev- vy. Mamie Clafoutis, a chain of bakeries profession that attracts many. “They can be er get used to it,” says Jonathan Chodjaï, a owned by two Frenchmen, marks the start very good employees—the ones who real- French consultant who has lived in Mon- of the maple-tree tapping season in early ise they are immigrants,” she says. 7 Bello Can the centre hold?

To make peace stick, Colombia’s government needs to do better N MAY3rd a delegation from the Un- not up to managing the aftermath of con- Oited Nations Security Council ar- flict. The main hope lies with Óscar Na- rived in Colombia for a two-day inspec- ranjo, a former police chief, whom Mr tion of the implementation of last year’s Santos has named as his vice-president peace agreement between the govern- with a briefto take charge ofthis. ment of Juan Manuel Santos and the Mr Santos has also had bad luck, some FARC guerrillas. “They are coming be- of which he helped to create. The fall in cause it is the only success story that the the oil price punched a hole in public fi- UN has in the whole world at the mo- nances, filled only by unpopular tax rises. ment,” crowed MrSantos. That is not how The economy is weak; the central bank many Colombians see it. A long-standing has cut its forecast for growth this year to gap between the upbeat view of outsid- 1.8%. Businesses are delaying investment ers, symbolised in the award ofthe Nobel because ofpolitical uncertainty. The pres- peace prize to Mr Santos, and disgruntle- ident has faced unremitting opposition to ment at home has widened to a chasm. the peace agreement from Álvaro Uribe, With a presidential election scheduled for his predecessor. Mr Santos has been hurt May 2018, that is worrying. by revelations that his campaign received The discontent starts with the peace leaders already have a licence to roam the undeclared money from Odebrecht, a agreement itself, which punishes FARC country, popping up at events in universi- Brazilian construction firm notorious for leaders who confess to terrorist crimes ties or at the Bogotá book fairwith an arro- corrupt practices (though so did Mr with “restrictions on liberty” (but not jail) gant message ofpolitical victory. Uribe’s candidate). The ELN, a smaller and grants their new political party ten The peace agreements run to 310 dense guerrilla group, and organised-crime seats in congress. The accord was narrow- pages. Implementing them requires a huge gangs still pose a threat to security. ly rejected in a plebiscite in October. After effort of political and bureaucratic co-ordi- Delaysand problemsin implementing some hasty tweaking, the undeterred Mr nation, ranging from setting up a special the peace deal were inevitable: Colombia Santos secured its approval in congress. “peace tribunal” to approving a new land is not Switzerland. What makes them By June 1st the UN is supposed to re- law and, perhaps, an electoral reform. To dangerous is the political context. By act- move from collection points weapons be credible, the tribunal must be indepen- ing together, Colombia’s politicians have turned in by 6,500 guerrillas (plus 3,500 dent and tough-minded. Securing peace transformed a country that was close to associated urban militia members) and on the ground meansmaintainingsecurity, being a failed state 20 years ago into one the fighters should begin civilian life. But strengthening justice, undertaking public with a potentially bright future. Now the the FARC stalled while they haggled over works and cracking down on rapidly ex- political establishment is discredited and the specifications forthe camps where expanding coca plantations (which supply divided. “What kept it together was the guerrillas are to live temporarily. The gov- the drug trade) in former FARC areas. guerrillas,” says Mr Cepeda. “The consen- ernment has been slow to build the 26 Mr Santos, a patrician who lacks the sus is broken.” camps, many in impossibly remote areas. populartouch, hasneverbeen loved, notes This leaves the election wide open. Sergio Jaramillo, the government’s peace Fernando Cepeda, a political scientist and Unless the national mood improves, a commissioner, insists that the deadline former minister. One poll gives him an ap- run-off between a far-right uribista and for the removal of personal arms of the proval rating of just 16%, making him less Gustavo Petro, a maverick far-leftist, is rank-and-file will still be met. Destruction popular even than Venezuela’s incompe- possible. Both would pose risks for peace. ofsome 900 armsdumpswill take longer. tent tyrant, Nicolás Maduro. He has proved Mr Santos’s government has a year to per- And the FARC have passed to the Red to be a poor manager, with a penchant for suade Colombians that outsiders are right Cross only 70 or so of hundreds of child creating rival and overlapping fiefs in the to hail the peace accord and highlight soldiers. All this means that Colombians executive. Squabbling among officials their country’s progress rather than its find it hard to understand why 60 FARC adds to the sense that the government is problems. Middle East and Africa The Economist May 6th 2017 35

Also in this section 36 Campaigning in South Africa 37 Bashing Egypt’s judiciary 37 America, Israel and the Palestinians 38 What Arab men think about women

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

A cotton boll’s journey has to travel over rutted roads past rapa- cious officials, the price these farmers re- From shrub to shirt to shelf ceive is only 60-70% of the international benchmark for delivery to Asia, a lower share than goes to American farmers. Yet the Ugandan farmers’ income is rising because of two changes further along KASESE the chain between shrub and shirt. One oc- curs at the ginnery, where huge clumps of What the tale ofa T-shirt reveals about Africa’s manufacturing potential seed-studded fluff are shovelled into gi- UNDREDS of bright blue T-shirts with the developing world’s manufacturing gantic machines that clean and comb Hthe slogan “smile” pass down a row of output. By 2014 that share had slumped to them. At the entrance, two officials of the tables where they are inspected, folded, 4%. As the world’s labour-intensive jobs government’s Cotton Development Orga- bagged and tagged. From here they will left the rich world forcountries with lower nisation diligentlyrecord each sale in order embark on an arduous journey of more wages, Africa lost out to Asia because of to tax it. The money goes back into buying than 1,000km (600 miles). A lorry will bad governance, political instability and good seedsand pesticidesthatare then giv- haul them from Kampala, Uganda’s capi- poor infrastructure. Another shift of simi- en to farmers. New seeds introduced from tal, across Kenya to the port ofMombasa. A lar proportions now seems in the offing as Zimbabwe last year produce bolls that week later they will be loaded onto a ship China grows richer. But there are some yield about a third more usable cotton for Hamburg, Germany. There they will be signs that, this time, Africa might catch the than the old variety. sold for €10 ($11) each by Bonprix, part of a wave ofindustrialisation. Better farming techniques also help. family-owned mail-order firm with sales In the shade of a large tree just a few ki- Western Uganda Cotton Company of$13bn a year. lometres from Uganda’s border with the (WUCC), a ginnery with British share- These shirts began as cotton bolls in Democratic Republic of Congo, a group of holders, is trying to get more of the fluffy fields on the equator in the far west of farmers have gathered to discuss their stuff by training farmers about when to Uganda, where the red-earth plains turn bumper cotton crop and the obstacles they weed and how to space out the seeds as upwards into the Rwenzori mountains. had to overcome to grow it. Elephants they plant. Those who follow these in-1 Their odyssey reveals much about Africa’s sometimes rampage out of a nearby game manufacturing potential. By following in reserve and trample the neat rows of cot- the footsteps of China and Bangladesh, ton, they complain. They plant barriers of From whole cloth which began their industrial revolutions chili peppers and keep beehives to keep East African garment Transport costs† with textiles, Africa could in theory create the jumbos out. exports*, $m $ per tonne-kilometre millions of jobs. But as the T-shirts’ travels Markets are even less predictable than 500 3.0 also illustrate, it will not be easy. pachyderms. All the farmers at this meet- 400 Several African countries have tried in ing are tenants who rent small plots. 2.5 the past to become tailors and cloth-mak- “When the price of cotton goes up, so does 300 ers to the world. Nigeria’s northern cities the rent we pay,” says one woman bitterly. 200 2.0 of Kaduna and Kano were once home to African farmers, who use ox-drawn 100 textile mills that employed 350,000 peo- ploughs and pick cotton by hand, are com- 1.5 ple. Yetthese factories are nowrusting, and peting against vast mechanised farms in 0 employ perhaps a tenth ofthat number. Texas that still receive subsidies. About 200510 15 2010 12 14 16 This mirrors a wider trend. In 1990 Afri- 80% ofUganda’scotton isexported, but be- Sources: *Kenya, Uganda, Tanzania, Rwanda, Ethiopia UNCTAD; TTCANC †Mombasa (Kenya) - Kampala (Uganda) can countries accounted for about 9% of cause its fields are farinland and the cotton 36 Middle East and Africa The Economist May 6th 2017

2 structions have seen their yields double to tory is so close to the fields, the cotton it ond-hand clothing. The rest are destined about 600kg an acre (twice as much as buys costs much less than it would in Asia, for Europe, where they will have to com- farmers in America manage—a testament giving it a small advantage over competi- pete on price with imports from Asia. to Uganda’s fertile soil). “I will double my tors from places such as Bangladesh, the Uganda’s main advantages, for the mo- cotton planting next year,” says Joshua, a world’s second-largest clothing exporter. ment, are cheap cotton and labour, and middle-aged man. But farmers face huge In this plant employees gingerly open preferential access to American and Euro- hurdles in doing so, even though there is the bales oflint and feed the cotton into an pean markets. When exporting to the rich plenty of land available. One says that assortment of machines that first spin it world “Africa hasan 18-35% dutyadvantage after setting aside money forher children’s into yarn, then knit it into cloth and dye it. over any other continent”, says Nick Earl- school fees she will have enough left to Then the fabric follows an orderly proces- ham, a shareholder in WUCC and in Fine rent only a single acre again next year. Bor- sion past long lines of work stations where Spinners. “It’s very competitive.” rowing is not an option. Bankloans are too it is cut and then stitched back together. Textile workers in Kampala earn about expensive and cheap ones from govern- Colourful designs are printed onto the fin- $85 a month, compared with $150 in Kenya ment agencies are wrapped in red tape. ished shirts. Some will be flown out to Cal- and $108 in Vietnam, never mind up to Although Uganda still exports most of ifornia to be sold by EDUN, a clothing $700 in China. But these savings are offset its cotton, the bags of lint emerging from brand started by Ali Hewson, an Irish busi- by problems in almost every other sphere. WUCC’s ginnery are trucked to Fine Spin- nesswoman, and Bono, her rock-star hus- Power cuts keep plunging the factory into ners Uganda, a factory in Kampala that band. Others are for sale in a local market darkness, and an erratic supply ofsteam to turns them into clothing. Because the fac- that has been squeezed by imports of sec- the dyeing machines makes it hard to ensure that each batch offabric looks alike. In a cramped meeting room alongside South Africa the factory, executives of Bonprix visiting from Europe make their unhappiness Bury him, praise yourself clear. Their inspectors in Hamburg are dis- JOHANNESBURG covering more defects than they would like, and one big shipment of T-shirts will Why ANC politicians campaign at funerals be unexpectedly late. “What would hap- O BECOME a leader ofSouth Africa’s pen ifthis item was on the cover of our cat- Truling party takes a talent forspeaking alogues?” one asks. sideways. The African National Congress Yetforall the tough talk, Bonprix isplac- (ANC) forbids open campaigning for ingorders at higherprices than it might pay leadership positions, a holdover from elsewhere and offering technical help to more secretive times as an underground nurture an industry which it hopes will, in resistance movement. Instead, during time, become competitive. As its rivals ANC election years such as this one, lookto countries such as Vietnam and Ban- politicians turn up at a succession of gladesh, which are starting to replace Chi- Sunday church services, memorial lec- na as big suppliers of clothing, Bonprix is tures and funerals ofparty stalwarts to already seeking out the countries that will, give thinly disguised stump speeches. in turn, replace them. “East Africa has a lot The trickis saying enough, but not too of potential to develop a strong textile and much, since flagrant campaigning can garment industry,” says Rien Jansen of mean disciplinary action. Bonprix. As Asia grows richer, its pool of The outdated rules will be challenged cheap labour will eventually run dry—and at an ANC policy conference in late June. Africa is next in line. But fornow, ahead ofa five-yearly leader- In turning to Africa, the company is ship vote in December, where Jacob helping to generate what may become a Zuma will be replaced as party president huge wave of exports. After years of stag- (though his term as the country’s presi- nation, east Africa’s clothing industry has dent lasts until 2019), covert campaigning more than doubled its exports since 2009 persists. Her presumed main rival forMr (see first chart). Dirk Willem te Velde of the The queen ofthe non-campaign event Zuma’s job is the deputy president, Cyril Overseas Development Institute, a British is Nkosazana Dlamini-Zuma, a former Ramaphosa. He is said to have think-tank, reckons that this is not only be- head ofthe African Union who hopes to “launched” his campaign last month in cause of rising wages in Asia and preferen- succeed her ex-husband. She pops up at the Eastern Cape, where he segued a tial access to markets. As important, he ar- everything from an “Israeli Apartheid tribute to Chris Hani, an anti-apartheid gues, are investor-friendly government Week” lecture in the mining-belt city of leader murdered in 1993, into a jab at Mr policies, as well as improvements in infra- Rustenburg to the opening ofa mega- Zuma. He complained about “the politics structure that have cut transport costs. church in Thokoza township. Though ofpatronage” and speculated that Hani These are starting to reverse the factors jobless at present, Ms Dlamini-Zuma must be wondering, “Why are we mess- that held Africa back during the previous travels under the guard ofa VIP protec- ing up this country?” big shift in the global economy. But unless tion unit. “It involves a humongous Mr Ramaphosa is not explicitly run- Africa’s leaders keep improving gover- convoy. The aim is to make her look ning forthe top job, but an unofficial nance, investing in skills and developing presidential,” says Ralph Mathekga, a website devoted to him has a snappy infrastructure, as well as opening up to for- political analyst and the author of slogan (“Build. Renew. Unite.”) and a slick eign investment, they may miss out on the “When Zuma Goes”. She is a dull speaker, logo, “CR17”, suggesting his initials and next wave of industrialisation, too. Robots but the ANC women’s-league leader campaign year. Another new website are not yet much good at fiddly sewing nonetheless likened her to Jesus, saying promotes the achievements ofMs Dla- jobs on floppy fabric; less than 0.1% of the she was “both a lion and a lamb”. mini-Zuma, coyly without saying why. world’s industrial robots are in the clothing trade. But they will improve. 7 The Economist May 6th 2017 Middle East and Africa 37

Egypt tions. The Supreme Constitutional Court could even reject the law altogether, setting Judgment day up a showdown with the president. Defenders of the bill argue that the government needs more powers to fight terrorism. Trying suspects takes “five or ten CAIRO years”, which allows them to “give orders from theircells”, MrSisi complains. But un- Abdel-Fattah al-Sisi goes afterone of the der the state of emergency, declared after few remaining checks on his power two church bombings in April, Mr Sisi al- HOUGH it presented no evidence, the ready has the power to try civilians in spe- TEgyptian government wasted little cial courts which he runs. Egyptians who time in blaming the Muslim Brotherhood are found guilty in these proceedings can- for the car bomb that killed Hisham Bara- not appeal. kat, the prosecutor general, in June 2015. MrSisi’sreal motive maybe to block the Abdel-Fattah al-Sisi, Egypt’s president, nat- promotion of judges who irritatingly rule urally concurred—he had, after all, booted againt him. Yehia al-Dakroury, who had the Brotherhood from power—but he also been expected to become chief judge of had harsh words for the judicial system. the State Council in July, ruled against the “The arm of justice is being chained by the president’s handover of the islands. Anas law,” said Mr Sisi at the time. He did not Omara, who was next in line to lead the mean this as a compliment. Long appeals Court of Cassation, revoked the Brothers’ delay executions, he grumbled. (Much of death sentences (he would also have the Brotherhood’s leadership sits on death chaired the electoral commission). Consulting America’s expert on land deals row.) As the president left Mr Barakat’s fu- During his three years in office Mr Sisi neral, he dressed down a crowd of judges, has dismantled most checks on his power. “formula ofnational consensus”, although saying: “No courts should workthis way.” Protests are banned. Harsh laws limit the it still thinks that peace with Israel is anath- Most Egyptian judges come from the activities of NGOs. Critical media outlets ema. The document is also notable for country’s elite and are “fundamentally have been shut down and muckraking what it does not say. The anti-Semitic lan- pro-regime and fundamentally conserva- journalists locked up. Even al-Azhar Uni- guage ofthe charter of1988 is not repeated. tive”, says Nathan Brown of George Wash- versity, the Islamic world’s most presti- Nor is the declaration that Hamas is a ington University. Some took to issuing gious centre of learning, has come under “wing ofthe Muslim Brotherhood”. mass death sentences to hundreds of pressure. Anotherbill in parliament threat- Good reasons for scepticism remain. Brotherhood members after the group was ens to impose greater government control The same document also declares that “no forcibly removed from power. But the pres- over that already tame institution. part of the land of Palestine shall be com- ident has nonetheless appeared vexed by Judges in Egypt persevered after Gamal promised or conceded.” As Mr Meshal pre- the judiciary’s protracted procedures, its Abdel Nasser, Egypt’s old dictator, purged pares to step down, a hardliner, Yahya Sin- semblance of independence and its occa- nearly 200 in 1969. They extracted conces- war, has risen to the group’s number two sional checks on his power. The Court of sions during the 30-year reign of Hosni spot as part of a reshuffle. And Hamas’s Cassation, one ofEgypt’shighest, hasvoid- Mubarak, such as the power to supervise military wing continues to restock its ar- ed capital convictions for members of the elections. But in Mr Sisi they may have en- senal ahead of a possible war with Israel, Brotherhood obtained with evidence ex- countered their stiffest challenge yet. 7 which would be its fourth in ten years. A clusively from (often uncorroborated) na- spokesman for Binyamin Netanyahu, Isra- tional-security investigations. In January el’s prime minister, calls the charter an ef- the highest administrative court upheld a America, Israel and the Palestinians fortto “deceive the world”. decision rejecting Mr Sisi’s unpopular ef- Perhaps more important than the docu- fort to transfer two islands in the Red Sea Movement, but ment’s content were its timing and motiva- backto Saudi Arabia. tion. Hamas’s comparatively moderate Fed up, Mr Sisi is now trying to neuter any change? politburo is vying for power with a bellig- the courts, with the help of a pliant parlia- erent military wing. And the document ment. As attention was fixed on Pope Fran- TEL AVIV came out hours before Mahmoud Abbas, cis’s first visit to Egypt, the president rati- the overall Palestinian leader, whose A new policy document and a White fied a bill on April 27th that gives him the nationalist Fatah faction lost Gaza to Ha- House visit power to appoint the chief judges of the mas in 2007, landed in Washington for his highest courts. Until now, even under TWAS a dramatic final act forKhaled Me- first meetingwith America’s president, Do- Egypt’s past strongmen, the courts had se- Ishal, soon to be the ex-leader of Hamas, nald Trump (see picture). Mr Abbas has lected their own chiefs, usually by senior- the Islamist movement that rules the Gaza long vowed to regain control of both parts ity. Under the new law, MrSisi will choose Strip and hopes one day to run all of bibli- of a would-be Palestinian state, striking a one judge from a list of three which the cal Palestine. After months of speculation series of abortive “unity” pacts meant to courts in question must submit. Chief he unveiled a policy document meant to end the schism. The new document was in judges have nearly complete power to as- amend (though not replace) the militant part aimed at stealing his thunder. sign cases and control budgets. group’s founding charter of 1988. Most Mr Abbas’s visit to the White House on Many Egyptians are outraged. “Judges strikingly, it endorses the creation of a Pal- May 3rd was remarkably cordial, given the have their own will, and they will impose estinian state in just the West Bank and pro-Israel platform on which Mr Trump it through the rule of law,” said Mohamed Gaza. As such, it moves a bit closer to the ran. The property mogul has decided he Mansour, the head of the Judges’ Club. “two-state solution” that has been the aim wants to make what he calls the “ultimate Some have threatened to strike. Members of American-led peace talks for more than deal.” He did not affirm his support for a of Egypt’s State Council say that they will two decades. Hamas has never accepted it. two-state solution, an omission which dis- not supervise the next parliamentary elec- But now, it says, Palestinian statehood is a appointed the Palestinians. But his opti-1 38 Middle East and Africa The Economist May 6th 2017

2 mism was unmistakable. “Maybe [it’s] not chief rival) to demand better conditions. In such an atmosphere, violence and as difficult as people have thought over the Nor can Israel’s right-wing coalition offer a harassment are common. In the fourcoun- years,” he told Mr Abbas as they sat down settlement freeze in the occupied territo- tries surveyed, 10% to 45% of men who to lunch. ries as a carrot to the Palestinians. have ever been married admitted to hav- Like his three predecessors, he will In the short term, Mr Trump will there- ing beaten their wives. Between 31% and soon discover otherwise. The first step is fore focus on bolstering the anaemic econ- 64% of men admitted that they had ha- simply bringing both sides back to the ta- omy in the West Bank, where the official rassed women in the street. Fewer than ble for the first round of direct talks since unemployment rate stands at 18%. This half of Moroccan men think marital rape 2014. But the deeply unpopular Palestinian closely mirrors Mr Netanyahu’s strategy of should be criminalised; most expect their leader is unlikely to accept an Israeli and “economic peace,” which has brought nei- wives to have sex on demand. Some 70% American demand that he first stop paying ther growth nor calm. The Americans also of Egyptian men still approve of female salaries to the families of jailed and dead want both sides to open a quiet back chan- genital mutilation (FGM). Palestinian terrorists. Prisoners are always nel, to talkawayfrom the spotlight. The last Well over half of Egyptian women also a resonant issue in Palestinian society—es- time they tried this, in BarackObama’s sec- say they approve of FGM. In fact, Arab pecially now, with about1,000 of them on ond term, Mr Abbas eventually disavowed women espouse many of the same views a mass hunger strike (organised by his everything his envoy agreed to. 7 as men. In Egypt and Palestine, over half of men and women say that if a woman is raped, she should marry her rapist. In at The state of Arab men least three of the countries, more women than men say that women who dress pro- Down and out in Cairo and Beirut vocatively deserve to be harassed. Most of the women surveyed say they support the idea ofmale guardianship. Activists have tried hard to encourage Arab women to assert themselves. They CAIRO have made little effort, however, to soften men’s attitudes. This is changing. ABAAD Struggling Arab men are clinging to the patriarchy forcomfort in Lebanon is one of several NGOs in the HMED, who lives in Cairo, allows his the study suggests that the struggle of region confrontingthe rigid norms of man- Awife to work. “At first, I insisted she young Arab men to find work, afford mar- hood; it uses awareness campaigns and stay at home, but she was able to raise the riage and achieve the status of financial psychological counselling. The study’s au- kids and care for the house and still have provider may be producing a backlash thors see an opening in men’s relatively time to go to work,” he says. Still, he against assertive women. In other words, liberal attitudes towards fatherhood and doesn’t seem too impressed. “Ofcourse, as male chauvinism may be fuelled by a women in the workplace. They also want a man, I’m the main providerforthe family. sense ofweakness, not strength. to stop the thrashing of boys at home and I believe women just cannot do that.” Another explanation is that a general in schools, which makes them more likely Ahmed’s outlook is widely shared climate of religious conservatism makes to harm women later on. throughout the region, where men domi- men suspicious of newfangled liberties. Studies suggest that greater equality nate households, parliaments and offices. Muslim legal scholars promote a notion of would make Arab countries richer as well Chauvinist attitudes are reflected in laws qiwamah (guardianship) that gives men as fairer—liberated women earn more. Yet that treat women as second-class citizens. authority over women. In conservative although some biased laws have changed, A new survey by the UN and Promundo, countries, such as Saudi Arabia, this is offi- official support has been grudging. “We an advocacy group, examines Arab men’s cial policy. But the attitude persists even in don’t have a Justin Trudeau in the Arab re- views on male-female relations. (One of relatively liberal parts of the Arab world, gion yet,” says Dr El Feki, referring to Cana- the authors, Shereen El Feki, used to write such as Morocco, where 77% of men be- da’s hunky feminist prime minister. But for The Economist.) It finds that around 90% lieve it is their duty to exercise guardian- Lebanon recently appointed its first-ever of men in Egypt believe that they should ship over female relatives (see chart). women’s affairs minister—a man. 7 have the final say on household decisions, and that women should do most of the chores. The unreconstructed So far, so predictable. But the survey Attitudes towards women, 2016, % agreeing Men Women sheds new light on the struggles of Arab It is a man’s duty to exercise guardianship over his female relatives men in the four countries studied (Egypt, Lebanon, Morocco and Palestine) and how Egypt Morocco Lebanon Palestine they hinder progress towards equality. At 01002550 75 01002550 75 01002550 75 05025 75 100 least two-thirds of these men report high levels of fear for the safety and well-being of their families. In Egypt and Palestine There are times when a woman deserves to be beaten most men say they are stressed or de- pressed because of a lack of work or income. Women feel even worse, but for Arab men the result is a “crisis ofmasculin- I think it is shameful when men engage in caring for children or other domestic work ity”, the study finds. Far from relaxing their patriarchal attitudes, Arab men are clingingto them. In ev- Unmarried women should have the same right to live on their own as unmarried men ery country except Lebanon, younger men’s views on gender roles do not differ substantially from those of older men. There may be several reasons for this, but Source: Promundo-US, UN Women SPECIAL REPORT INTERNATIONAL BANKING May 6th 2017

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films.economist.com/p/blancpain-ocean SPECIAL REPORT INTERNATIONAL BANKING

Ten years on

Though the eﬀects of the ﬁnancial crisis in 2007-08 are still reverberating, banks are learning to live with their new environment, writes Patrick Lane. But are they really safer now?

THE ELECTIONOFDonald Trump asAmerica’s45th president dismayed CONTENTS most ofNew York; Mr Trump’shome city had voted overwhelmingly for another local candidate, Hillary Clinton. But Wall Street cheered. Be- 5 A brief history of the crisis tween polling day on November 8th and March 1st, the S&P 500 sub-in- When the music stopped dex of American banks’ share prices soared by 34%; finance was the fast- 6 European banks est-rising sector in a fast-rising market. At the time ofthe election just two Sheep and goats of the six biggest banks, JPMorgan Chase and Wells Fargo, could boast market capitalisations that exceeded the net book value of their assets. 8 American banks Now all but BankofAmerica and Citigroup are in that happy position. After Dodd-Frank Banks’ shares were already on the up, largely because markets ex- 10 International regulation pected the Federal Reserve to raise interest rates after a long pause. It ob- Bother over Basel liged in December and March, with three more rises expected 12 Financial technology this year. That should enable Friends or foes? banks to widen the margin be- 14 Recruitment tween their borrowing and lend- The millennial problem ing rates from 60-year lows. Mr Trump’s victory added an extra 15 The next crisis boost by promising to lift Ameri- How safe are banks? ca’s economic growth rate. He wants to cut taxes on companies, which would fatten banks’ profits directly as well as benefiting their customers. He hasalso pledged to loosen bank regulation, the industry’s biggest gripe, declaring on the campaign trail that he would “do a big number” on the Dodd-Frank Wall Street Reform and Consumer Protection Act, which overhauled financial regulation after the crisis. So have the banks at last put the crisis behind them? This special report will argue that many of them are in much better shape than they were a decade ago, but the gains are not evenly spread and have further to go. That is particularly true in Europe, where the banks’ recovery has been distinctly patchy. The STOXX Europe 600 index of bank share prices is still down by two-thirds from the peak it reached ten years ago this month. European lenders’ returns on equity average just 5.8%. America’s banks are significantly stronger. In investment banking, they are beating European rivals hollow. They are no longer having to ACKNOWLEDGMENTS fork out billions in legal bills for the sins of the past, and they are at last making a better return for their shareholders. Mike Mayo, an indepen- As well as those mentioned in the text, the author would like to thank, dent bank analyst, expects their return on tangible equity soon to exceed among others: Wayne Abernathy, their cost of capital (which he, like most banks, puts at 10%) for the first Carla Antunes da Silva, Philip time since the crisis. Aquilino, Matt Austen, Mike Baxter, But financial crises cast long shadows, and even in America banks Richard Bove, Louise Brett, Gerard S P du Toit, Douglas Elliott, Douglas are not back in full sun yet. Despite the initial Trump rally, the & 500 Flint, Vishal Garg, Aaron Klein, Julia banks index is still about 30% below the peakit reached in February 2007 Lane, Max Levchin, Christian (see chart, next page). Debates about revising America’s post-crisis regu- Meissner, Philippe Morel, Hans lation are only just beginning. And the biggest question of all has not Morris, Vikram Pandit, Trent Reasons, Yorke Rhodes, Matthew gone away: are banks—and taxpayers—now safe enough? Richardson, Meg Tahyar, Larry White Plenty of Americans, including many who voted for Mr Trump, are A list of sources is at and Michael Zeltkevic. still suspicious of big banks. The crisis left a good number of them 1 Economist.com/specialreports

The Economist May 6th 2017 3 SPECIAL REPORT INTERNATIONAL BANKING

overs and keeps margins high. As commodity prices have sagged Not what it was recently, so has profitability in both countries, but last year Aus- Banks’ return on equity, % tralia’s lenders returned 13.7% on equity and Canada’s 14.1%, results that banks elsewhere can only envy. 20 Australia Canada Japan’s biggest banks, which had been reckless adventur- ers in the heady 1980s and 1990s, did not remain wholly un- scathed. Mizuho suffered most, writing down about ¥700bn 10 ($6.8bn). The Japanese were able to pick through Western debris Japan for acquisitions to supplement meagre returns at home. Some + chose more wisely than others: MUFG’s stake in Morgan Stanley Europe 0 was a bargain, whereas Nomura’s purchase ofLehman Brothers’ United States European business proved a burden. Chinese lenders were – mostly bystanders at the time, remaining focused on their domestic market. 10 2003 04 05 06 07 08 09 10 11 12 13 14 15 16 The seven consequences of apocalypse Sources: MSCI; Thomson Reuters Askbankers what has changed most in theirindustry in the past decade, and top of their list will be regulation. A light touch has been replaced by close oversight, including “stress tests” of 2 (though fewbankers) conspicuouslypoorer, and resentment eas- banks’ ability to withstand crises, which some see as the biggest ily bubbles up again. Last September Wells Fargo, which had change in the banking landscape. Before the crisis, says the chief breezed through the crisis, admitted that over the past five years financial officerofan international bank, hisfirm (and otherslike it opened more than 2m ghost deposit and credit-card accounts it) carried out internal stress tests, for which it collected a few forcustomers who had not asked forthem. The gain to Wells was thousand data points. When his bank’s main supervisor started tiny, and the fine of$185m was relatively modest. But the scandal conducting tests after the crisis, the number of data points leapt cost John Stumpf, the chiefexecutive, and some senior staff their to the hundreds of thousands. It is now in the low millions, and jobs, as well as $180m in forfeited pay and shares. Wells has been still rising. The number of people working directly on “controls” fighting a public-relations battle ever since, and mostly losing. atJPMorgan Chase, America’sbiggestbank, jumped from 24,000 This report will take stockofthe bankingindustry, chieflyin in 2011(the year after the Dodd-Frank act, the biggest reform to fi- America and Europe, a decade after the precipitous fall from nancial regulation since the 1930s) to 43,000 in 2015. That works grace of banks on both sides of the Atlantic (see box, next page). out at one employee in six. The origins ofthe crisis lay in global macroeconomic imbalances The second big change is far more demanding capital re- as well as in failures of the financial system’s management and quirements, together with new rules for leverage and liquidity. supervision: a surfeitofsavings in China and othersurplus econ- Bankers and supervisors agree that the crisis exposed banks’ omies was financing an American borrowing and property equity cushions as dangerously thin. For too many, leverage was binge. American and European banks, economies and taxpayers the path first to profit and then to ruin. Revised international bore the brunt. rules, known as Basel 3 (still a work in progress), have forced Banks in otherparts ofthe world, by and large, fared farbet- banks to bulkup, addingequity and convertible debt to theirbal- ter. In Australia and Canada, returns on equity stayed in double ance-sheets. The idea is that a big bank should be able to absorb figures throughout. It helped that Australia has just four big the worst conceivable blow without taking down other institu- banks and Canada five, which all but rules out domestic take- tions or needing to be rescued. Between 2011 and mid-2016 the 1

A long road back Share prices, January 1st 2007=100 HSBC writedown Bear Stearns funds collapse 120 Bear Stearns bought by JPMorgan Chase Lehman Brothers collapses Trump orders review of regulation 100 TARP enacted Donald Trump elected Fed cuts interest rates to near zero Fed raises rates for first time since 2006 80 Treasury recapitalises banks Treasury sells last TARP stake Fed’s first stress tests 60 Dodd-Frank act becomes law S&P 500 banks 40

20 STOXX Europe 600 banks Basel 3 agreed on 0 2007 08 09 10 11 12 13 14 15 16 17 BNP Paribas RBS UBS bailed out; First pan-European ECB cuts deposit rate below zero Brexit referendum funds frozen bailed out Credit Suisse recapitalised stress tests Single Supervisory Mechanism ECB begins bond-buying Northern Rock RBS-led group begins overseeing euro-zone banks rescued buys ABN AMRO Sources: Thomson Reuters; The Economist

4 The Economist May 6th 2017 SPECIAL REPORT INTERNATIONAL BANKING

2 world’s 30 “globally systemically important” banks boosted their common equ- When the music stopped ity by around €1trn ($1.3trn), mostly through retained earnings, says the Bank forInternational Settlements in Basel. A brief history of the financial crisis Third, returns on equity have been lower than before the crisis. In part, that is EXACTLY TEN YEARS ago, on May 6th 2007, two hedge funds run by Bear Stearns, an a natural consequence of a bigger equity ABN AMRO rejected a $24.5bn bid by three investment bank, collapsed after losing base. But the fallout from the crisis has European rivals for LaSalle, a Chicago bank money on soured subprime investments. also squeezed returns in another way. which the Dutch lender had owned since As banks started to worry about expo- Central banks first pushed interest rates to 1979. The previous month Britain’s Royal sure to subprime lending and the piles of ultra-low levels and then followed up Bank of Scotland (RBS), Spain’s Santander complicated derivatives connected to it, with enormous purchases ofgovernment and Belgium’s Fortis had offered €72.2bn credit markets began to seize up, causing bonds and other assets. This was partly (then $98bn), almost all in cash, for the BNP Paribas, a French bank, to suspend intended to help banks, by making fund- whole of ABN AMRO. By October that year RBS withdrawals from three funds in August. The ing cheaper and boosting economies. But and its partners had won their prize, minus following month Northern Rock, a British low rates and flat yield curves compress LaSalle, in what is still banking’s biggest mortgage lender that had funded its rapid interest margins and hence profits. takeover. When ABN AMRO was carved up, RBS expansion in the flighty wholesale markets, Balance-sheets have been stuffed briefly enjoyed the glory of being the asked the Bank of England for liquidity with cash, deposited at central banks and world’s largest bank by assets. support. Depositors queued round the block earning next to nothing. According to Oli- A giddy party was in full swing. “As to retrieve their money. In November 2007 ver Wyman, a consulting firm, the share long as the music is playing,” Chuck Prince, the music stopped even for Mr Prince: he of cash in American banks’ balance- then boss of Citigroup, told the Financial resigned. That quarter Citi took subprime- sheets jumped from 3% before the crisis to Times in a quip that became notorious, related write-downs of $18.1bn. a peak of 20% in 2014. As the world econ- “you’ve got to get up and dance.” But the The euphoric frenzy came to a total omy is at last reviving after several false tunes were already off-key. American house halt with Lehman Brothers’ implosion in starts, earnings may pick up in Europe as prices, driven skyward by low interest rates September 2008. The mergers of that period, well as in America. and rash lending to “subprime” borrowers unlike the opulent, record-breaking deal of (people with poor or non-existent credit 2007, were hasty, embarrassed dashes to the Sweat your assets histories) had peaked a year earlier. In altar. JPMorgan Chase saved Bear Stearns in Fourth, sluggish revenues, com- February 2007 Britain’s HSBC shocked mar- March 2008 when Bear’s failure became bined with the competingdemandsof su- kets by raising its bad-debt provisions to inevitable. After Lehman’s collapse, JPMor- pervisors and shareholders, have forced $10.5bn, $1.8bn more than analysts had gan took over Washington Mutual, which had banks to screw down their costs and to expected, because of failing American become America’s seventh-biggest bank on think much harder about how best to use subprime mortgages. During that summer the back of the housing boom. Bank of scarce resources. “If I’m going to get a America absorbed Countrywide, another good return on a high amount of capital, over-eager housing lender, and then Merrill I’d better focus on what I’m good at,” says Lynch. Japan’s MUFG bought 20% of Morgan Jim Cowles, Citigroup’s boss in Europe, Stanley. Wells Fargo snapped up Wachovia, the Middle Eastand Africa. Citi, which un- America’s fourth-biggest bank. der Sandy Weill in the late 1990s had be- After its moment in the sun, RBS would come a sprawling financial supermarket, have followed Lehman into oblivion but for a selling everything from investment-bank- £45bn ($78bn) bail-out from the British ing services to insurance, has retreated to government. Today, after nine years of become chiefly a corporate and invest- losses, it remains in state ownership. Fortis ment bank, much as it had been in the was rescued by the governments of Belgium, 1970s and 1980s. Its bosses emphasise its Luxembourg and the Netherlands and dis- “network”, a presence in nearly100 coun- membered. Santander played its hand far tries that multinationals’ treasurers can better. It emerged from the crisis without a count on. It once also had retail banks in single quarter of losses, and remains the 50 countries, many of them second- euro zone’s most valuable bank. string. That total is now down to 19. Such retreatfrom marginal businesses has also meant fewer jobs and lower bonuses, even if bankers’ pay is still the envy of most. That has less payment-protection insurance; fixing Libor, a key interest brought about a fifth change: banks have become less attractive rate; rigging the foreign-exchange market; and much more. employers forhigh-powered graduates. “The brightest people no Seventh and last, financial technology is becoming ever longer want to go to banks but to Citadel [a hedge-fund firm],” la- more important. That may be better news for banks than it ments a senior banker. Some millennials, he adds, are drawn to sounds, despite the creakiness of some of their computer sys- technology companies instead. Others “don’t want to deal with tems. Plenty of financial startups are trying to muscle in on their business at all”. That is because of a sixth change: the financial business, but in a highly regulated industry heavyweight incum- sector’s reputation was trashed by the crisis. One scandal fol- bents are harderto usurp than booksellers ortaxi drivers. As a re- lowed another as the story of the go-go years unfolded: provid- sult, there is a good chance of banks and technology companies ing mortgages to people who could not afford them; mis-selling forming mutually beneficial partnerships to improve services to securities built upon such loans; sellingexpensive and often use- their customers rather than fighting each other. 7

The Economist May 6th 2017 5 SPECIAL REPORT INTERNATIONAL BANKING

European banks Sheep and goats

Most of Europe’s banks were slow off the mark after the crisis “THE SHORT ANSWER is Hank Paulson,” snorts a Euro- pean banker. “They got TARPed.” The question had been why America’s banks recovered so much faster than Europe’s from the debacle of ten years ago. Within days of Lehman’s de- mise in 2008 Mr Paulson, then America’s treasury secretary, forced the banks, as well as AIG, a giant insurer, and other companies to take equity injections from the federal government, whether they needed and wanted them or not. TARP, the Troubled Asset Relief Programme, at first ear- marked around $700bn forcompanies in difficulty. That was later cut to $475bn, of which $245bn was pumped into banks. With interest and dividends, the banks eventually repaid $275bn, having replaced public money with private funding. In 2014 the government sold its last shares in a TARP bank: Ally Financial, for- merly the financial wing ofGeneral Motors. The recapitalisation of Europe’s banks has been as gradual as that of America’s was swift, and in dribs and drabs of tens of billions a year rather than in one big splurge (see chart). It is still Lloyds, Northern Rock, RBS and UBS, even if British taxpayers continuing. So far this year Deutsche Bank and UniCredit, the paid a “scandalously high price” to save RBS. biggest lenders in Germany and Italy respectively, have raised Stress tests by European authorities were sometimes way €21bn in new equity. off the mark. For example, they gave Ireland’s banking system a European banks could have done a lot more sooner. Hyun clean bill of health in 2010, just before it collapsed, and in 2011al- Song Shin, of the Bank for International Settlements, calculates lowed Dexia, a Franco-Belgian bank, to pass with flying colours that between 2007 and 2015, 90 euro-zone banks retained just a few months before it was caught by exposure to Greek €348bn of their earnings and paid €223bn in dividends. Had sovereign debt and bailed out by the governments of Belgium, they kept the lot, they would have been able to stuff 64% more France and Luxembourg. into their equity cushions. Because stronger banks tend to lend The authorities eventually got their act together. Spain’s more, Mr Shin adds, profits, earnings and capital would have banking system, for instance, is much the stronger for a consoli- been that much higher ifthey had done so. dation eventuallyco-ordinated bythe state, although weak spots Nicolas Véron, ofBruegel, a Brussels think-tank, and the Pe- remain. Several cajas (local savings banks) clobbered by the terson Institute for International Economics in Washington, DC, country’s property bust were folded into more robust institu- contrasts Mr Paulson’s “tough love” favourably with the reaction tions. A grand total of 55 banks has been reduced to 14. Several to the financial crisis of national supervisors in Europe. Authori- leading lenders—Santander, BBVA, Caixa and Sabadell—have ties in the euro area were too concerned with protecting national also expanded abroad. champions from embarrassment, he says, “a story very much of Unlike America, the euro zone did have a second crisis to forbearance and denial”. British and Swiss regulators were deal with, which posed a threat to its very survival; and it was quicker than their counterparts in the euro zone, bailing out only in response to the euro crisis that a common banking supervisor was created within the European Central Bank. The Single Supervisory Mechanism (SSM) has been up and running for just two-and-a-half years. It directly supervises the euro area’s 126 From major to minor most important banks (the biggest in the zone, plus those critical Capital raised, $bn to national economies, big or small), a group that accounts for US banks European banks 80% of the area’s banking assets. Oversight of the remaining 140 3,200 lenders is delegated to national authorities. 120 A union of sorts 100 Europe’s “bankingunion”, ofwhich the SSM is a central ele- 80 ment, remains incomplete, partly because German politicians 60 balk at a plan to insure deposits across the euro zone. Rules on 40 banking supervision, moreover, are still inconsistently applied. “We need regulations, not directives,” says Danièle Nouy, the 20 head of the SSM. (Her point is that European Union regulations 0 are adopted automatically by member states, whereas directives 2008 09 10 11 12 13 14 15 16 17 Q1 require implementation by national parliaments.) The directive Sources: Dealogic; Autonomous Research translating Basel 3 into EU law contained more than 160 national 1

6 The Economist May 6th 2017 SPECIAL REPORT INTERNATIONAL BANKING

Some ratesremain constant, a mere 20% oflend- ers will earn their cost of capital (estimat- European ed at 8%) by 2020; last year 60% did. countries, Thomas Olsen ofBain, a firm of consultants, argues that before the crisis, and notably even for several years afterwards, banks Italy and everywhere “didn’t really have different strategies”. Tight regulation had tradition- Germany, ally limited their scope for experimenta- have too tion, but in the helter-skelteryears leading up to 2007-08 banks grew indiscriminate- many banks ly, spreading into as many countries and and areas of business as they could. After the fall, “they didn’t have a strategy then, ei- branches ther: they were just firefighting.” As the for all of dust settled, theyhad to decide what strategy to adopt and how to put it into effect— them to often by retreatingfrom unprofitable mar- flourish kets and activities. Too many European banks have been slow to dust themselves off. Some at least went into the crisis with robust business models—and therefore did not need a thorough shake-up. Santander, which had built retail and commercial banking businessesin a numberofcountries, from Chile to Britain, was well placed to with- 2 options. A single capital market is also still faroff. stand the storm, even though its homeland took a battering. It is These days European supervisors’ most pressing problem the euro zone’sbiggest bankby market value and has made mon- is Italy. Bad debts that seemed manageable back in 2007 grew ey in every quarter since at least the late 1950s. Like many banks, into a mountain, reaching €360bn (at gross value) by 2015 as Ita- it has had to turn to shareholders to boost capital, raising €7.5bn ly’s economy failed to grow, borrowers ran into trouble and in January 2015. Its share price is just a shade below net bookval- banks and supervisors procrastinated. Jean-Pierre Mustier, the ue. By European standards it is doing fine. newish French boss of UniCredit, is knocking the biggest bank Contrast that with Deutsche Bank. This used to be a slightly into shape, writing down bad debt by €8.1bn, selling assets and staid institution, serving Germany’s biggest companies at home raising €13bn in equity. Intesa Sanpaolo, the next-biggest, has and abroad and looking after well-off retail customers; but long been in decent shape forsome time. But the fourth-largest, Banca before the crisis it had ventured far from that model, choosing Monte dei Paschi di Siena, is pinned down by its bad debts and the buccaneering life of international investment banking and awaiting state aid for the third time within a few years. Banca trading. By 2007 it was leveraged to the hilt, with equity amount- Populare di Vicenza and Veneto Banca, two smaller banks that ing to only 2% of total liabilities, one-third of the ratio at Santan- plan to merge, are also seeking a bail-out. der. The crisis dealt it a heavy blow. The SSM wants to be sure that the banks will at last be well capitalised. In December it told Monte dei Paschi that it would Not quite über alles need €8.8bn, buthassince deemed itsolvent. However, bail-outs Deutsche is the biggest bank in Europe’s biggest economy must be approved by the European Commission, which over- and has not needed state aid, but it has had to turn to share- sees recently tightened state-aid rules to discourage continuing holders three times in seven years, tapping them for a total of calls on taxpayers. more than €20bn. Despite a rally since last September, its shares The state-aid rules say that junior bondholders as well as have beeen tradingat only two-fifths ofbookvalue. This January shareholders should be “bailed in”—ie, wiped out—if a bank has it concluded a $7.2bn settlement with America’s Department of to be rescued. But in Italy many retail customers bought bank Justice (DOJ), which had accused it of mis-selling residential bonds believing them to be as safe as deposits. The Italian au- mortgage-backed securitiesin the wild pre-crisis daysof 2005-07. thorities are desperate to find a way of compensating them that (Some otherEuropean bankshave yetto settle; American offend- satisfies the commission. A bail-in at smaller banks in late 2015 ers have already paid hefty penalties.) The bill was less than caused political uproarand resulted in at least one suicide. Prece- feared: initially the DoJ had demanded $14bn, and only $3.1bn of dent suggests that a solution should be possible; holders of simi- the settlement has to be paid in cash. lar Spanish bank bonds were compensated for falling victim to Now this is out of the way, Deutsche may at last have ar- “mis-selling”. rived at an enduringstrategy. In March John Cryan, its chiefexec- ButEuropean banks’ plightstemsfrom more than justbeing utive since 2015, decided to keep Postbank, a retail operation he slow to recapitalise and sort out bad loans. Some countries, nota- had previously intended to sell, shoring up Deutsche’s deposit blyItalyand Germany, have too manybanksand branches forall base in Germany. To boost its ratio of equity to risk-weighted as- of them to flourish. A long period of ultra-low interest rates has sets, a key regulatory measure ofresilience, Deutsche has instead flattened margins. German banks, which rely on interest for raised another slug of equity, €8bn-worth, and is selling part of three-quarters of their income, the highest proportion in any its asset-management division. It is also reorganising its invest- OECD country, have been squealingalmost as loudly as savers. A ment bankand has said that in future it intends to concentrate on paper recently published by the Bundesbank forecasts that, if serving multinationals. 1

The Economist May 6th 2017 7 SPECIAL REPORT INTERNATIONAL BANKING

2 Credit Suisse also took its time, changing tack dramatically in 2015. Its then-new chief executive, Tidjane Thiam, an ex-insur- Mirror images er, tilted the business towards Asia, seeing newly rich Chinese as United States ideal clients for a Swiss bank. He also cut investment-banking Number of banks by size of assets Total assets by size jobs and proposed a partial sale of the Swiss domestic business. ’000 $trn Investorswere unconvinced. In April he ditched thatsale and an- 20 20 nounced a share issue. Others caught out by the crisis were quicker to narrow their 15 15 ambitions. One wasUBS, which was bailed out by the Swiss government in 2008. Mr Cryan, then the bank’s chief financial offi- $100m-1bn 10 10 cer, helped turn it around. In 2011it decided to concentrate more Below $100m Below on wealth management worldwide and on its Swiss universal $100m bank, and to cut back on investment banking. That meant miss- 5 5 Over $1bn ing out on a good year for fixed-income businesses in 2016, but $100m-1bn Over $1bn over time it should involve fewer downs as well as ups. 0 0 All in all, European banks have fallen behind their Ameri- 1985 90 95 2000 05 10 16 1985 90 95 2000 05 10 16 can counterparts. In investment banking, where they compete Source: Federal Deposit Insurance Corporation head-to-head, the gap is worryingly wide. Part of the reason is that the Americans’ domestic market recovered sooner and more strongly from the crisis. According to Dealogic, a research stress tests, estimating how much equity would be burned up in firm, America yielded 48% of global investment-banking rev- a hypothetical crisis. The Fed may also limit banks’ dividends enue in 2016, up from 41% in 2007 (and only34% in 2009, itsweak- and share repurchases if it finds they do not have enough capital est year). Asia’s share also grew, but Europe’s shrank to 22% in in the worst scenario. Banks are given plenty of information 2016 from 36% in 2007. about the imaginary catastrophe—but not about the models the American banks were naturally best placed to take advan- Fed uses in the tests. It is hard, they mutter, to hit a moving target tage ofgrowth at home, where they rule the roost. Asian (mainly in the dark. The Fed, however, does not want banks to arrange Japanese and Chinese) investment banks, plus Morgan Stanley, their balance-sheets merely to meet the test. Daniel Tarullo, the thanks to MUFG’s stake in the American firm, lead the way in designer ofthe Fed’s stress-test apparatus, who stepped down as their home region. But European firms have also lost ground to a governor last month, said in a farewell speech that the tests the Americanson theirown continent. The Americansfill fourof needed refining but that they had to adapt to new risks, and that the first five slots in Dealogic’s European regional league table. publishing models would “result in less protection for the finan- Only Deutsche prevented a clean sweep, coming third. cial system”. Leading the field both at home and abroad, you might sup- Bankers freely admit that they had too little equity before pose that America’s big banks had little to complain about. Even the crisis. Now they say they have too much. Mr Dimon points so they are restive, insisting that they got over the crisis years ago out that under the worst scenario in the Fed’s stress test last year, but are still being held back by a thicket of regulation. Donald the 33 banks’ hypothetical losses amounted to $195bn. That is Trump said he would cut through it all. But how? 7 bound to be an overstatement: the test assumes that each and every bank will be the worst affected. But it still amounts to less than 10% of their combined loss-absorbing resources. They are American banks now required to hold so much capital, Mr Dimon writes, that lending and the American economy are being held back. The banks grumble about a surfeit ofrules as well as ofcap- After Dodd-Frank ital. The Fed’s first stress tests predated, by a year, the Dodd-Frank act of 2010, which recast American financial regulation. The law runs to 848 pages. It abolished one watchdog but created two more, the Consumer Financial Protection Bureau (CFPB) and the Time to loosen the reins, say America’s banks. Not so Financial Stability Oversight Council, which is made up of the heads ofregulatory agencies and is chaired by the treasury secre- fast, say regulators tary. It laid out procedures for dealing with bankruptcy of sys- “LEFT TO OUR own devices,” said Lloyd Blankfein, boss of temically important banks, using public money if need be. In all Goldman Sachs, in February, “we wouldn’t hold as much it imposed 390 requirements for which regulators had to come capital as we are holding.” He is not alone. “It is clear that the up with new rules. According to Gabriel Rosenberg of Davis banks have too much capital,” wrote Jamie Dimon of JPMorgan Polk, a law firm, only 279 have been finalised. Banks moan that Chase, America’s biggest bank by assets, in a letter to share- the regulation of mortgages—more than half of which are now holders last month. originated by non-banks—is especially fiendish. American banks, both big and small, are chafing. Since Complaints about red tape extend far beyond Wall Street. 2009 the 33 banks deemed to be “systemically important”, America has a total of around 5,900 banks, all but 100-odd of which are subject to stress tests by the Federal Reserve, have add- which hold assets of less than $10bn, a category dubbed “com- ed $700bn in common equity. The eight banks considered to be munity” banks; indeed, more than 5,000 of them hold less than of global systemic importance (G-SIBs, in banking parlance) $1bn. Community banks, like their bigger peers, say regulation is must meet not only the capital and leverage requirements agreed costing them too much and restricting lending. on by international supervisors after the crisis (see next article) Community banks have plenty of other problems as well. but also additional surcharges levied by the Fed. Among other They lackscale; their risks are locally concentrated; and they face changes, Mr Dimon wants this “gold-plating” to go. competition not only from bigger banks but also from online Perhaps most irritating to the banks are the Fed’s annual lenders. Already one-fifth of small businesses—the community 1

8 The Economist May 6th 2017 SPECIAL REPORT INTERNATIONAL BANKING

2 banks’ staple—lookto online lenders when seeking a loan. Small There may be broad agreement on some areas. One is that banks have been in decline for decades (see chart, previous small banks’ burden should be eased, for instance via complete page). Stephen Cecchetti, of Brandeis University, and Kim exemption from the Volckerrule, which bans banks from trading Schoenholtz, of New York University’s Stern School of Business, most securities for their own profit, and from owning private- point out that this downward trend did not accelerate after equity and hedge funds, and which was aimed at big institu- Dodd-Frank. tions. It helps that community banks have plenty of congressio- Still, extra regulation has not helped. Karen Mills of Har- nal clout. Another is that the threshold of$50bn in assets fordes- vard Business School, a formerhead ofthe federal government’s ignating a bank as systemically important, and so subject to Small Business Administration, says that Dodd-Frank has thick- detailed stress-testing, is too low. The smallest are no systemic ened the “spaghetti soup”. In particular, community banks’ abili- threat, and the limit discourages otherwise sensible mergers that ty to make loans of under $150,000 has been weakened. Al- would push banks above it. The Fed has already eased some re- though they are exempt from many ofthe regulations governing quirements forsmaller systemic banks. large institutions, such as supervisory stress tests, the fixed costs It should also be possible to loosen the reins without new ofregulation weigh more heavilyon smallerlenders. “Bankpres- laws. Dodd-Frank gives regulators a fair amount of discretion, idents are really thinking about regulation more than serving and Mr Trump will be able to choose a number of new ones. customers,” says Hester Peirce, of the Mercatus Centre at George Most important (and possibly imminent) is a replacement for Mr Mason University in Washington, DC. Tarullo, long a thorn in the banks’ sides, to oversee financial stability at the Fed. Two other slots at the central bank are vacant. Do a big number Thomas Curry’s term as the Comptroller of the Currency, who If Hillary Clinton had been elected president last Novem- oversees national banks, ended on April 9th. And in November ber, bankers’ best hope for regulation might have been more of Martin Gruenberg’s term as chairman of the Federal Deposit In- the same. Mr Trump, by contrast, has promised to “do a big num- surance Corporation (FDIC) is due to run out. ber” (meaning a radical cutback) on the Dodd-Frank act. No one Jeb Hensarling, chairman of the House Financial Services knows how big. All Mr Trump has done so far is to issue an exec- Committee, intends to revive legislation that he proposed last utive order listing seven unobjectionable principles for financial year. Atthe core ofhisFinancial CHOICE (CreatingHope and Op- regulation (sample: “foster economic growth and vibrant finan- portunity for Investors, Consumers and Entrepreneurs) act is in- cial markets through more rigorous regulatory impact analysis”) deed a choice: banks can opt to maintain a leverage ratio, of equ- and to instruct the treasury secretary to assess by early June ity to total liabilities, of 10%, in return for exemption from such whether existing laws can deliver these objectives. A separate burdens as minimum ratios ofequity to risk-weighted assets laid proclamation has paved the way foreasing rules on financial ad- down in international banking standards, “living wills” setting visers’ duties to their clients. out how they could be wound up if they went bust, and those Nothing much is likely to happen soon, although ideas are pesky stress tests. With enough equity, the theorygoes, a failing in the air. Gary Cohn, Mr Trump’s chief economic adviser, has bank would be no risk to the taxpayer and so could be left in mused about a “21st-century version” of the Glass-Steagall act, a peace. Ifit overreached, only its shareholders would suffer. Depression-era law, repealed in 1999, that forced the separation A book published in March by academics at the Stern 1 of commercial and investment banking. Separately, Republicans in the House of Representatives have said that they want The to pass a bill to replace Dodd-Frank by the summer. But the new administration Dodd-Frank wanted to concentrate on replacing Ba- act has rack Obama’s health-care law (over which it came a cropper) and on reform- thickened ing taxes. And although Mr Trump has a the treasury secretary in place, Steven Mnu- chin, other jobs in the department that re- “spaghetti quire approval by the Senate, plus many soup” that do not, have not yet been filled. Passing new legislation may anyway be tricky. Although the Republicans have majoritiesin both the House and the Senate, they lack the 60 votes needed to break a filibuster (debating a bill for so long that it runs out of time) in the upper house. Persuading eight Democrats to join them appears a tall order for anything that looks like a sop to Wall Street, butsome sound keen on MrCohn’sGlass- Steagall idea. Budgetary measures can be passed with a simple majority. That may allow Republicans to restrict funding for (and perhaps restructure) the CFPB, which is financed through the Fed rather than directly by Congress, or perhaps to gut Dodd-Frank’s bankruptcy procedure.

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2 School and NYU’s law school, “Regulating Wall Street: CHOICE commercial subsidiary (as before), which would be subject to a Act vs Dodd-Frank”, compares the two acts, section by section. It leverage ratio of at least 10%; the investment-banking arm’s re- argues that Dodd-Frank has made the American financial sys- quirement would be based on risk, but should be no less than tem safer, both since the crisis and relative to those of other large that of stand-alone broker-dealers today (8.4%). In return, big countries; butitsmanypages and associated ruleshave notgotto banks could be freed from a whole array of regulations, includ- the heart ofsystemic risk, and are more burdensome than neces- ingstresstestsand livingwills. The idea, MrHoenignotes, issimi- sary. So does CHOICE represent an improvement? lar to the “ring-fencing” ofretail banks in Britain, due in 2019. (Mr Startwith a tickin itsfavour. The Volckerrule, the NYU team Cohn could also be thinking along these lines.) concludes, could go. It is supposed to stop banks using deposits Otherssaythat10%, however you measure it, is not enough. insured by taxpayers to fund risky proprietary trading. But it was In “The Bankers’ New Clothes”, published in 2013, Anat Admati not such trading that caused the crisis, and the rule does not re- of Stanford and Martin Hellwig of the Max Planck Institute for duce risk enough to justify the burden of compliance. Banks Research on Collective Goods proposed a minimum of20%. The complain that they must send reams ofdata to regulators daily to Federal Reserve Bank of Minneapolis estimated last year that show that they are complying. They say that if the rule were Dodd-Frank had cut the chance that big American banks would scrapped they would not reopen proprietary trading desks any- need another public bail-out at least once in the next 100 years way. A separate study, by consultants at Oliver Wyman, finds onlyfrom 84% to 67%. To reduce the probabilityto 9%, itproposed that the Volcker rule and similar regulations in Europe may have the equivalent ofa leverage ratio of15%. Banks that fell short after harmed liquidity in some important markets, including repos, five years would see the bar raised, eventually to 24%. which provide short-term funding, corporate bonds and com- Underlying all this is a divergence between what suits a big mercial mortgage-backed securities, because banks now hold bank and what suits the economy as a whole. Unsupervised, much less ofsuch stuffon their balance-sheets. banksare likelyto issue too little capital, because they do nottake Neither Dodd-Frank nor CHOICE, says the NYU team, tack- into account the effect of a systemic crisis on other banks or on les important flaws in American regulation. The country has lots the economy as a whole. That is why the biggest face more de- of different watchdogs, and who oversees what depends on a manding capital rules and stress tests. The alternative is to force company’s legal form ratherthan its economic function. Its prop- them to have so much equity on their balance-sheets that they ertyand mortgage marketsare distorted byFannie Mae and Fred- can fail without bringingdown the lot. MrDimon argues that the die Mac, which guarantee almost all housing loans. Both laws banks have already passed that point: “Essentially, too big to fail leave these problems untouched. has been solved—taxpayers will not pay if a bank fails.” The CHOICE’s central bargain—10% leverage in return for less question now is whether Mr Trump appoints supervisors who regulation—may make sense for smaller, non-systemic banks. agree with Mr Dimon. 7 For the bigger ones, it looks like a bad deal both for the banks themselves and for the wider economy. Eliminating stress tests forsystemically important banks, argue the NYU authors, “could International regulation be catastrophic”. One of them, Philipp Schnabl, says the point is not how much capital banks have in normal times but how much they have in hand when trouble arrives. And because le- Bother over Basel verage ratios treat all assets as equally risky, banks may have an incentive to increase risk—and hence, they hope, returns—while keeping the ratio constant. Youneed risk-weighting too. Moreover, measuring leverage is not as simple as it looks. International bank regulation is grinding towards American accounting principles, known as GAAP, allow banks to offset derivative exposures on the asset and liability sides of completion—or possibly to a halt theirbalance-sheets. International standards, orIFRS, restrictthis BY THE END of last year bank supervisors were supposed possibility, because the liabilities will still exist in bankruptcy. to have agreed on revisions to Basel 3, the international cap- Balance-sheets are therefore smaller, and leverage ratios larger, ital and liquidity standards devised after the financial crisis, under GAAP than under IFRS. which would then be all but complete. That did not happen, Thismatters. ThomasHoenig, vice-chairman ofthe FDIC, is chiefly because some European authorities balked at the pros- no fan ofregulatory risk-weighting. He thinks it is fine for banks pect of yet higher capital demands for the banks in their charge. to use it internally, but not forsupervisors to decide priorities for Officials close to discussions at the Basel Committee on Banking them, pointing out that “I cannot predict the future.” So he also Supervision, which draws up the standards, are still confident favours leverage ratios of at least 10%—but for all banks, and on that agreement will eventually be reached. But further delay the IFRS measure. In December, America’s eight G-SIBs had a seems inevitable, if only because Donald Trump has yet to combined leverage ratio of8.2% underGAAP butonly6.3% under choose the American officials needed to complete the talks. And IFRS. In the 2008 crisis, Mr Hoenig notes, their losses amounted even ifa deal is done, there are signs that the trend towards inter- to 6% of tangible assets. national regulation that gathered pace after the financial crisis may be going into reverse. “Post-crisis, there was a consensus for Disentangling risk a global setofrules,” saysHuwvan SteenisofSchroders, a British He recently put more flesh on his proposals. Dodd-Frank fund-management firm. “That consensus has now broken.” was “well-intended”, he says, but its “many and complicated” The crisis revealed that many banks had too little capital to regulations are too burdensome for all banks, especially small absorb losses, were funded with too much debt and not enough ones. For the largest ones, he thinks, the law has “served to en- equity, and were prone to illiquidity. Basel 2, the previous set of shrine too big to fail”. He suggests that big banks should split standards, completed in 2004, had required banks to maintain a commercial and investment banking into separately capitalised minimum ratio of “tier-1” capital (equity plus qualifying debt) to and managed subsidiaries, each capable of entering bankruptcy risk-weighted assets (RWAs), with the weights determined either without public support. The FDIC would insure deposits in the by banks’ own models or by a standardised approach. This had 1

10 The Economist May 6th 2017 2 proved inadequate. Moreover, though Europe had adopted Basel 2 wholesale, American supervisors had applied it to just a dozen internationally active banks, fearing(with good cause) that Basel 2 would allow lenders to maintain dangerously low levels of equity. For the rest, they preferred to watch a simple leverage ratio, ofequity to unweighted assets. Basel 3, agreed on in 2010, wasaccepted on both sidesof the Atlantic (and in many other countries). Its many and detailed provisions are being phased in gradually and have been re- viewed and adjusted several times. The standards are far stricter than the previous ones in several ways, starting with tighter defi- nitions ofboth tier-1capital and RWAs. The equity component of tier-1 capital (common equity tier-1, or CET1) must amount to at least 4.5% of RWAs. Total tier-1 capital must be at least 6%. Stuart Graham of Autonomous, a research firm, reckons that the new rules in effect lopped around three percentage points from CET1 ratios. On top of this Basel 3 stipulated a “capital-conservation buffer” of 2.5% of RWAs and a “countercyclical buffer” of up to 2.5%, set by national regulators and intended to cool overheating. Both must be made up ofequity (see chart). Of G-SIBs and TLACs The 30 institutions considered to be globally systemically important banks, or G-SIBs, incur an equity surcharge, ranging from 1% to 2.5% of RWAs. All these requirements will increase yearby yearuntil 2019. G-SIBs from rich countries must also have a “total loss-absorbing capacity”, or TLAC, comprising equity and convertible debt, of 16% of RWAs by 2019 and 18% by 2022. The handful of G-SIBs from emerging economies will have longer. The idea is that should they fail, they can be automatically recapitalised by bailing in investors, without troubling taxpayers. Basel 3 also introduced a minimum leverage ratio, an idea European regulators resisted at first. Tier-1capital must be at least 3% of assets, and more for G-SIBs. To deal with worries about liquidity, Basel 3 also requires banks to have enough high-quality liquid assets to withstand a month of outflows under stress and maintain sufficient “stable” funding, such as equity, long-term debt and retail deposits. All this has meant that banks have become much better capitalised. Both CET1 and leverage ratios have climbed (see chart, next page). Virtually all of the 100 big international banks and 110 otherscovered in the Basel committee’slatestmonitoring report are keeping up with the Basel 3 standards. A few tasks have not yet been tackled, such as whether the risk-weights of sovereign Pile on the cushions bonds should be raised. The Basel 3 capital requirements, % latest kerfuffle stems from the important parameters in internal models (such as the probabili- Common equity Tier 1 committee’s attempts to bring ty that certain types of loan will go bad). Most controversially, it Tier 2 Conservation buffer more consistency to banks’ in- suggested an overall “output floor”—a lower limit for the sum of G-SIB surcharge ternal calculations of RWAs RWAs—of between 60% and 90% of the number reached via the 14 and to narrow the gap with the standardised method. Ifa bank’s internal model yielded a figure standardised approach, which below the floor, the floorwould be used instead. 12 typically yields higher RWAs The changes would have little if any effect on American 10 and hence lower capital ratios. banks, but some European (and Asian) lenders would see their In 2013 the committee asked 32 RWAs and hence theirminimum capital requirements go up. Un- 8 lenders to work out CET1 ratios fair, said the Europeans: the changes, in effect, penalised them for 6 forthe same hypothetical cred- keeping on their balance-sheets assets such as residential mort- it portfolio. The highest figure gages and loans to big companies, which American lenders are 4 was four percentage points less likely to have. Not at all, retorted the Americans, who still 2 above the lowest. mistrust risk-weighting: you should have put your houses in order sooner, as we did. 0 That, the committee de- 2013 14 15 16 17 18 19 cided, was too much, so it pro- Officials say that pretty much all the disagreements have Source: Bank for International posed changes to close the gap, been sorted out except, crucially, forthe output floor. But fornow Settlements including minimum values for there is no one to talk to on the American side; and the isolation- 1

The Economist May 6th 2017 11 SPECIAL REPORT INTERNATIONAL BANKING

2 ist mood among some Republi- want capital to be siphoned away from a local subsidiary to prop cans may work against a deal. The Basel 3 effect up the parent; and if the subsidiary stumbles, they want to be In a letter to Janet Yellen, the Big banks sure it has enough equity of its own so it can be allowed to fail Fed’s chairman, in January, Pat- United States Europe without imposing on local taxpayers. Since last July foreign rick McHenry, vice-chairman Basel 3 leverage ratio, % banks in America have had to create separately capitalised “in- ofthe House Financial Services 8 termediate holding companies” for their local subsidiaries. In Committee, said it was “unac- November Valdis Dombrovskis, the European Union’s commis- ceptable” that the Fed “contin- 6 sioner for financial services, proposed something similar for the ues negotiating international 4 EU. The details have not yet been worked out, but he wants G- regulatory standards for finan- SIBs in the EU to maintain enough loss-absorbing capacity local- 2 cial institutions among global ly to permit orderly bankruptcy. bureaucrats in foreign lands 0 Britain’s departure from the EU, scheduled for 2019, may without transparency, account- 2007 2016 give the ratchet another turn. Banks in the EU have “passports” ability or the authority to do Basel 3 common equity that allow them to serve the entire union from any member so”. In other words, stay out of tier-1 ratio, % state, without local branches or subsidiaries. Most have chosen Basel until you get new orders. 14 London as their base. After Brexit, London-based banks will lose Would it matter if there 12 their passports. No one yet knows which operations and how were no deal? Politically, very many jobs will move away, but regulators in France and Ger- much so: it would be one sign 10 many, say, may insist that hubs in Paris and Frankfurt are sep- among many (in trade, security 8 arately capitalised. HSBC and elsewhere) that global co- 6 Some banks, such as and Santander, have long capi- operation can no longer be tak- talised subsidiaries in different places separately. And it is not en for granted. In practical 4 hard to understand why national supervisors might insist that terms, perhaps not so much. 2 othersdo the same: a little sand in the wheelsofglobalised finan- Apart from this point, Basel 3 is cial institutions may be a good thing. Nonetheless, even cautious 0 largely done; most banks use 2007 2016 banks worry that supervisors may trap capital that could be bet- the standardised approach Sources: Company reports; Autonomous ter deployed elsewhere. The effect would be to raise lenders’ anyway. But failure may give Research minimum capital requirements even further. some European banks an ex- “If you have a very fragmented approach to banking regu- cuse to put off adding extra lation,” says David Strachan, a British ex-supervisor who is now equity or reducing risks. working for Deloitte, a consulting firm, “the cost this imposes on Perhaps delay may be no bad thing: given more time, Euro- banks trying to operate globally is material.” If some countries pean economies and banks should become stronger, making lose confidence in supervisors elsewhere in the world, ring-fenc- agreement easier. And once a new American team is in place, a ing may increase. If others follow the lead of America and Eu- way forward may emerge. Mr Trump’s nationalist streak could rope in asking for intermediate holding companies, “then it be- even help. Given that the proposals scarcely affect American comes quite damaging.” 7 banks but may burden foreign competitors, an agreement could widen the lead the Americans already enjoy overtheirrivals. On the European side, some fierce critics have softened their tone. Financial technology Recently Andreas Dombret, a Bundesbank official who had opposed the output floor outright, moderated his stance to “any output floor should not be too high.” Friends or foes? Stronger non-American banks are also keen for a deal. Bankers are annoyed about the delay over completing Basel 3, because delay means uncertainty. “Do you ever want to stop?” sighs one banker, reeling off a list of changes to regulation over The relationship between banks and technology the past few years. Even ifsigned offtomorrow, the amendments would not take full effect until the mid-2020s. companies is becoming increasingly collaborative IN JUNE 2007 a banker, or anyone else with $499 to spare, Beware a new transatlantic divide could try a novel distraction from work: Apple’s first iPhone A change in American supervision along the lines pro- had just gone on sale. In October 2008, after Lehman’s fall, an- posed by Mr Hensarling or Mr Hoenig would pull America back othertechnological innovation was more quietly unveiled. Apa- towards a system of supervision based primarily on minimum per published online under the name of Satoshi Nakamoto de- leverage and away from the CET1 ratio and the Basel liquidity scribed and advocated a form of electronic cash which people constraints, as well as dismantling much of America’s domestic could send to one another without going through discredited regulatory apparatus. IfMr Hensarling’s bill became law and the banks. It was called bitcoin. big banks rejected the option of a 10% leverage ratio in exchange As banks have adapted to the crisis and its aftermath with for regulatory relief, something resembling the old transatlantic varying degrees of success, the rest of the world has not stood divide in supervision could emerge: Basel standards for the big still. Smartphones and, less visibly, cloud computing have trans- American banks and all European ones; domestic, leverage- formed people’s daily lives—and hence their use of money. Con- based supervision forsmaller American lenders. sumers expect to be able to use the powerful computers in their Smallerbanks tend not to operate outside theirhome coun- palms to pay forgoods or move cash around as easily as they can tries. Whatworriesinternational banksmore isthatdomestic su- tweet, stream videos or share photos with friends. Corporate pervisors are tightening requirements for foreign lenders on customers are equally demanding. Yet banks’ information-tech- their turf. If a parent bank abroad gets into trouble, they do not nology systems are a curious mixture of the old and rickety and 1

12 The Economist May 6th 2017 SPECIAL REPORT INTERNATIONAL BANKING

the sleek and modern. Malevo- Even tech giants, which are moving into finance and may enjoy Watch Asia lent hackers continually probe more trust from younger customers than banks do, could be de- Fintech investment by region for weaknesses as banks are terred. Apple, Google and Samsung all have apps allowing peo- $bn striving to stay ahead. ple to pay shopkeepers from smartphones, and Amazon offers 20 And if they don’t? Bitcoin loans to businesses selling on its platform, but may not want to Other embodied an anti-establish- be supervised as closely as banks are now. ment, libertarian threat to In the West, regulation isopeningup more ofthe field to fin- 15 banks: that upstart technolo- techs, both large and small. A revised European Union directive Asia gists might disrupt them as on payment services, known as PSD2, allows third parties to of- 10 Amazon has disrupted bricks- fer more convenient ways of paying online or to consolidate in- Europe and-mortar retailers and Uber formation from differentaccounts(with the holder’spermission) 5 cabbies. So farthat has not hap- so that people can keep track of their finances. America has no North America pened, to the chagrin of ambi- equivalent, but the Office of the Comptroller of the Currency, 0 tious financial-technology (fin- which oversees national banks, has proposed giving special li- 2012 13 14 15 16 tech) startups and the relief of cences to fintechs. Source: Autonomous Research many bankers. New competitors have made some inroads, How China does it but—in Western countries, at China’s digital behemoths worry less about such things. least—they are finding that collaboration is a likelier path to suc- Companies like Ant Financial, the financial arm ofAlibaba, an e- cess than a full-on fight. Moreover, farfrom being usurped by bit- commerce giant, and JD.com, another online marketplace, have coin, banks are eager to turn blockchain, the technology on masses of data about those who buy and sell on their platforms. which it is based, to their own ends. Again, co-operation with They know their spending habits and how much cash they can technology companies, and sometimes with other banks, is the spare, so an easy next step is to offer them small loans. Big Chi- order ofthe day. nese banks in any case neglect consumers and small businesses, To be sure, a gang of newcomers have muscled their way so customers feel no loyalty towards incumbent lenders. Regula- into their domains. Peer-to-peer or marketplace lenders, such as tors have also been willing to let online companies shift into fi- Lending Club and SoFi in America, or Funding Circle and Rate- nance. No wonder that Asia accounts for the bulk of investment Setterin Britain, connectpeople and companiesthatwant to bor- in fintech (see chart). row with those that have money to lend, promising both sides Whereverthey are, even small fintechs have at least two ad- keener rates. Britain’s MarketInvoice allows small companies to vantages over bigger rivals. First, they are nimble, writing and re- borrow against receivables immediately, rather than turn to a writing code, testing and retesting products, discarding what 1 bank or wait for bills to be paid. Digital banks such as N26 in Germany, Tinkoff Bank in Russia and an array of British hopefuls are challenging incumbents. But banks are not easily displaced. Peer-to-peer lending, for instance, has grown rapidly, but still amounted to just $19bn on America’s biggest platforms and £3.8bn in Britain last year, according to AltFi Data, an analytics company. And some marketplaces now involve banks. Lex Sokolin, director of fintech strategy at Autonomous, a research firm, argues that music—one of the first industries to be at- tacked by digital revolutionaries—was fairly easily disrupted. Retailing was a little harder, but customers got used to not handling books, cameras and clothes before buying. Finance and health care, he says, are much more difficult. People are rarely inspired by financial products, says Mr Sokolin, which makes it costly to build a brand. It is easier to team up with those who already have the customers. Banks command resources that small startups can only dream of: last year JPMorgan Chase spent over $9.5bn on technology, including $3bn on new initiatives. As well as economies of scale, they enjoy the advantage of incumbency in a heavily regulated industry. Entrants have to apply forbanking licences, hire compliance staff and so forth, the costs of which weigh more heavily on smaller firms.

The Economist May 6th 2017 13 SPECIAL REPORT INTERNATIONAL BANKING

The millennial problem

Young bankers are getting harder to please “FIST BUMP, MAN.” That was how a young can business school before the bust, says a employee at Bank of America Merrill Lynch bank boss, would need an overflow room. expressed his approval after a presentation Now, he jokes, bank staff outnumber poten- to staff, recalls Diego De Giorgi, head of tial recruits. investment banking there. The boss obliged. In fact, finance, along with consulting, After a recent “town hall” meeting he got an remains the top destination for graduates of e-mail from a second-year analyst who want- America’s leading business schools (see ed to discuss some ideas. Mr De Giorgi duly chart). But it is a lot less popular than it was; invited him and a few of his peers for a chat. at MIT’s Sloan School, for example, it shrank Today’s recruits to big banks have from 31% of the total in 2006 to 15% last different priorities from the newcomers of a year, and at Columbia from 55% to 37%. decade or two ago. These days a presentation Conversely, technology has leapt from 12% to to university students might be followed by 33% at Stanford and doubled its share at half an hour of questions about the bank’s other schools. Within finance, investment corporate social responsibility programme, banks are still the biggest recruiters, but as well as the more obvious ones about pay hedge funds, venture capital and private and promotion prospects. equity have gained ground. Those presentations attract significant- Banks also need fewer people in abso- ly fewer people than they did at the height of lute terms. Trading operations have been cut the banking boom. An event at a top Ameri- back, and a difficult decade has increased pressure to cut costs. Some bankers say that recruiting ambitious youngsters is not that hard; banks still pay well, and plenty still Greener grass want to join. Keeping them is a different United States, MBA graduates entering* matter. After two or three years some itch to work at a non-profit organisation at 60% of % of total try their hand at tech, private-equity firms or their proposed pay. Back in the office, too, 40 hedge funds. “Millennials are much more banks promise less spreadsheet drudgery, as Finance likely to come and go than to pursue a one- well as faster promotion for outstanding 30 firm career,” notes the chief executive of an performers. The Wall Street convention, says international bank. Mr McGuire, was to advance people “almost 20 “There was a view that this was cycli- in lockstep”; now they are more likely to Technology cal,” says Ray McGuire, global head of cor- move up “when they are ready”. 10 porate and investment banking at Citigroup. Fashions in the job market are fickle; “I think it’s more secular.” So his bank and tech also attracted lots of graduates during 0 2007 09 11 13 16 others are trying to make themselves more the dotcom bubble before falling back, and *Average of Berkeley, Chicago, Columbia, Harvard, attractive to 20-somethings. At Citi, for could lose its shine once more. But for now MIT, Northwestern, Pennsylvania, Stanford, and Virginia instance, new investment-banking analysts banks will have to scramble to get and keep Source: Business schools can defer starting their jobs for a year to the brightest and best.

2 doesn’t work and improving what does. Better, an online mort- maintaining basic systems on which others make money from gage-broker in New York, updates its products “20 or 30 times a fancy new products. Application programming interfaces, or day”, says Erik Bernhardsson, the company’s chief technology APIs—routines that connect two lots ofsoftware—are taking sym- officer. Banks might do so “every six months”. Second, fintechs biosisa stage further. Small businesses, say, mightuse accounting attract bright, mainly young people whom banks might have software, created by a fintech, through a bank’s online platform. hoped to get to work for them (see box). Plenty of them used to. Banks (and central banks) have invited startups to develop Joseph Lubin, the founder of ConsenSys, a blockchain company products in controlled environments such as in-house labs and in Brooklyn, came from Goldman Sachs; Andrew Keys, the head accelerator programmes. That can lead to more formal arrange- ofbusiness development, was previously an analyst at UBS; and ments. Bipin Sahni, head of research and development in Wells other colleagues used to work at Bank of America, Deutsche Fargo’s innovation group, says11young firms have gone through Bankand HSBC. his bank’s six-month programme since 2014. Being based in San Francisco, Mr Sahni adds, “we see more interesting companies A profitable symbiosis than a banksitting in other parts ofthe United States.” All this fosters co-operation between banks and fintech For fintechs, symbiosis need not mean minnowhood. companies. Fintechs gain access to banks’ scale and customers. Stripe, a San Francisco firm, processes mobile and online pay- Banks can exploit fintechs’ expertise in programmingand in ana- ments on companies’ behalf, linking them to card networks (and lysing mountains of data. Co-operation may also lessen (but not through them, banks) in much the same way as bricks-and-mor- eliminate) the danger that banks are reduced to dumb utilities, tar retailers and offering them additional software tools. It was 1

14 The Economist May 6th 2017 SPECIAL REPORT INTERNATIONAL BANKING

2 valued at $9.2bn in November, when it last raised money. Patrick duced vehicles in many shapes and sizes for specific uses. Block- Collison, who founded Stripe with his brother John in 2010, ex- chain, he thinks, will follow the same pattern. plains that from the beginning the plan had been to work with This technology is still in its infancy, but with plenty of ap- credit- and debit-card networks. “It was always clear there was plications in the pipeline, banks should soon start to learn no viable independent strategy,” he says. whether, and in what form, it lives up to its promise. Until then Some fintechs allow lenders to reach customers they might they have little choice but to pursue it. They are under pressure otherwise miss—forinstance, by improving underwriting. Better from supervisors and shareholders to reduce costs, and from cli- funds mortgage applicants with capital from more than 20 inves- ents to work better and faster. The eventual gains will probably tors, including Fannie Mae and most of America’s big banks, let- flow to customers rather than producers, because that is usually ting its software decide which of the investors’ underwriting cri- the way with leaps in technology. But the banks know that it is teria suit the borrower best. better to be first than to bring up the rear. 7 Chinese internet giants, too, are using smaller fintechs. Douglas Merrill of ZestFinance in Los Angeles says that Baidu, a search-engine titan that has a stake in his firm, increased approv- The next crisis al rates for its small-loans programme by 150% without a rise in losses; ZestFinance’s software crunches reams of messy data, allowing less obviously creditworthy people to borrow. A big How safe are banks? American credit-card issuer, Mr Merrill adds, has cut annual losses by “a nine-figure number”; a carmaker has reduced credit losses by more than 20%. Adam Ludwin of Chain, another blockchain company, Safer than they were; but crises have a habit of calls examples like these, in which new and better products are connected to banks’ own infrastructure, “top-down fintech”. recurring “They do what financial institutions should have done, but do it IN 1992 SWEDEN nationalised (and subsequently merged) more quickly.” Blockchain, by contrast, he calls “bottom-up”: two banks: Gota Bankand Nordbanken, which wasalready new infrastructure, either within banks or shared among them. mostly owned by the state. As in America 15 years later, property Blockchain enthusiasts stress that its potential stretches far prices had first boomed and then plunged, bringing banks down beyond finance. In essence, a blockchain is an immutable shared with them. In 2001 Nordbanken was combined with Danish, record known as a distributed ledger. It might list transactions, Norwegian and Finnish lenders to create Nordea, the region’s payments or simply owners of money, land, shares or other as- biggest bank. It was not until September 2013 that the Swedish sets. All parties have their own copies, which are updated in- government sold its last shares in Nordea, finally drawing a line stantly once changes are agreed on. That makes it lightning-fast under a crisis by then 20 years in the past. by comparison with traditional transactions. Transfers between Banking crises leave deep and lasting scars on economies American banks, for example, can take three days. International and societies. The one of 2007-08 was the biggest and worst transfers, which mayinvolve several banks, can take even longer, since the 1930s, so the recoverywasbound to take time. In a study and senders do not always know how much recipients will get published in 2014 of100 financial crises going back to the 1890s, after banks have taken their cut. Settlement of securities trades Carmen Reinhart and Kenneth Rogoff, two Harvard economists, can be held up because one bank’s record of who sold what to found that real income per person took an average of eight years whom, when and for how much may differ from another’s. A to return to pre-crisis levels. They identified 12 countries where blockchain permits just one version of the truth, holding out the systemic crises began in 2007-08, of which seven have so far promise of huge savings in back offices. “Blockchain reduces the clambered backat least to their starting-point. cost oftrust,” says Mr Lubin ofConsenSys. Economic growth in America restarted in 2009 and has continued ever since, in one of the longest periods of expansion Chain reaction since the second world war. Unemployment has dropped to Banks, central banks, regulators, exchangesand technology 4.7%. But growth has been unusually slow, averaging just 2.1% a companiesboth large and small are workingon a hostof projects year. The economy recovered its pre-crisis level of GDP per per- using blockchain. Collaborative efforts abound, including Hy- son only in 2013. Many Americans feel that prosperity is some- perledger, run by the Linux Foundation, a non-profit group that thing that happens to other people—such as those who work on promotes open-source software, and backed by IBM; R3, a con- Wall Street. sortium involving several banks; and the Enterprise Ethereum Banking crises also have a habit of turning private debts Alliance (EEA), the newest such group, which includes Microsoft into public ones: when banks are overwhelmed by foolish bor- and ConsenSys, aswell asan arrayofbanks. AmongChain’spro- rowingand lending, governmentsstep in. America’sratio ofdebt jects is a payment-settlement system for VISA, a credit-card net- to GDP rose by about half between 2007 and 2011, though it has work, which is due to go live this year. Another hopeful, Ripple, since steadied. Greece’s, Ireland’s and Spain’s went up even has payments partnerships with several banks, including San- more. Although some have declined in the past couple of years, tander. Digital Asset is developing a clearing-and-settlement sys- the countries’ ratios are still far above pre-crisis levels (see chart, tem forthe Australian stockexchange. next page). This mix reflects different ideas about which version of Central banks’ balance-sheets and interest rates also still blockchain will work best. The EEA is building private, secure bear the imprint of the crisis, not least because monetary rather blockchains with technology repurposed from an open, public than fiscal policy has been the principal, even sole, means of network, based on ethereum, another blockchain platform, post-crisis macroeconomic support. Even if the Fed raises its which its creators believe will be the next generation of the inter- main interest rate by another three-quarters of a percentage net. Others think blockchains will be more specialised. Ryan Za- point this year, as most forecasters expect, that will still leave it gone, Ripple’s head of regulatory relations, likens bitcoin to the lower than it was when Lehman collapsed. The European Cen- Model T Ford: since that first appeared, carmakers have pro- tral Bank, which cut its benchmark rate to zero just over a year 1

The Economist May 6th 2017 15 SPECIAL REPORT INTERNATIONAL BANKING

Frank act will survive Mr Lasting scars Trump’s promised assault or Offer to readers General government gross debt, % of GDP whetherthe latest version of the Reprints of this special report are available. A minimum order of five copies is required. 200 Basel capital-adequacy stan- Please contact: Jill Kaletha at Foster dards will be completed. But Printing Tel: +1 866 879 9144 Ext: 168 Greece whateverthe outcome, the argu- e-mail: [email protected] 150 Italy ments arising from the 2007-08 Corporate offer crisis are likely to carry on for Corporate orders of 100 copies or more are 100 years yet. available. We also offer a customisation United States service. Please contact us to discuss your Spain Britain Wait for it requirements. 50 No one knows, either, Tel: +44 (0)20 7576 8148 e-mail: [email protected] Ireland when or where the next crisis For more information on how to order special 0 will strike, but it seems certain reports, reprints or any copyright queries 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 that another one will come you may have, please contact: Source: IMF along some time, somewhere. The Rights and Syndication Department In “This Time Is Different”, a 20 Cabot Square book published in 2009, Ms London E14 4QW 2 ago, is still accumulating bonds, albeit more slowly. Reinhart and Mr Rogoff wrote Tel: +44 (0)20 7576 8148 Fax: +44 (0)20 7576 8492 The effects ofthe crisis are not just seen in the dry economic that banking crises are “an e-mail: [email protected] data; they are felt in the gut as well. Among the many and com- equal-opportunity menace”—as www.economist.com/rights plex causes of the populism that carried Mr Trump to the White common, over the long sweep House and will take Britain out of the European Union is resent- of history, in rich countries as in Future special reports ment of ill-defined “elites”: well-off, educated, at ease with glo- emerging markets. Giddy build- Israel May 20th balisation and doing nicely from it, while ordinary folk struggle ups of debt are a warning sign. Trump’s America July 1st Ageing and finance July 8th to make ends meet. Related to that is anger at the crisis, its conse- In the past couple of years, Chi- quences, the bail-outs of the banks—and the knowledge that na, scene of another credit-fu- bankers still earn bucketloads. elled property boom, has Previous special reports and a list of forthcoming ones can be found online: There is nothing new in that. Economic crises always have looked like the most vulnerable economist.com/specialreports political consequences, which loop back into economic policy big economy. fordecades to come. Germany’s twin fears ofinflation and fiscal Are the West’s banks safe fecklessness, which arguably have held back recovery in the for now? Bankers’ recent grum- euro zone after the 2007-08 crisis, have roots in a series of 20th- bles about capital requirements and the burden of supervision century economic calamities, dating back to the hyperinflation have caused some to worrythat bad old habitsmaybe returning. of the 1920s. America’s Fed was founded in 1913 in response to a Those grumbles have different causes on either side ofthe Atlan- severe crisis in 1907; the country’s perennial arguments over the tic. America’s banks think they are strong enough to have their proper role of a central bank, and indeed the need for one at all, harnesses loosened, whereas some European ones moan that started when the FirstBankofthe United Stateswasset up in 1791. regulation is slowing down their recovery. But for both those Crises often prompt an overhaul ofregulations, in the hope groups the memory of ten years ago is still fresh enough to instil of avoiding a repeat performance. Much of the complicated ap- great caution. paratus of American financial regulation today—the Federal De- Banks are never wholly safe, but they probably shouldn’t posit Insurance Corporation, the Securities and Exchange Com- be. Capitalism, after all, thrives on risk. The best preparation for mission, Fannie Mae—was erected afterthe catastrophic banking catastrophe is a thickequity cushion, and banksare certainly bet- collapse of 1933. The Office of the Comptroller of the Currency ter upholstered than they were a decade ago. Still, with hindsight was a product ofthe civil war. No one knows whether the Dodd- it is hard to imagine how they could have done much worse. 7

16 The Economist May 6th 2017 Europe The Economist May 6th 2017 39

Also in this section 40 Merkel on the march again 40 Turkey and Russia cosy up 41 Crisis at Eurovision 42 Bulldozing homes in Russia 43 Charlemagne: The parable of Amiens

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

France’s presidential election a close fourth, refused to call for a vote for Mr Macron against Ms Le Pen. Fully 65% of The rage against Macron his supporters said that they would ab- stain or spoil their ballot papers. Ms Le Pen has made some gains. She secured the first national alliance in the 45- year history of her party, the National FN VILLEPINTE Front ( ), hooking up with Nicolas Du- pont-Aignan, a right-wingEurosceptic who Even ifMarine Le Pen is defeated, she will have lefta deep markon French politics scored nearly 5% of the vote in the first S FAMILY outings go, it was unortho- cy and everyone dreams of him being round. Ms Le Pen, who won 21%, has also Adox. No fewer than 20 members of all elected: he is called Emmanuel Macron.” tried to broaden her base by reaching out ages travelled from Normandy to a soul- It is a message that chimes with a big to the mainstream right (with its older vot- less exhibition hall 20km (12 miles) north chunkofthe electorate in a fractured coun- ers) and the farleft (with its younger ones). of Paris, to watch the nationalist Marine Le try. Big cities and college-educated voters She lifted a stirring passage on regional Pen take the stage for her last big campaign favour Mr Macron and his pro-European, identity from a speech by François Fillon, rally. The youngest in the troop was seven; business-friendly politics, while struggling the defeated centre-right candidate, which there were several teenaged girls with smaller towns and rural parts lean to the her aides insisted was a “wink” at his elec- pony-tails. But the family seemed thrilled. protectionist, anti-immigration Euroscep- torate. Her team made an appeal on social “For 30 years, politicians have ruined this tism ofMs Le Pen. Even some ofthose who media to Mr Mélenchon’s “unsubmissive” country,” said Bernard, an uncle in the recoil at her xenophobia turn out to loathe voters too, pointing to their shared posi- clan, who works in funeral insurance: the world of finance even more. “Neither tions such as distrust of NATO and desire “They tell us that we’re racist, but that’s banker, nor racist” read a banner at a prot- for retirement at the age of60. nonsense. She’sthe one who’sgotconcrete est rally in Paris. Jean-Luc Mélenchon, a Perhaps most striking, Ms Le Pen soft- ideas to get us out ofthis chaos.” Communist-backed candidate who came ened her position on the euro. Her vow to Ahead ofthe run-offvote forthe French quit the single currency has long divided presidential election on May7th, MsLe Pen the FN: those around Florian Philippot, her trails her liberal opponent, Emmanuel The rising tide lieutenant, consider it a centrepiece; those Macron, by a hefty 20 points. But she has France, number of votes received in elections close to Marion Maréchal-Le Pen, her niece not given up the fight. On May 3rd she by the National Front, m and an FN deputy, see it as a distraction. lashed out at Mr Macron in a televised de- European Legislative But it has turned into a liability for herrun- bate againstthe 39-year-old one-time bank- Presidential DepartmentalRegional off campaign. Older voters in particular er, casting the election as a referendum on 8 worry that a currency devaluation could globalisation and finance. She accused the slash their pensions and savings. So Ms Le formereconomy minister ofbeing the can- 6 Pen has fudged the issue, with a muddled didate of “the system”, “Uberisation of plan for parallel currencies instead. At a FN society”, and “savage globalisation”. 4 souvenir stand in Villepinte, offering such In an echo of a campaign line used by delights as pendants and earrings featur- François Hollande, the Socialist president, ing Ms Le Pen’s blue-rose emblem, Anne- 2 in 2012, Ms Le Pen told flag-waving suppor- Claire, an off-duty police official, agrees: ters in Villepinte: “Today, the enemy of the “The euro isn’t what matters; Marine is French people is still the world of finance, 0 about defending the values ofFrance.” 1984 90 95 2000 05 10 17* but this time he has a name, he has a face, Nonetheless, it will be extremely diffi- Source: Official statistics *First round he has a party, he is presentinghis candida- cult for Ms Le Pen to make up the gap be-1

40 Europe The Economist May 6th 2017

2 tween her and Mr Macron in the remain- slipped between gaps in the asylum sys- ing days. No poll has put her remotely Too close for comfort tem. Bild-Zeitung, Germany’s main tabloid, close to winning a majority. She gets over Voting intention, % CDU/CSU SPD branded it “The Greece ofGermany”. 50% in only one region, Provence-Alpes- Germany Schleswig-Holstein is less troubled. Côte d’Azur, the FN’s southern stronghold. 40 One study claims it is the happiest part of In Brittany and greater Paris, her score 30 the country. MrAlbig’s steady government drops to 31%. It would take a historic upset 20 is a relief in a state previously plagued by at this point for her to keep Mr Macron 2012 13 14 15 16 17 drama (one of his predecessors was found from the presidency. A loss for Ms Le Pen dead in a bathtub in Geneva). But Daniel would be a symbolic defeat ofthe forces of North Rhine-Westphalia Günther, his CDU rival, has plenty ofmate- nationalism and populism that have 40 rial to workwith: slow autobahn improve- gained ground in parts of Europe. It could 30 ments, unreliable rural internet, and 20 also put internal pressure on her leader- above-average unemployment. ship. “If she gets much less than 40%, the 2012 13 14 15 16 17 Picking apart state issues and national party will consider it a disappointment,” personalities is tricky. Mr Schulz has cam- Schleswig-Holstein says Cas Mudde, a scholar ofextremism. paigned extensively in both states. He lives 40 Yet it would be a mistake all the same to 30 in North-Rhine Westphalia, used to be understate Ms Le Pen’s achievement. With 20 mayor ofa small town there and is a proud a first-round score of 7.7m votes, she has al- Rhinelander. Senior Christian Democrats 2012 13 14 15 16 17 ready set a historic record for the FN (see and Social Democrats from across the Sources: Wahlrecht.de; pollytix strategic research chart on previous page). In 2002, when her country have converged on the two states; father, Jean-Marie Le Pen, also made it into Mrs Merkel alone will have made eight vis- the presidential run-off, there were de- (see chart). its to North-Rhine Westphalia by the elec- monstrations across the country and his The SPD has run both for over 20 of the tion. “If we don’t hold both it’s really bad opponent, Jacques Chirac, swept up 82% of past 30 years. Its premiers are popular and news,” admits one senior SPD figure. the vote. This time, the streets have been seem relatable: Hannelore Kraft in North- The results of the two elections will af- mostly quiet, and she looks set to double Rhine Westphalia is known as “Landes- fect the morale of the two parties. A few his score. Mr Macron may well be safely mutter”, or mother of the state; Thorsten weeks ago the Schulz-Effekt was energising elected on May 7th. But he will inherit a Albig in Schleswig-Holstein could pass for the SPD and roiling the CDU; some of Mrs deeply divided country. 7 a schoolteacher. In both Düsseldorf and Merkel’s MPs were even quietly opining Kiel the party governs with the Greens, its that she was past it. All that has changed as favourite coalition partners. Back in early the polls have turned, and will change German politics April it seemed elections in both states even more if North-Rhine Westphalia and would give the SPD a morale-boosting Schleswig-Holstein confirm the trend. Angie’s army shove into the national campaign. There is almost half a year to go until Ger- But since then the Schulz-Effekt has many’s election. But for now, Mrs Merkel cooled. The party has fallen back below has the momentum. 7 30% nationally. The mostlikelyoutcome in SPD DÜSSELDORF the North-Rhine Westphalia is an - CDU grand coalition, led by whichever Turkey and Russia cosy up Two state elections suggest growing emerges as the largest. In Schleswig-Hol- momentum behind the CDU stein the CDU isnowahead and mightoust Brothers in arms ERHAPSitwasthe impeccablyproletar- the SPD in favour of a coalition with the Pian setting: a vast former coal mine in Greens and the liberal FDP. the industrial Ruhr. Or perhaps it was the Germany’s 16 state governments run 1,500-strong crowd chanting “Martin! Mar- everything from schools and police forces tin! Martin!” Or perhaps it was the sound to motorways and health systems; their system blaring the upbeat1990 hit “I’ve got leaders are big figures in their own right. So Turkey defies NATO, not forthe last time the power”. But for some reason Martin the suggestion that state elections are mere Schulz, the Social Democratic (SPD) candi- testsforfederal politics“impliesthatvoters HE attempt to find some common date forGermany’schancellorship, got cardo not know what they are voting on,” ar- Tground over Syria dominated the talks ried away and said something rash at his guesManfred Güllner, founderofthe Forsa on May 3rd between Recep Tayyip Erdo- early-April rally in Essen. If the SPD won polling agency. He notes that the CDU’s gan and Vladimir Putin. But the meeting the state election here in North-Rhine grim defeat at the last election in North- between the Turkish and Russian presi- Westphalia on May 14th, he proclaimed, it Rhine Westphalia, in 2012, came a year be- dents also touched on another subject of would go on to become “the strongest fore voters in the state resoundingly concern to Turkey’s NATO allies. A deal has force in Germany” and eject Angela Mer- backed Mrs Merkel in a federal election. been agreed in principle for Russia to sell kel at the general election in September. These voters also have reasons to give Turkey its potent S-400 long-range air-de- The Essen rally coincided with the so- the SPD a kick. Even party insiders admit fence system. A price has yet to be agreed. called Schulz-Effekt, the surge in support for that North-Rhine Westphalia is a mess. It But as both strongmen have shown with the SPD following Mr Schulz’s coronation has the worst traffic jams and the highest their steady reconciliation over the past as party leader in March, which saw it level of child poverty in Germany, and the year, enough political will can make most drawalmostlevel with MrsMerkel’sChris- highest unemployment rate outside the plans lift off. tian Democrats (CDU) for the first time in former-communist east. It was here that At a time when tensions between five years. Its poll numbers in North-Rhine hundreds of women were sexually as- NATO and Russia are at their highest since Westphalia, Germany’s industrial heart- saulted in Cologne on New Year’s Eve in the cold war, the purchase, if it goes ahead, land and most populous state, and Schles- 2015. It was here that Anis Amri, the Tuni- will be seen as a calculated snub to the alli- wig-Holstein, its northernmost state sian immigrant who drove a truck through ance. It will also confirm the impression of which votes on May 7th, had also jumped a Berlin Christmas market in December, recent years that Mr Erdogan is happy for1 The Economist May 6th 2017 Europe 41

The Eurovision song contest War music

Anotheryearofcheesy pop, anotherdiplomatic row DDLYfora pop show that is meant wheelchairs. (Rather than, say, a country Oto be apolitical, the Eurovision song that dislikes being dismembered by its contest causes a fission offury nearly stronger neighbour.) every year. In 2014 Conchita Wurst, a It helps Ukraine’s government, too, bearded drag queen from Austria, won distracting public attention from its fail- the annual festival ofkitsch, leading to ure to fulfil the promises ofthe Maidan calls in Russia and Belarus for Ms Wurst’s Revolution of2014, which triggered the song not to be transmitted and accusa- war. Complaining about Russia can be an tions that the show was a “hotbed of excuse not to pursue difficult reforms, sodomy”. Last year Ukraine won the such as tackling corruption, says Balázs contest with “1944”, a song about the Jarábikofthe Carnegie Endowment for deportation ofCrimean Tatars under International Peace, a think-tank. Stalin sung by Jamala, herselfan ethnic Problems were already afootat the Crimean Tatar. This infuriated the Rus- Eurovision party in Ukraine, which had sian government, which had invaded hoped to host an “austerity” show (cost- Autocratic weapon and annexed Crimea in 2014. ing only $16m, compared with Den- This year yet another squabble is mark’s $61m extravaganza in 2014 and 2 Turkey to become, in effect, a semi-de- brewing among the latex and glitter. Azerbaijan’s $76m bash in 2012). But costs tached member ofNATO. Ukraine is hosting the contest, which will have spiralled. In November the head of Turkey first began pushing NATO’s but- be held on May13th. Channel One, Rus- the newly-independent public broadcast- tons in this way when it announced its in- sia’s main broadcaster, has put up as er quit, accusing the government of tention in 2013 to acquire a Chinese air- Russia’s representative Yulia Samoilova, chipping away at his budget forthe bash. and missile-defence system instead of a 28-year-old wheelchair-bound singer As with so much in Russia and Ukraine, American orEuropean kit. Bydoingso, Tur- (pictured). Ms Samoilova performed in television drama overshadows reality. key was flouting European Union and Crimea in 2015; this means she falls foul American weapons sanctions against Chi- ofUkraine’s travel ban on prominent na. It would also have meant buying a sys- Russians who have either been to Crimea tem that could not be integrated into since the annexation or who openly NATO’s wider missile-defence shield with- support their government’s policy there. out allowing the Chinese to delve into Shortly after she was selected, the Ukrai- Western military technology. Turkey gave nian security service announced that she its reasons for preferring China’s offer as would not be allowed in. the lower price (about $3.4bn) and better Eurovision’s organiser, the European termson the transferof intellectual proper- Broadcasting Union, criticised Ukraine’s ty (IP). decision as undermining “the integrity Building up the capabilities of its fast- and non-political nature” ofthe show. It growing indigenous defence industry has suggested that Ms Samoilova might become a priority for Mr Erdogan. Two perform remotely or that Russia might years ago he declared that Turkey planned choose another contestant. Channel One to “eliminate external dependency on de- refused, ofcourse; a bully’s taunt stings fence equipment supply” by 2023, and that less ifretracted. Ms Samoilova will now it wanted to be involved in the design and perform in Sevastopol, the main city in production of any new defence equip- Crimea, on the day ofthe semi-final, and ment before then. Russia will not take part in the contest. What caused Turkey to drop the deal The squabble plays well in Russia. It with China later that year is not clear, but lets Vladimir Putin’s state media portray the decision was made around the time of Ukraine as a country run by horrid na- the G20 summit in Antalya in southern tionalists who are mean to people in Crimea river Turkey. A combination of diplomatic car- rotsand sticksprobablyplayed a part. Dou- glas Barrie, a military aerospace expert at missile consortium. But in April Fikri Isik, key’s eagerness to buy it must be because it the International Institute for Strategic Turkey’s defence minister, said that “NATO believes it is getting enough knowledge Studies in London, thinks that the Chinese member countries have not come up with about the technology it wants and because may have been unable to hand over the an offer that is financially effective” and Mr Erdogan likes demonstrating that he technological know-how Turkey wanted, that talks with Russia to buy the S-400 need not bow to the West. because much of the IP of their system, were now at a final stage. Russia will also benefit from the deal, as based on the S-300, is owned by Russia. The S-400 is one of the best air-defence the world’s second-biggest arms exporter. The assumption then was that Turkey systems currently made. But Mr Isik ac- China and India, until recently two of its would go with MEADS (medium extended cepts that Turkey will not try to integrate it best customers, are ramping up their own air defence system), a joint venture be- with NATO’s infrastructure. That makes it production. Russia badly needs new mar- tween Lockheed Martin, an American de- “a sub-optimal system”, thinks Mr Barrie. kets forits weapons—and Mr Putin also en- fence company, and MBDA, a European Given that the S-400 is also expensive, Tur- joys thumbing his nose at NATO. 7 42 Europe The Economist May 6th 2017

Housing in Russia for local opinion. Some projects are popular; others, like rootingup pavements, have A new kind of revolution left many Moscovites peeved, though not quite enough to protest. Mr Sobyanin’s proposals to tear up housing have made some snap. Residents are handing out flyers and lobbying local MOSCOW apparatchiks. Neighbours who had never spoken before are banding together. A Russians are rebelling against plans to teardown theirhomes “Muscovites Against the Demolition” ITH its tree-lined boulevards Mos- ion, pushed the construction of prefabri- group on Facebook has nearly 20,000 Wcow’s Bogorodskoye district is an is- cated apartments to deal with a fast-grow- members. Dozens of neighbourhood-spe- land of calm in the clattering metropolis. ing population and a housing crisis. The cific groups have popped up. A protest is Dmitri Pankov and Natalia Yakutova new flats gave ordinary people private planned for May 14th; thousands have al- moved in a year ago, seeking fresh air for spaces for the first time, instead of commu- ready said they will attend. their young daughter and a place close to nal apartments that housed several fam- Mr Pankov’s mother. The ample greenery ilies at once. By Khrushchev’s death in 1971, Rooms of their own and accessible transport also attracted Igor more than 125m lived in the buildings. At one gathering between local officials Popov, who bought a flat several years ago Most were not meant to last more than 25 and residents in Moscow in April, frustra- in one of the Soviet-era apartment blocks years(bythen, presumably, the bright com- tion rang out from across the political spec- typical of the area. “Youcan hear the birds munist future would have dawned). trum. Nikita Lazarev, a 29 year-old engi- chirp,” he grins. Late one evening in April Without snooping neighbours to fear, neer, questioned the quality of the they gathered with several dozen others to dissidents gathered to swap samizdat, im- construction in the new buildings. Though discuss how to save their beloved neigh- bibe unsanctioned art and discuss politics. he has not voted in more than a decade, he bourhood—not from creeping crime, but As a result these apartments helped to plans to cast a ballot in the presidential from the wrecking balls ofcity hall. plant the seeds of a new middle class elections of 2018 against Mr Putin, and for Earlier this year Moscow city authori- which, 30 years later, would come to un- the opposition leader Alexei Navalny, ties unveiled plans to demolish as many as dermine the Soviet system. Yet the khru- whose anti-corruption rallies drew tens of 8,000 buildings and move up to 1.6m resi- shchevki would acquire a less flattering thousands across the country in March. dents from ageing low-rise apartment nickname: khruschoby, a neologism that (This week Mr Navalny lost 80% of the vi- blocks known as khrushchevki. The ambi- combines the Russian word for slums. sion in his right eye after attackers doused tious urban makeover could touch some They often have thin walls, low ceilings, his face with dye and acid, an act he 25m square metres of housing, cost at least creaky utilities and cramped corridors. blames on the Kremlin.) 3.5 trillion roubles ($61bn), and run for Improving living standards should not Not farfrom Mr Lazarev stood an elder- more than 20 years. The plan is the brain- be controversial: under a plan initiated by ly woman railing against the officials child ofMoscow’s mayor, Sergei Sobyanin, Mr Sobyanin’s predecessor, around 1,700 speakingon stage. “I’m the owner, I bought and comes with the blessing of President khrushchevki came down. Many residents the apartment, and they’re telling me I Vladimir Putin. For some residents, it want to leave. But the recent plans have have to give it up!” Svetlana, who used to means a chance to ditch dilapidated hous- been introduced in a characteristically top- work in city hall, is no liberal. She yearns ing. Others fear being thrown out of their down fashion; for their critics, they smack for the days of Stalin, when “we were un- homes, and are furious at the prospect. of an assault on property rights and a ited and strong.” Yetshe cannotfathom los- On May 2nd the mayor’s office pub- handout for real-estate developers. Since ing her home, where “there are nightin- lished a list of 4,566 buildings, home to becoming mayor in 2010, Mr Sobyanin has gales and squirrels all around.” The only some 1m people, thatwill be up fordemoli- imposed wide-reaching changes to the solution, she declares, is to take to the tion. Owners and some tenants have been city’s infrastructure, often with little regard streets and resist. 7 asked to vote: if two-thirds approve or ab- stain the building will go and its residents will be moved. Ballotsmust be cast by June 15th, even though a final version ofthe programme has yet to be presented. For now the outlines of the plan can be found in a draft bill that passed a first read- ing on April 20th. Residents will receive replacement apartments ofequal size, rather than equal value. Those who refuse would face eviction, with no possibility to appeal against the decision in court. And although Mr Sobyanin has promised to resettle residents within their current districts, many stretch for miles. Some people worry about being separated from family members; others that their commutes to work will lengthen. Such inconveniences may seem small. But they are the stuff of which daily routines are built; the invisible scaf- folding that structures urban life. Khrushchevki have been central to Rus- sian cities since the 1950s, when Nikita Khrushchev, the leader of the Soviet Un- They came in like a wrecking ball The Economist May 6th 2017 Europe 43 Charlemagne The parable of Amiens

What Emmanuel Macron’s home town says about the French presidential favourite gant finance” and the rootlesselite. Its unemployment rate, at12%, is above the national average. In recent years Amiens has lost a mattress factory and a tyre plant. Now the Whirlpool factory, where 286 workers make tumble-dryers, is closing too, with production moving to lower-cost Poland. The town’s troubles, in short, put Mr Macron’s pro-European creed of open borders and corporate freedom sorely to the test. So it was not until last week that Mr Macron at last made a campaign stop in Amiens. It began dismally. As he sat down with union leaders in a meeting room in the town centre, Ms Le Pen staged an ambush. Turning up unannounced at the Whirlpool factory gate on the outskirts, she claimed to be supporting “the workers” while Mr Macron was defending “the oligarchy”. His team hastily scheduled a campaign stop at the factory that afternoon. It was a brave decision. As plumes of black smoke rose from burning tyres, unionists in fluorescent jackets awaited his arrival in a hostile, muscularblock. The acrid stinkof charred rub- berhungin the air. “We don’texpectanythingofMacron, he’s just the continuation of Hollande,” declared Jean Santerre, a worker at the factory for 23 years. He said that he and his colleagues will vote for Ms Le Pen, because she will “shut the borders” and stop HEN history recounts the remarkable rise of Emmanuel foreigners taking French jobs. WMacron, it might start and end in the town of Amiens. On Sure enough, when the besuited Mr Macron stepped from his the big-skied plains ofthe Somme, amid the woods and the fields car, he was jeered. His security team trailed his black car all the ofyellow rape that cover formerbloody battlefields, this redbrick way down the narrow lane leading to the picket line, just in case. working-class city is the French presidential candidate’s home- Yet for nearly an hour the candidate waded into the edgy crowd, town. With its soaring 13th-century cathedral, and charmless re- takingon the abuse, arguing his case, and refusingto make empty built central drag, Amiens is arresting both for its splendour and promises. Non, he said, he could not outlaw factory closures. its banality. It is the place that shaped Mr Macron, and the town Non, shutting the border would not help France in the long run. he fled. It was also the setting for a fraught encounter in the cam- Retraining would be improved; buy-out options would be exam- paign’s closing days, which revealed much about the man who ined. By the time Mr Macron drove off, Mr Santerre and his could soon be the next, and youngest-ever, president of France. friends had not changed their minds. But calm had returned, and It was as a pupil at a private Jesuit school in Amiens, aptly with it a certain respect forhis efforts. named Providence, that Mr Macron met the drama teacher, Brigitte Auzière, fully 24 years his senior, who later became his No fear wife. The bond alarmed his parents, both provincial doctors, The Amiens moment may not shift votes. It was Ms Le Pen’s who sent him to finish his schooling in Parisinstead. The bookish selfies with smiling workers that grabbed the headlines. Yet it student was at first in awe at the brilliance of the capital’s bright- offered a telling insight. Although 60% say they will vote for Mr est. Buthe quicklylearned the codesofthe French elite, winninga Macron, only 37% think he has presidential stature. He has often place at the Ecole Nationale d’Administration—whose alumni in- appeared more ambiguous than decisive, more charming than clude three of the five past presidents—and with it access to the tough. Even in France, which treats public intellectuals like na- power-brokers in Paris. tional treasures, his erudite vocabulary and measured reasoning If Mr Macron outgrew Amiens, it was through a desire, as he are mocked. At rallies, he drowns his audience with abstract puts it, “to choose my own life”. What underlies his single-mind- nouns; when he finally told an anecdote on stage in Paris this edness is a “quest for liberty”, says Marc Ferracci, his best man week, it was about a philosopher. Perhaps the only thing that his and an economist on his team. Mr Macron defied convention detractors and admirers agree on is that Mr Macron is “dans la with his marriage. He later sought financial independence by séduction”. Dinner guests and factory workers alike are left with working as an investment banker at Rothschild. As economy the impression that he has listened, and valued the argument. minister under the Socialist president, François Hollande, he was If there are reservations about Mr Macron’s ability to lead, an outspoken critic of the 35-hour working week. Just a year ago, theyconcern hisuntested political resolve. Faced with a fractured Mr Macron flouted rules by launching his own political move- country, restless unions and a potentially unstable parliament ment, En Marche! (“On the Move!”), as a rival to both the Socialist after legislative elections in June, would he have what it takes to Party he once belonged to, and the president he served. The gam- stave off, or withstand, revolt? “He is fearless,” says a team mem- ble was immense; so was the freedom it secured him. ber, pointing to the way that he, a newcomer to elections, has When the French select their president on May 7th, Amiens is swept aside political veterans and is now dictatingterms to them. set to back its most famous son. In first-round voting he came top In 2012 MrHollande also visited a factory, a steelworks, duringhis there, scoring fourpoints above his national result. Yet the town’s campaign. He vowed to rescue it, failed while in office, and politi- gritty industrial vulnerability also makes it an awkward home cal disillusion ensued. Mr Macron’s gutsier approach in Amiens turffor the candidate whom Marine Le Pen, his nationalist oppo- may not be what wins him the presidency. But it suggests how he nent, pillories as the champion of “savage globalisation”, “arro- might exercise it. 7 44 Britain The Economist May 6th 2017

Also in this section 45 The oﬃcial election artist 45 Leaving Euratom 46 Bagehot: One nation under May

Our election blog can be found at: Economist.com/blogs/speakerscorner

The European Union and the election struggling to master her brief. She reportedly said a deal allowing her, as home sec- When Brussels spouts retary in 2014, to opt into selective EU security and judicial measures could serve as a template for Brexit. To Brussels, this im- plies a failure to see that Britain will be ne- EU BRUSSELS AND LONDON gotiating as a third country, not an member. “Mrs May still appears to be in A sudden spat with the EU may boost Theresa May’s election chances—but at the cherry-pickingmode,” saysJohn Kerr, a for- cost ofmaking Brexit even tougherforherto negotiate mer British ambassador to the EU. T HAS become sadly common forforeign Jean-Claude Juncker, the commission’s The commission was irritated by Mrs Ipowers to be accused of intervening in president, in London on April 26th. Like May’s refusal to accept a rejigging of the elections. But usually it is Russia or China brawling boxers at a weigh-in, the two current EU budget, citing “purdah” rules that is said to be involved. That Theresa sides have since been unable to restrain that bar such decisions during election May should this week have accused un- themselves from a premature scrap. campaigns. “FULL PURDAH RECIPROCI- named European politicians and officials British critics complained that the com- TY,” Mr Selmayr tweeted, suspending in- of deliberately seeking to affect the result mission’s promises to be transparent over formal talks. Mr Barnier’s draft mandate of the election on June 8th is more shock- Brexit hardly justified a leak of a private includes demands from the 27 that could ing. In fact she may benefit from a sudden meeting. (Many blamed Martin Selmayr, push the gross “Brexit bill” (obligations the outburst ofbad blood between Britain and Mr Juncker’s combative chief of staff.) Yet EU thinks Britain has incurred) as high as its European Union partners—but it risks the story suggested the prime minister is €80bn-100bn ($87bn-109bn), according to souring the Brexit negotiations. the Financial Times (the net bill would be It was not meant to be like this in late lower). This week the commission also March, when the prime minister invoked Buyers and sellers started efforts to shift the clearing of euro- Article 50, the EU mechanism for with- Britain, goods and services trade with selected denominated financial instruments away drawal. Her letter was well received, partly EU countries, 2015, £bn % of country’s exports from London. because her earlier mantra that “no deal is Trade balance going to Britain* Such heavy-handed tactics may just un- better than a bad deal” was replaced by imports from exports to derline MrsMay’smain pitch to British vot- hopes fora new “deep and special partner- 8060 40 20– 0+ 20 40 ers: thatonlyshe hasthe strength to take on ship”. She also hinted atthe need for a tran- Germany 7. 4 the grasping Eurocrats. This week she re- sition at the end of the two-year period set Spain 7. 3 peated her “no deal” mantra and her quip by Article 50. On April 29th the EU’s 27 oth- from last July that Mr Juncker would be the 8.8 er heads ofgovernment duly approved po- Belgium next to learn that she is a “bloody difficult litical guidelines for Michel Barnier, the Netherlands 9.3 woman”. In fact, it is not the commission EU European Commission’s Brexit negotiator. France 7.1 but other governments that may be the His more detailed draft mandate, circulat- most awkward. The guidelines agreed on ed this week, will be rubber-stamped on Poland 6.7 April 29th were tightened during talks May 22nd and formal talks should begin Italy 5.4 among the 27, and the higher bill reflects soon after Britain’s election. demands that Britain should shell out for Sweden 7. 2 The souring ofthe mood came after the EU farm subsidies until 2020, as well as be- Frankfurter Allgemeine Sonntagszeitung Greece 4.2 ing denied a share in assets like buildings. (FAZ), a German newspaper, published a Ireland 13.7 Spanish sensitivities on Gibraltar and a colourful account of an apparently disas- mention of Irish unification are also re- Sources: ONS; IMF *Goods only trous dinner date between Mrs May and flected in the negotiating texts. 1 The Economist May 6th 2017 Britain 45

2 Mrs May still seems to want parallel whatone callsa “flowerydeclaration”. The Euratom talks over the divorce and over a subse- British are anyway expected to apply their quent trade deal with the EU. But the own tougher rules for non-EU spouses to The nuclear guidelines say that discussions on trade, as EU citizens in Britain. well as on any transition, must wait until A mix of pre-negotiation swagger and cliff-edge the 27 governments agree that “sufficient the election was bound to raise the tem- progress” (a phrase that will now be end- perature. Brexiteer buffoonery or Euro- lessly parsed) has been made on with- pean intransigence could kill the talks; the A Brexit-related decision on atomic drawal talks. This is unlikely to happen un- FAZ report claims that Mr Juncker’s “entou- energy could cause chaos til October or even later, making it still less rage” puts the chances ofa deal at less than likely that a trade deal can be done within 50%. There are concerns about two com- HE government’s stand-off with Brus- the two years of Article 50. Yet the 27, hith- mon views in London. One is the idea that Tsels is less than a week old but already erto united, may not hold together on the MrsMaycan geta good deal onlybythreat- one aspect of the Brexit divorce is causing sequencing. Those with extensive trade ening to walk out, something her advisers severe collywobbles in Britain: with- links with Britain, such as the Dutch (see fault her predecessor, David Cameron, for drawal from the European Atomic Energy chart, previous page), already fret that the not doingin his renegotiation last year. The Community (Euratom), which oversees divorce talks may get bogged down. other is that she can ignore Brussels and the EU’s nuclear industry. A cross-party They have reason to worry. The debate merely talk to the German and French committee of MPs, as well as the industry overthe Brexitbill will be fierce, but so may leaders. Both views are seen in Brussels as itself, said this week that an abrupt depar- talks over the rights of the 3.2m EU citizens delusional, for they overestimate what is ture in two years’ time could be disastrous. living in Britain, and the 1.2m Britons in the an inherently weakbargaining position. It is also a real possibility. EU. The EU seeks a settlement covering Yet in the end Mrs May and her fellow Euratom, started in 1957, provides safe- everything from employment, eligibility leaders all want a deal. They understand guards for trade in nuclear materials, en- for health care and benefits, the status of that the logic of negotiation can lead gov- suring they are not diverted to rogue re- non-EU spouses, university tuition fees, ernments into surprising concessions. The gimes. It encompasses the EU’s single pension transferability and more—as well EU may be right in thinking that Mrs May market, but also agreements with suppli- as a legal underpinning for an agreement has not grasped her own weakness, but ers of uranium, such as Australia, Canada (the EU will insist on the European Court thatdoesnotmean itwill rejectall compro- and Kazakhstan. Moreover it provides le- ofJustice, a red line forBrexiteers). Nothing mises. Expect more huffing and puffing, at gal underpinning fora global supply chain irritates Eurocrats more than the apparent least until June 8th. Only after that will the ofnuclear technology and services. British belief that details can be settled by fight truly begin. 7 If Britain crashes out of Euratom in 2019 without substitute arrangements in place, within a matter ofweeks it could find itself unable to replenish its uranium stockpiles. It would be unable to carry out maintenance on reactors using American and Japa- nese technology, and be forced to halt construction of Hinkley Point C, a new reactor beingbuilt by France’s EDF that will rely on foreign firms forup to 36% ofits inputs. It could also provoke an abrupt skills shortage. The nuclear industry is re- nowned for its globe-trotting workers and Euratom enshrines their ability to move freely across borders. Britain’s nuclear in- dustryrelieson imported welders, steel fix- ersand pipe fitters. Itwould take time to develop such skills domestically. The MPs described Theresa May’s Brexit-related decision to quit Euratom in January as an “unfortunate, and perhaps unforeseen” consequence of her choice to leave the jurisdiction of the European Court ofJustice, on which it depends. They urged her to delay departure. The government has sought to reassure Explosive appointment the industry that it understands the risks. Many were bemused by the announcement on May 1st that Cornelia Parker was to be the After all, nuclear power generates a fifth of official artist of the 2017 general election. Not as a comment on her credentials—she is British electricity, and there are £60bn widely considered one of Britain’s most exciting contemporary artists—but to discover ($78bn) ofnew investments planned. that such a post exists. Its previous holders have created figurative works using oil, ink But it has just two years to replace the and photography to record the four general elections since 2001. Ms Parker is likely to be infrastructure, equipment, skilled person- more inventive. She is using an Instagram account (@electionartist2017) to offer an nel and processes that Euratom has provid- eclectic commentary: the inaugural image, captioned “The election contenders”, shows ed in Britain to safeguard the nuclear in- a group of waving garden gnomes. She is best known for her conceptual work with dustry. Only when these are in place can it sculpture and installation, including detonated sheds, cut-up shotguns and squashed start negotiating its own nuclear co-opera- instruments. A perfect fit for the explosive modern moment. tion agreements with other countries. That is not an impossible task, but there is no View a gallery of past British election artwork at Economist.com/electionart guarantee it will succeed either. 7 46 Britain The Economist May 6th 2017 Bagehot One nation under May

The forces that are felling otherestablished political parties are making the Tories stronger 2014 the percentage of Indian voters identifying with Labour fell from 77% to 45%, while amongPakistanisitfell from 79% to 54%. In 2015 the Conservatives won more than 1m ethnic minority votes and outpolled Labour among Hindus and Sikhs. The Tories still have fewerminorityMPsthan Labour(17 compared with 23 in the 2015 intake) but the party is changing. Mrs May’s cabinet has two non-white members, Priti Patel and Sajid Javid, and the party’s rising stars include Kwasi Kwarteng and Rishi Sunak. Mrs May is determined to extend the Toryadvance to the “just aboutmanaging”. IfDavid Cameron wasobsessed with winning over middle-class Britons who were disillusioned with Tony Blair, Mrs May’s obsession is courting struggling Britons who have been taken forgranted by Labour fordecades and who may at last have been shaken free from their old loyalties by the twin shocks of Brexit and Corbynism. The Conservatives will campaign hard in Labour’s old industrial strongholds of the West Midlands and the north. One of the central questions of Mayology—the science of trying to understand Britain’s enigmatic new prime minister—is whether she wants to take her party to the right or to the left. The answer is that she wants to do both. She is expanding rightward ISRUPTION seems to be the rule in politics as well as in busi- by pursuing a “hard Brexit” and promising to control immigra- Dness. Economic churn is promoting discontent with the station. She looks like someone who can deliver the smack of firm tus quo while technological innovation is making life easier for government and enjoy it. But she is also expanding leftward by upstarts. The result is that long-established political parties such promising to reignite industrial policy, discipline greedy bosses as France’s Socialists and Greece’s Pasok have crumbled, while and keep spending at least 0.7% ofGDP on foreign aid. insurgents have come from nowhere to form governments (in the How are the Conservatives strengthening their position at a case of Greece’s Syriza) or shake things up (like Italy’s Five Star time when other established parties are crumbling? Luck plays a Movement). Neither of France’s main parties has a candidate in part. Labour is in the grip of a hard-left faction that combines re- the final round of the election on May 7th. In America Donald pugnant politics with extreme incompetence. This week saw Trump hasmounted a hostile takeover ofthe Republican Party. John McDonnell, the shadow chancellor, appearingat a May Day Yet in Britain the world’s oldest political party is marching to rally framed by Syrian and Communist Party flags and Diane Ab- an easy victory in the general election. The country has endured bot, the shadow home secretary, flubbing an interview about a decade of stagnation and austerity. Its public services are policing. The first-past-the-post system squeezes out other rivals. strained to breaking point. The Brexit referendum delivered the The Conservative Party went through its own near-death ex- biggest shock to the political establishment since Suez and divid- perience during the 13 years of New Labour dominance. Even in ed Britain down the middle. Yet the only question that troubles its current parlous state the Labour Party leads the Tories among psephologists is whether the Torieswill get a “small” majority of those under about 35. The biggest danger for the long-term health 30 or so or a blowout ofmore than 100. ofthe Conservatives is that they will become the party of“gener- Since Benjamin Disraeli pronounced that his Conservatives ational haves”, ignoring young people who cannot get onto the were a national party or else “nothing”, the Tories have tried to property ladder and are weighed down with student debt. appeal to every class and region. Lord Salisbury put the union with Ireland at the heart ofhis politics. Tory prime ministers from Mother Theresa Stanley Baldwin to Margaret Thatcher presented themselves as Yet the Tories have survived as one of Britain’s two big parties champions of a “property-owning democracy” against Labour’s longer than any other. Even at their most feeble they were not as divisive class politics. David Cameron tried to detoxify his weakas the Corbynised LabourParty. They have a genius forbur- party’s brand and sell it to sexual and ethnic minorities. Now nishing their brand. They don’t go in for trashing their predeces- Theresa Mayhasa good chance ofrisingto Disraeli’schallenge by sors to the same extent that Mr Blair did to Old Labour and Mr delivering Torygains in almost every corner ofthe country. Corbyn’s gang is now doing to Mr Blair. They also have a knack The Conservatives are advancing in the Celtic fringe. They for muddling through: the Tories have been riven over Europe have been virtually irrelevant in Walessince the 1850s, derided as since the 1980s, yet seem to have survived the earthquake of the the party of coal- and steel-owners and English snobbery. Now referendum. Above all they have a skill for adjusting to social the Welsh Political Barometer, an opinion poll, puts the Tories on change and external shocks. The party of the landed aristocracy 40% and on course to win 21 seats to Labour’s 15. In 2015 trium- succeeded in absorbing not just factory owners but enough fac- phant Scottish Nationalists boasted that Scotland had more pan- tory workers to stay competitive in the age ofmass production. das (two) than Tory MPs (one). Now polls show the Tories win- The biggest challenge to established parties at the moment is ning up to 12 seats as they hoover up votes from Scots who want populism that is rooted in anger at remote elites and economic to preserve the union, while Labour is left with none. stagnation. The Conservative Party bears a good share of the re- The Toriesare almost certain to expand theirgains among eth- sponsibility for this. Yetit shows every sign of not only riding out nic minorities. Loyalty to Labour is in long-term decline: in 1997- this challenge but using it to extend and entrench its power. 7 International The Economist May 6th 2017 47

Aid and the private sector partly because the oversight of aid is often poor. Think-tanks are still trying to work Doing good, doing well out where all the Haitian disaster-relief funding ended up, for example. And private-sector involvement can further ob- scure the picture, because the winners of bids may use a host of subcontractors, or insist that some information is kept confidential forcommercial reasons. A growing share ofaid is spent not by charities, but by private firms What is known, though, is that for-pro- HE gold rush is on!” That is how a ca- to multilateral organisations such as the fit and non-profit groups work differently. “Tble from the American ambassador UN) went to contractors, most of them for- A non-profit body typically has large bu- to Haiti described the descent of foreign profit companies, up from 12% five years reaus in the countries where it works, or firms upon Port-au-Prince in early 2010. An earlier. forms long-standing partnerships with lo- earthquake had flattened the city and Typically, firms win aid contracts at auc- cal charities that do. It will consider wheth- killed hundreds ofthousands. But a deluge tion, rather than receiving grants, as chari- era proposed project fits with its charitable of aid presented an opportunity. The mes- ties do. Some have become global players. purpose, and whether it has suitable in- sage, released by WikiLeaks, noted that Chemonics, an American firm founded in house expertise; only then will it decide AshBritt, a Florida-based disaster-recovery 1975, is active in 70 countries. In 2015 it won whether to bid. Firms, by contrast, tend to firm, was trying to sell a scheme to restore a contract for health-care services with have fewer staff, and to rely on subcontrac- government buildings, and that other USAID worth up to $10.5bn over eight tors and freelance experts who can be firms were also pitching proposals in a years. Cardno, an Australian firm, won 17% flown in for as long as a project lasts. Tim “veritable free-for-all”. of the country’s contracts last year, worth Midgley of Saferworld, a charity, argues During the following two years $6bn in A$945m ($709m). that this model means that firms may be aid flooded into a country of 10m people, One reason for the shift towards the less likely to understand local cultures, for everything from rebuilding homes to private sector is the changing nature ofaid. build relationships with governments and supporting pro-American political parties. A smaller share now is made up of tradi- monitor long-term results. But it can also Of $500m or so in aid contracts from the tional projects, such as building schools or be more flexible, with firms matching ex- American agency for international devel- handing out food parcels, and more is pertise and staffing to each contract. opment (USAID), roughly 70% passed “technical assistance”, for example to through the hands ofprivate companies. streamline a country’s tax code and Cool aid Haiti is one example of a trend. Though strengthen tax collection, or to set up an in- To shed light on the shift towards private- not all countries break down aid spending surance scheme to help farmers when sector aid delivery, The Economist has ana- according to the type of contractor used, crops fail. Private firms may be best-placed lysed 4,500 subcontracts from USAID data from those thatdo suggestthata grow- to advise on, or even run, these schemes. worth more than $25,000 each. (All were ing share of aid is funnelled, not through Another reason is that even as aid bud- granted since 2010. Those for which data charities or non-profit foundations, but gets have grown, governments have were not available were excluded.) A third through consultancies and other private- sought to make aid departments smaller wentto for-profitfirms, and the rest to char- sector contractors that profit from the and more nimble. Both USAID and DfID ities, NGOs or other governments. For con- work. Nearly a quarter of USAID spending have around the same number of employ- tracts where a firm was the primary con- in 2016 went to for-profit firms, a share that ees now as they did when their budgets tractor, on average 41% of subcontracts was two-thirds higher than in 2008. Brit- were just half as large in real terms. As aid went to other firms; when the primary ain’s Department for International Devel- agencies struggle to manage contracts, contractor was a non-profit organisation, opment (DfID) counts its spending slightly they have turned to the private sector. just 27% did. Around two-fifths of all sub- differently: in 2015-16, 22% of bilateral Surprisingly little research has been contractors were based in America, al- spending(asopposed to moneythatit paid done on the impact of this shift. That is though most aid workis done abroad. And 1 48 International The Economist May 6th 2017

2 four-fifths of them worked with just one What is more, the contracts won by for- primary contractor, suggesting that aid profit outfits were more likely to bust their workiscarried outlargelybystable consor- budgets and miss deadlines. tia, rather than shifting alliances. All this suggests that donor govern- Not just aid budgets but contracts are ments should improve theirbiddingproce- growing bigger, says Raj Kumar of Devex, dures and contract management. In the an aid-focused news organisation. One meantime, aid contractorshave responded consequence is that only large bidders can to bad publicitybylobbyingharder. In 2016 stomach the risks. Together with the high a group ofBritish aid contractors set up the cost of preparing bids—as much as Centre for Development Results to repre- $100,000—this has led to market concen- sent their views and counter unfavourable tration. In Britain ten firms snap up half of headlines. In 2011 American contractors all contracts (orlead consortia that do). The started the Council of International Devel- top ten account for around the same share opment Companies, which joined forces of USAID contracts, a much higher share with an older group dubbed the “Bombay than for other government departments. Club” after the Indian restaurant where it In Australia they account for70%. first met. It lobbies federal politicians, argu- The sector is consolidating further, as ing against aid dollars being given directly firms seek to expand the number of coun- to foreign organisations and governments, tries where they have the expertise to bid which would riskcutting its members out. for contracts, and to run them. Between Amore immediate threat to the sector is 2007 and 2015 Tetra Tech, an American that aid budgets might fall. President Do- firm, bought ARD and DPK, two aid consul- nald Trump wants to reduce American aid tancies; Coffey International, an Austra- Terms and conditions apply by 28%. Australia’s government started cut- lian engineering firm; and a handful of ting in 2011. Britain’s government has reaf- smaller Canadian consultancies. Austra- have stepped down. firmed its commitment to spending 0.7% of lia’s GRM International merged with A specific concern is that, like many gross national income on aid—a target long America’s Futures Group and laterbecame firms that rely on government contracts, suggested by the UN which Britain is the part of Palladium International, a perma- private aid contractors may be prone to re- first big country to meet. Nonetheless, calls nent consortium ofsix aid firms. volving-door hiring. Our analysis of data to abandon it are growing ever louder. A smaller firm’s best chance to pick up from LinkedIn, a social network, shows some of this work is to join a consortium that, at six ofAmerica’s ten biggest aid con- How to be the change led by a larger firm. But it risks becoming tractors, about 5% of listed staff name One way to keep going during leaner times mere “bid candy”, as a recent investigation USAID astheirpreviousemployer, a higher is to bid not only for contracts, but for by a British parliamentary committee into share than foranyotherformerworkplace. grants—that is, to do some aid work at cost, DfID’s use of contractors put it, with its ex- The agency was one of the most common without making a profit from it. When pertise used to win a contract, after which ex-employers at the other four. No wrong- USAID funding reached a plateau in 2008, the lead contractor keeps the work in- doing may have resulted. But the risks are following years of fast growth, a few firms house. The committee also concluded that evident at Adam Smith International, started bidding for more such grants. Take DfID focused too much on evaluating bids which turned out to have sought to win Abt Associates, a firm set up in 1965 that rather than results. bids by using proprietary information does research and implements aid pro- shared by a former DfID employee who grammes in nearly 50 countries. In 2008 Other people’s money went on to workforthe firm. 17% of its revenue from USAID came in the Some worry that firms motivated by profit Another claim is that private firms may form ofgrants; by 2016 that share was 31%. rather than altruism may be careless in skim too much cream from their contracts. Another opportunity, says Mr Kumar, is their spending, or even steal. Though Withoutaccessto commercial information to work directly for the governments of wrongdoing by charities is hardly un- this is hard to evaluate; however, private countries that have long been aid recipi- known, some high-profile scandals have firms do seem to pay higher salaries than ents. Some have started to fund pro- fuelled such fears. In recent years Louis charities to their top executives. We com- grammes similar to those paid for by do- Berger Group, one of USAID’s largest con- pared firms that won USAID contracts in nors, such as improving the way their tractors, has been found guilty of several the past eight years with data from USA- health-care systems are administered. A cases of bribery and fraud. Its former boss, spending, a state website that lists expendi- third option is to expand into the fledgling Derish Wolff, was found guilty ofconspira- tures and the pay of senior staff at some “corporate-aid” sector. This strand of de- cy to defraud USAID by faking timesheets, government contractors. Information velopment work involves multinationals fined $4.5m and sentenced to a year’s about wages was available for135 for-profit building capacity in poor countries, not home confinement. The firm agreed to re- firms. For comparison we looked at figures principally for philanthropic reasons, but pay $69m. for 346 similar-sized American charities to benefit their businesses. Starbucks, for Last year the Mail on Sunday, a British from CauseIQ, a data company. The bosses instance, is training coffee farmers in tabloid, published e-mails suggesting that of the private firms earn on average more Rwanda and Ethiopia. Private aid contrac- the beneficiaries of aid projects run by than $500,000 a year—more than twice as tors may be well placed to act as consul- Adam Smith International, one of DfID’s much as their non-profit peers. tants to firms keen on such projects, or as biggest contractors, had been threatened A separate study published in 2014 by brokers between them and local partners. with the loss of funding if they refused to Marieke Huysentruyt, then at the London One estimate puts the total value to write it glowing testimonials. Parliamen- School of Economics, examined 457 DfID firms ofsuch “aid-like” workin developing tarians inquired further, and in February contracts from 1999 to 2003. She found countries at around $20bn a year, a figure said that the firm had indeed sought inap- that, when controlling for the type of con- that is expected to rise. Having built their propriately to influence their probe of tract, the total personnel costs proposed by businesses on contracts with Western gov- DfID’s contractors. The firm has since been non-profit firms were on average just two- ernments, private aid firms may need to restructured and four senior executives fifths those proposed by private firms. diversifyifthey are to continue to thrive. 7 Business The Economist May 6th 2017 49

Also in this section 50 A court battle over self-driving cars 52 Spending on cancer 52 Ride-hailing in Saudi Arabia 54 Animal waste, clean energy 54 Axel Springer’s transformation 55 Food trucks in America 56 Schumpeter: What they teach at HBS

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Sports on TV on catch-up instead of when they air origi- nally, or they are watching such entertain- Still the champion? ment on Netflix-like services. Networks and advertisers see live sports as one ofthe few examples of “appointment viewing” that still draws substantial audiences. Some formeremployeesatESPN reckon BRISTOL, CONNECTICUT that the network has taken this reasoning to the extreme and paid way over the odds ESPN is losing subscribers and viewers. But it is still Disney’s cash machine for sports rights, including $1.9bn a year for OR a sports addict, a visit to ESPN’s 123- services from Netflix, Amazon and Hulu. 17 regular-season National Football League Facre campus is like mainlining the pro- In the households that are still connect- (NFL) games plus highlight rights, and over duct. In an industrial workspace connected to ESPN, residents are watching less. Fig- $600m a year for eight post-season college ed by an array ofcables and satellite dishes ures from Nielsen, which tracks TV viewer- football games. The next time sports con- to live feeds from all over the world, em- ship, show big declines in American tracts are up—the NFL is due in 2021—they ployees of the channel crowd around audiences over this decade both for big are expected to get even more expensive. monitors at 80 desks and watch games. sporting events and, especially, for news- Cash-rich tech firms want sport to enhance This is the world’s nerve-centre for and-highlight shows. The early-evening their internet services: Amazon recently highlights. The feeds show almost every edition of SportsCenter, ESPN’s flagship agreed to pay $50m forthe right to offer ten sporting event that might be of interest, show since 1979 and a touchstone ofAmer- NFL games on its Prime video service. from cricket tests in India to football ican sports culture in the 1990s, has lost al- As a result, an empire that has been ex- matches in Brazil to baseball games in Flor- most half of its audience in the demo- panding almost continuously since 1979, ida. ESPN’s staff watch everything so that graphic segment of men aged 18 to 49, when ESPN was just a few men and a tran- viewers don’t have to, digitally tagging which is coveted by advertisers. These sponder, looks shaky. In 2017 its operating more than 1,000 of the day’s best plays to viewers make up 46% of the show’s audi- profit will probably be lower than last turn them into consumable clips on TVs, ence (itself77% male). year’s. Some experts believe that profits browsers and smartphones. One reason is that viewers are sharing will fall by a lot more over time. In April The campus embodies Disney’s hopes highlights using phones. ESPN makes ESPN laid off about 100 people, including for the brand—the technology inside it has many ofthese clips, but sports leagues and well-known journalists and on-air talent. been expensively upgraded in recent other networks also produce them. Fans Bob Iger, Disney’s boss, admits that the years. The channel offers live sporting film plenty of their own, capturing snip- pay-TV system is “definitely challenged”. events, continuous sports news, game pets from games they watch on their de- That is why John Skipper, ESPN’s presi- highlights and conversations about sport. vices and posting them on social media. dent, is improving the company’s digital By dominatingtelevised sport, ESPN gener- Some post clips of their TV sets at home; it services. Yet an ESPN-branded subscrip- ates some $4bn in cash for its parent each is not uncommon to see Lionel Messi’s lat- tion streaming service, due to start later year, over two-fifths of Disney’s profits. est wonder-goal in such bootleg fashion. this year, has not allayed fears much; some The problem, however, is that ever-few- In a cruel twist, however, the cost of worry it will speed the decline of cable TV er people are tuning in. The number of rights to live games has shot up even without improving ESPN’s bottom line. American homes paying to get ESPN has though sport is attracting fewer viewers. The pace of “cord-cutting” caught the firm declined by more than 12m from a peak of That is because the decline in ratings for by surprise, critics say. “The question for 100m in 2011(see chart on next page). ESPN scripted dramas and comedies on cable me is, how much of this should they have is not alone: consumers are broadly aban- has been still more calamitous. Viewers at seen coming?” says James Andrew Miller, doning costly cable packages for online home are watching their favourite shows author ofa bookon the network. 1 50 Business The Economist May 6th 2017

2 One argument is that ESPN misjudged Before leaving Alphabet to start Otto, the readiness ofcompetitors to overpay for Touch down Waymo claims, Mr Levandowski illegally sports rights and, because ofthat, overpaid ESPN sports network, United States downloaded around 14,000 computerfiles for them itself. If it had not splurged, it Total subscribers, m Daily average that contained proprietary information could have demanded smaller increases in audience, m about its lidar technology. Lidar uses lasers its hefty subscriber fees in exchange for ca- 105 1.2 to scan a vehicle’s surroundings and is es- ble providers guaranteeing to sell more ca- Total sential for many self-driving systems. Mr 1.0 ble packages that include ESPN. 100 Levandowski has not directly addressed In the short term there is little cause for 0.8 many of Waymo’s allegations. He has in- worry. Thanks largely to the high “affiliate” 95 voked the Fifth Amendment to avoid mak- 0.6 fees ESPN collects from pay-TV operators, ing statements that could be self-incrimi- its profits should start growing again from 90 0.4 nating. The government could choose to 2018. For the next five years at least, it 18- to 49- bring criminal charges in the months 85 year-old men 0.2 should continue to be Disney’s cash cow. ahead, and Mr Levandowski has hired his But after that, the rights’ costs will ratchet 0 own civil and criminal defence lawyers. up again afterdeals expire. And the high af- 2010 15 17 2010 15 17* Uber, for its part, has firmly rejected the Source: Nielsen * To April 30th filiate fees lookever more precarious. allegations, and says that its lidar is differ- In 2011 ESPN was paid less than $5 per ent from Waymo’s. It had been working on subscriber per month. This year it is being would have far fewer subscribers than it autonomous cars well before it bought paid $7.86, according to Kagan, a research has now via cable, and thus would have to Otto, it points out. But the very fact of the firm—meaning it collects $2.3bn more de- be much more expensive than Netflix— lawsuit comes at a bad time for Uber, spite having 12m fewer subscribers. No probably $20 or $30 a month. which is under fire forhaving a rough-and- otherbasic-cable channel commandseven Underestimating ESPN has been a mis- tumble culture that values winning at all $2 a month from pay-TV operators, and take in the past. Its inception was a strug- costs. The lawsuit may also have hurt most charge farless than a dollar. ESPN has gle; investors, lenders and commentators Uber’s ability to recruit employees to help been able to charge so much because it is doubted the prospects of an all-sports net- develop its autonomous efforts. Because crucially important to distributors as a work. In 1996, when Disney bought its 80% ofit, no one knows which technologies the “must-have” cable channel. But the high of ESPN as part of its purchase of ABC, a firm will be able to use. cost could be drivingsome pay-TV custom- broadcast network, the sports network As a result, the outcome could affect the ers away. And if the fees were ever to go was an afterthought. Now, however awk- landscape for autonomous-vehicle tech- down, investors would run screaming. wardly it sits with film studios, franchises nology. Alphabet has been working on That will be a growing concern as con- and theme parks, its place in the Disney fir- self-driving cars since 2009 but now faces sumers turn to new, skinny bundles of TV mament is secure. ESPN may have muscled lots of competition. It has watched estab- channels being offered over the internet at its way into many homes that no longer lished carmakers and younger rivals accel- low prices. YouTube recently announced it wish to pay for it, but a sizeable, hard core erate their efforts. Uber has been scram- will be sellinga live TV service, joiningsev- offans is unlikely to kickthe habit. 7 bling to develop autonomous capabilities eral other services offering TV packages for lest another company come up with a as little as $20-40 a month (a typical cheaper ride-hailing service using self- monthlycable bill in America isabout $80- Alphabet v Uber driving cars. A federal judge was expected 100). ESPN is being offered in almost all of to decide whether to grant Waymo’s re- these packages so far, which MrIgersees as No brakes quest for an injunction as The Economist a sign ofthe network’s resilience. ESPN gets went to press. Such an outcome could bar paid at least the same fee, of $7.86 per sub- Uber from using its lidar technology until scriber, on the internet services. Mr Igerbe- the case goes to trial in October. lieves that as consumers continue to opt SAN FRANCISCO As well as revealing cut-throat competi- forcheaper packages ofchannels, it will be tion over self-driving car technology, the A lawsuit about self-driving cars shows non-sports channels that will be left out. case draws attention to how intertwined Silicon Valley’s complicated ties Yet this is not a forgone conclusion. Re- rivals often are in Silicon Valley. Alphabet cently some cable networks, including URLOINED documents, duplicitous is one of Uber’s largest shareholders. Its AMC, are said to have begun discussing an Pemployees and conflicted loyalties. The venture-capital arm, Google Ventures, ultra-cheap non-sports bundle. Disney race to dominate the field of self-driving made a $250m investment in Uber in 2013. will fight that—it has commitments from cars is in its early stages, but is already full Until last year David Drummond, Alpha- pay-TV operators that ESPN must be in- of intrigue. On May 3rd a packed court- bet’s chieflegal officer, sat on Uber’s board. cluded in a certain percentage of cable room watched lawyers tussle during a Firms allow star employees to develop packages—but it portends a struggle over hearing on a lawsuit that could affect the complex loyalties, too. It has emerged in le- ESPN’s place in the future TV landscape. future ofautonomous-vehicle technology. gal documents that at Alphabet, Mr Levan- At its headquarters, it is clear that the On one side is Waymo, the self-driving dowski had two self-driving startups on networkis taking these challenges serious- car unit owned by Google’s parent com- the side. Alphabet dealt with this by quietly. In an effort to retain viewers, ESPN is pany, Alphabet. It has accused Uber, a ride- ly buying the firms for a reported total of turning to shows driven more by personal- hailing firm, of using stolen technology to $50m, presumably wanting to keep him ities than by sports highlights. Examples develop its autonomous-driving capabili- and to stop rivals acquiring his startups. include a revamp of its early-evening edi- ties. The origin of the dispute was a deal Uber last month demoted Mr Levan- tion of SportsCenter, called SC6, with two last summer when Uber spent $680m to dowski so that he no longer leads the com- bantering presenters. buy Otto, a self-driving lorry firm. Antho- pany’s autonomous initiatives. The future Eventually Disney may have to be bol- ny Levandowski, who had worked at Al- of ferrying things and people about will der still. ESPN could be marketed one day phabet for ten years and played a big role rely on self-driving technology. Uber’s ac- as a standalone internet service. Mr Iger in its self-driving efforts, had co-founded quisition of Otto seemed a far-sighted bet says he thinks it can, if need be, become a the startup, which was just seven months not long ago. But now it looks like Uber’s “Netflix for sports”. Such an offering old when Uber bought it. riskiest decision yet. 7

52 Business The Economist May 6th 2017

Ride-hailing in Saudi Arabia Taken for a ride

Saudi women are a captive market forUberand Careem ASHMIAH Alenzy, a doctor in Saudi 1.9m out of13.1m Saudi women partici- NArabia’s conservative Qassim re- pate in the workforce. One barrier to gion, uses ride-hailing apps at least two workis a lackofmobility; ride-hailing or three times a week, and sometimes apps mean that more women—at least, every day, to get to workor to run er- those with credit cards and smart- rands. Before she started using these apps phones—can take up workor run their last year, every journey needed to be own businesses. Uber, under fire in its planned well in advance as she negotiat- home market forits macho culture, has a ed getting a lift with her husband, her better story to tell in the Gulf. brother, ora private driver. Saudi Arabia’s embrace ofride-hail- Barred from driving in a country with ing also exposes a contradiction. Because non-existent public transport, Saudi ofpressure from Wahhabi clerics, wom- women are a profitable prospect for en are not allowed to drive or to mix with ride-hailing companies. Careem, a firm men outside their family. Yet the state is valued at $1bn that is based in Dubai and actively encouraging them to spend time operates across the Middle East, north alone with total strangers, something The pharma industry Africa and South Asia, set up shop in that makes conservatives uncomfortable. 2013. Uberfollowed in 2014. Both see the Some women are annoyed fordiffer- Hard to swallow Saudi market as one ofthe most lucrative ent reasons. The state ensures that wom- in the region. Around four-fifths oftheir en are dependent on men to get around, respective customers are women. says Hatoon al Fassi, an academic, and is Both firms are directly backed by the now profiting from that dependence. Saudi state. In response to falling oil Despite her qualms, Dr al Fassi often has revenues, the government’s “Vision little choice but to use the Uber app her- Cancerdrugs are getting betterand 2030” programme seeks to diversify its self. So long as women cannot take the dearer sources ofincome. In June last year its wheel themselves, ride-hailing compa- HE debate in rich countries about the sovereign-wealth fund ploughed $3.5bn nies will be firmly in the driver’s seat. Thigh price ofdrugs is a furious and frus- into Uber; and in December Saudi Tele- tratingone. The controversy isalreadyhav- com, which is controlled by the same ing an impact on spending on drugs, sug- fund, tooka 10% stake in Careem. gest new figures from the QuintilesIMS Ifthe motives forthese investments Institute, a research firm. The rate of are chiefly financial, the two firms also fit growth in spending on prescription medi- the government’s social goals. Both help cines in America fell to 4.8% in 2016, less (male) participation in the gig economy, than half the average rate of the previous in line with an aim to push more Saudis two years (after adjusting for discounts into the private sector, which is currently and rebates). Michael Levesque of dominated by expatriates. Unemploy- Moody’s, a ratingagency, reckonsthat pres- ment is high, particularly forthe young. sure over pricing is contributing to a decel- Around two-thirds ofthose in workare eration in earnings growth at pharma employed in the cushy public sector. Last firms. Public scrutiny constrains their flexi- year the Ministry ofTransport decided bility over what they can charge and al- that only Saudi drivers could be licensed lows payers to get tougher. to use their own cars forride-hailing. In one area, however, earnings are ex- Foreigners must be employed directly by pected to keep rising: cancer. Oncology is taxi firms. the industry’s bright spot, says Mr Leves- Ride-hailing services also help with que. The grim fact is that two-fifths of peo- the government’s stated aim ofboosting ple can now expect to get cancer in their women’s labour-market activity. Only Appwardly mobile lifetime because of rising longevity. This is one ofthe reasons why the numberofnew cancer drugs has expanded by more than a growing crowd of medicines known as sense of the value of the new drugs came 60% over the past decade. The late-phase “checkpoint inhibitors”, designed to work when Opdivo failed a key clinical trial in pipeline of new medicines contains more on a key molecular target that helps the August last year. The market value of Bris- than 600 cancer treatments. New cancer body’s own immune system to fight can- tol-Myers Squibb fell by16%, and its shares drugs are being approved more quickly. cer. Merck of America has pembrolizumab have been in the doldrums since. More are arriving all the time. On May (Keytruda); Bristol-Myers Squibb has nivo- Handsome prices for cancer drugs are 1st, America’s Food and Drug Administra- lumab (Opdivo); and Switzerland’s Roche far less pleasing for governments, insurers tion approved durvalumab (trademarked has atezolizumab (Tecentriq). and patients. Even five years ago, most Imfinzi), a drug from AstraZeneca, a British These checkpoint inhibitors are expect- newly-approved treatments had gross an- firm, which treats cancer of the bladder. ed to account for much of the growth in nual prices of more than $100,000. But the Imfinzi, which has a wholesale price of spending on cancer medicines. Merck, in pressure on budgets has worsened with $180,000 for treatment lasting a year, joins particular, has done well with Keytruda. A the new generation of more expensive im-1 There will be more than nine billion people to feed by 2050.

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CME Group is a trademark of CME Group Inc. The Globe logo is a trademark of Chicago Mercantile Exchange Inc. All other trademarks are the property of their respective owners. Copyright © 2017 CME Group. All rights reserved. 54 Business The Economist May 6th 2017

2 muno-oncology drugs, and could become more severe still if they are found to work best in combination with each other. Making a mistake over which cancer drugs to use can be extremely costly for a payer, as illustrated by a disastrous recent attempt by Britain’s government to increase access to new cancer drugs by creating a special fund in 2010. By the time it closed in 2016, £1.27bn ($1.83bn) had been spent, mostly on drugs that were later shown to be ineffective for the conditions they were tried on. Some thinka better approach would be to try drugs out on patients and for payers to pay a price based on how well they work, an approach known as“value-based pricing”. That would mean collecting a great deal of data from patients, which Protected species would be farfrom straightforward. Some companies, such as Genentech, a tempt to go “Beyond Petroleum” in the and other Dickensian-sounding waste pro- biotech company owned by Roche, are try- 2000s, many oil companies have sought to ducts produced in America. That may put ing to do just this, as are some payers in- become greener. But few have taken a an upperlimit on the supply ofraw materi- cluding American health insurers. But more idiosyncratic route than Neste, als, meaning renewable diesel will always however reassuring it is to know that mon- which is part-owned by the Finnish state. remain a niche product. ey is going on drugs that are proven to In the past decade it has invested €1.42bn Yet Neste still sees ample room for work, it does not solve the broader pro- ($1.55bn) in “biorefineries” in Porvoo, Sin- growth, as restrictions on cars using fossil blem ofaffordability. 7 gapore and Rotterdam. These process ani- diesel increase, and fuel-guzzling heavy mal waste and recycled cooking fat into re- vehicles and jet aircraft strive for lower newable diesel, a cleaner form of the fuel emissions. Petri Lehmus, its head of re- Animal waste than that which, since the scandal at Volks- search and development, says the firm is wagen, has tainted the car industry. It is exploringnew potential feedstocks such as Burning the fat also a more sustainable alternative than forest residues and algae. However suc- the biofuels made from food crops. Neste cessful it is, Neste will never become the has become the world’s biggest producer. next Saudi Aramco. But what it lacks in nat- For years, Neste’s diversification away ural resources, it will strive to make up for 7 PORVOO from fossil fuels terrified investors. “They in human ingenuity. really didn’t believe us,” says Matti Lievo- A Finnish refinerturns slaughterhouses nen, its chief executive. But since 2013, into oil wells when its operating profit from renewable The newspaper business N ALDOUS HUXLEY’S “Brave New diesel turned positive for the first time, to IWorld”, the human corpses in Slough lastyear, when itreached €469m, itsshares Metamorphosis Crematorium are turned into a phospho- have outperformed other refiners. A few rous-based fertiliser. “Fine to think we can competitors, such as Valero, an American go on beingsocially useful even after we’re refiner, Total of France and Eni of Italy, also dead,” a character enthuses. produce renewable diesel, but Neste’s BERLIN An engineer at Neste, a Finnish oil com- 2.6m-tonne capacity dwarfstheirs. Axel Springeris in the throes ofa radical pany, wryly echoes that observation while The preference for renewable diesel digital transformation showing visitors around a novel diesel re- over other biofuels is because it can be finery in Porvoo, an industrial town 50km “dropped” straight into a tank with no ISITING the top floor of Axel Spring- (31 miles) east of Helsinki. But the sickly- blending. Neste says its products generate Ver’s tower in Berlin is like travelling smelling brown gloop fed into the town’s less carbon dioxide, nitrogen oxides and back to a lost age. The German publisher’s pre-treatment plant has nothing to do with particulates than fossil diesel, which is Journalisten Club is a suite of wood-pan- humans. It is made from the rendered fat of why California, a clean-energy pioneer, is elled rooms filled with antique books, slaughtered cattle and pigs, transported by its biggest market. Renewable diesel is leather armchairs and classical paintings. tankers in heated vats to stop it congealing. more expensive than its traditional coun- “It is a symbol,” says Mattias Döpfner, the No reindeer, either. “Too lean,” he says. terpart, however, so it relies on clean-ener- publisher’s chiefexecutive. In a triumph of the “circular economy”, gymandates, fuel standardsand taxcredits Whether it still makes sense as a sym- Neste has found a way to make transport for growth. Demand is thus subject to the bol is unclear, for Axel Springer’s business fuel more sustainable. Afterheatingand fil- whims of regulators, which can fluctuate. has shifted rapidly away from print media tering the gunk, what is left of it is mixed Most intriguing is Neste’s impact on (though it still owns Bild and Die Welt, two with hydrogen in a refinery, producing die- slaughterhouses globally. Ryan Standard leading German dailies) towards an array sel-like hydrocarbonsthatare then tailored of The Jacobsen, an American journal that ofdigital businesses. In 2000 it had almost so that they can be poured straight into the tracks the trade in animal fats, says that an- no digital revenue; by the end of last year tanks of everything from cars to passenger ticipated global demand from Neste and over 72% of its operating profit came from jets. “Youcould put this in your VW diesel its smaller American rival, Diamond digital activities. Profits have increased by and drive off,” says Joshua Stone of Bar- Green Diesel, is likely to account for the 37% over the past decade, from €434m clays, a bank. equivalent of almost half the tallow, lard, ($473m) in 2006 to €596m last year. Since BP, a British firm, made its at- white grease, poultry fat, used cooking oil Four years ago Axel Springer sold off1 The Economist May 6th 2017 Business 55

2 several newspapers and magazines, in- Street food cluding the Hamburger Abendblatt and the Berliner Morgenpost, for $1.2bn. In 2015 it nearly bought the Financial Times, a British Rules of the road paper with a strong online presence but lost out to Japan’s Nikkei, which paid a America’s food-truckrevolution stalls in some cities, accelerates in others whopping £844m ($1.1bn). Shareholders were said to be relieved. T WAS in 2008 that an out-of-workchef The list of Axel Springer’s digital acqui- Inamed Roy Choi began selling $2 Kore- Michelin tyred sitions, meanwhile, stretches to over 150 in an barbecue tacos from a roaming kitch- United States, food trucks the past decade. StepStone, Germany’s en on wheels, tweeting to customers as Per 100,000 population most-visited site for jobseekers, for exam- he drove the streets ofLos Angeles. Mr 5 ple, is one of several popular classified-ad Choi’s gourmet food truck has since Portland* platforms it owns, for everything from sec- inspired a reality-TV programme and a Austin* 4 ond-hand cars and holiday rentals to jobs hit Hollywood film, and helped jump- Seattle* and real estate. It has the world’s most lu- start a $1.2bn industry. San Francisco 3 crative collection of such ads. Another big Within the food industry, the food- Boston* business is Idealo, a popularprice-compar- truckbusiness, built on unique dishes, New York City 2 ison site with tips forthrifty housewives. low prices and clever use ofsocial media, Chicago* Its recent foreign acquisitions include is the fastest-growing segment. Restau- 1 Business Insider, a digital-only news site rants fret about an army oftrucks stealing known forclickbaity headlines and for fea- customers but such concerns are unwar- 0 tures like “Coolest people under 40 in Sili- ranted. According to the Bureau ofLa- 2005 07 09 11 13 15 16 con Valley”, and eMarketer, a New York- bour Statistics, counties that have experi- Sources: US Census Bureau; US Bureau of Labour Statistics *Metro area based publisher of digital-market data. enced higher growth in mobile-food Last year Axel Springer joined forces with services have also had quicker growth in South Korea’s Samsung to start Upday, a their restaurant and catering businesses. and local regulations. In few places are mobile-news service that combines algo- Although many cities have treated these stricter than in Chicago. Influenced rithms with human editors to provide us- food trucks as a fad, a nuisance, or a by a powerful restaurant industry, the ers with personalised news streams. threat to existing businesses, others have city prohibits food trucks from setting up The company’s tower in Berlin over- actively promoted them. Portland, Ore- shop within 200 feet ofa bricks-and- looks its startup accelerator, a joint venture gon, known forits vibrant culinary scene, mortar eatery or from parking in any one with Plug and Play, a Silicon Valley-based has had small food carts on its streets for location formore than two hours. Ven- firm that helped companies such as Goo- decades. After a study in 2008 by re- dors are required to carry GPS devices gle and PayPal early on. It is meant to give searchers at Portland State University that record their whereabouts every five the firm an early look at up-and-coming concluded that the carts benefited resi- minutes, on pain ofheavy fines. Such disrupters, which it then either buys or dents, the city began encouraging the use restrictions have stifled the industry’s keeps a close eye on. Of late Axel Springer ofvacant land for food-truckclusters or growth. Despite being home to more has also started making direct, early-stage “pods”. Today, Food Carts Portland, a than 7,000 restaurants and 144 craft brew- investments in small American startups website, reckons the city has over 500 eries, Chicago has just 70 licensed food such as Thrillist.com, a lifestyle site for carts and trucks. trucks. young men. It has taken tiny stakes in Yet government figures suggest the The Windy City may be the least giants too: in Airbnb, a home-sharing site, revolution has stalled in several of the food-truck-friendly place in America but and in April, in Uber, a ride-hailing firm. country’s biggest cities (see chart). The New Yorkand Boston are little better. In This web of investments causes some sector is subject to a patchworkof state Boston vendors must compete for space awkwardness. Neil Thurman, a media pro- on public roads at specified places and fessor at Ludwig-Maximilians-Universität times through an annual lottery. In New in Munich, saysthatAxel Springerneeds to Yorka vendor must obtain a two-year be highly transparent in how it reports on government permit, which requires companies. The group’s newspapers often sitting through a 15-year waiting list or include disclaimersin articlesdisclosing its shelling out as much as $25,000 to rent financial interestsbutsome articles neglect one on the blackmarket. Adam Sobel, to do this, he notes. owner ofCinnamon Snail, a popular Axel Springer’s bid for the Financial vegan food truck, shut down his oper- Times underlined an enduring appetite for ations in 2015 because ofrising costs. conventional journalism, and in January “You kind ofhave to be crazy to have a the group launched Fussball Bild, a new, food truckin New York,” he says. print-only sports newspaper, Germany’s Fortunately, truckoperators can drive very first sports daily. But at the majority of to more welcoming cities, such as Minne- its print publications, circulations are still apolis and Philadelphia. Once there, and in steady decline. Bild’s average daily circu- no matter how cosy they get with policy- lation halved between 2006 and 2016, makers, truckowners still want to culti- from 3.8m to 1.9m. By investing in digital vate their underdog image. “It used to be classifieds and advertising Axel Springer the restaurants and their chefsthat had has bought itselftime to try and save its tra- all the power,” says Han Hwang, the chef ditional news business, argues Katja Rie- and owner ofPortland’s Kim Jong Gril- fler, a media analyst. If they help with that lin’. “Now it’s the people. That’s the hard task, the startups might even get invit- The burghers rise up revolution that’s happening right now.” ed to the Journalisten Club. 7 56 Business The Economist May 6th 2017 Schumpeter From great to good

A confidential memorandum to the seniorfaculty ofHarvard Business School funds (run by the university’s management company) and $1.6bn of other assets, including our campus. You have all benefited handsomely; we pay out a higher share of our income in compensation than Goldman Sachs does. It may look like poor cost control, with expensesrisingata 7% annual rate, butitalso means we live up to our legal status as a non-profit organisation. After deducting capital expenditure, the school makes a modest loss. However, we face three strategic problems. First, conflicts of interest—let’s be honest here—that have become glaring. We grant companies a veto over case studies written about them. We permit our faculty to be paid, for example, through consulting gigs, by firms they teach about. We do case studies on some of our big donors. It is likely that this compromises our objectivity. Second, we face ever more competition to our claim to intellectual leadership. Important business thinkers such as Michael Porter and Clayton Christensen are still on staff, but a new generation ofsuperstarshasnotyetcaughtfire. The authors ofthe most influential recent business book, “The Second Machine Age”, work across the Charles river at the Massachusetts Institute of Technology. As the tech industry expands, its chief alma mater, Stanford University, is growing ever more powerful. OU will all be aware that a book has just been published Last, we may perpetuate inequality, a relevant subject at the Yabout our institution, Harvard Business School (HBS). Entitled moment. We have worked to make our intake of students more “The Golden Passport”, by DuffMcDonald, it makes a number of diverse. But even after the financial aid that we give to some, we unflattering claims about the school’s ethics and its purpose. have ramped up our effective MBA fees by 31% over the past five While often unbalanced, it is likely to galvanise hostility to HBS years. Relative to the median salary our graduates earn in their both inside Harvard University, of which we are a part, and first year at work, our fees are twice as costly as they were in 1986. among the public. This memorandum, circulated only to the It doesn’t take much to see our networkas a form ofcronyism. most senior faculty members, assesses HBS’s strategic position. Left unaddressed these weaknesses could compromise our Our school has been among the country’s most influential in- business model. If HBS is more about cash and contacts than stitutions since its foundation in 1908. Ourforebears helped build ideas, bright people may eventually go elsewhere. Other schools America’s economy in the early 20th century and helped win the may stop buying our case studies if they doubt their objectivity. second world war. HBS educates less than 1% of American MBA We are part of Harvard University, but our already uneasy rela- students but case studies written by our faculty are used at busi- tionship with it could deteriorate. We benefit from an implicit ness schools around the world. Our alumni fill the corridors of subsidy because we can use the Harvard brand while operating elite firms such as McKinsey. Many bosses of big American com- atarm’slength. In return theybenefitfrom ouralumni, who often panies studied here. Even in Silicon Valley, where we are relative- donate to the university as well as to HBS. But the university has, ly weak, about a tenth of“unicorns”—private startups worth over at least notionally, the power to overhaul our management. $1bn—have one ofour tribe as a founder. We have a business model that monetises the Harvard brand The Boston Business School Inc through fourrevenue streams. About $127m, or17%, ofsales come Our school, led by Nitin Nohria, dean since 2010, has made im- from MBA tuition fees. Ourcase-studymethod, in which students portant reforms. We have tightened disclosure rules on conflicts learn from real business situations, is popular. But it is only one of interest. Students must spend time in emerging markets. We reason why they are willing to pay headline feesof$71,635 a year. have tried to signal that our interests go beyond shareholder val- Like parents of pupils at Britain’s elite private schools, they are ue by publishingessays criticisingit. Yet deeperchanges are need- buying social standing as well as access to an alumni network ed if we are to maintain our competitive position. One course is that will dramatically raise theirodds ofgettinghigh-paying jobs. to reduce the influence ofbigmoney and fullyeliminate conflicts. Afurther23% ofsalescomesfrom ourexecutive-education op- Our dependence on big donors’ generosity would have to fall eration, which sells short courses to mid-career executives. They and, by implication, we would have to be less extravagant. get a modest amount of mental stimulation and the right to call If you have a good thing going, though, why stop? An alterna- themselves Harvard alumni. We get $176m a year in return. Our tive is to follow the advice of Alfred Chandler, a theorist at HBS publishing arm sells case studies to other universities and pub- between 1970-89, who taught that structure must reflect strategy. lishes books and a magazine; that brings in 29% of our revenues. HBS would cut loose from Harvard and acknowledge its tacit The remaining 31% comes chiefly from wealthy businessmen in commercial status. If we trimmed costs to their level five years the form of donations. Some of them may well be under the im- ago and were valued on the S&P 500’s price-earnings multiple, pression that they gain influence over what we teach. HBS would be worth $5bn. The university would get a huge spe- We have had a fantastic run of it, with sales growing at a com- cial dividend with which to pay formore scholarships for under- pound annual rate of 8% in the past decade, above the universi- privileged applicants. We would be subject to the forces of ac- ty’s rate of5% and outperforming the median firm in the S&P 500 countability and transparency that we have always argued index. Our balance-sheet is strong, with $3.2bn of endowment maximise performance. We lookforward to your feedback. 7 Finance and economics The Economist May 6th 2017 57

Also in this section 58 Buttonwood: Share prices 60 Ultra-long bonds 60 Puerto Rico’s ﬁnances 61 The economics of saving the rhino 61 Car ﬁnance in America and Britain 62 The euro-area economy 63 Free exchange: Algorithms and antitrust

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

Chinese investors agers, once marginalised, playing a bigger role in the country’s markets. Mr Buffett is The Buffetts of China held up as the gold standard of value investing, respected forhis long-term view in selecting stocks. But when they get down to business, many Chinese investors still opt for hard-driving, debt-laden, risky ap- Shanghai proaches; they are products of a stock- marketthatisnotyetthree decadesold and The Oracle ofOmaha has legions offans but few true followers in China an economy that during that time has seen S THE second-richest person in the But they might want to think twice. In few serious downturns. Aworld, and with a half-century record the Chinese context, declarations of Buf- Consider the two investors most often of investing success, Warren Buffett is a fett-like investment abilities have, over the likened to him. One is Guo Guangchang, household name worldwide. But in China, past couple ofyears, proved less a badge of chairman of Fosun, a conglomerate with he is somethingmore: a celebrity. In March honour than a warning sign. In rapid suc- interests from mining to tourism. There is a a special edition of Cherry Coke, featuring cession his putative disciples have run into superficial similarity between Fosun and a cartoon image of the 86-year-old inves- trouble. One was jailed for manipulating Berkshire Hathaway in that both partly tor, hit Chinese shop shelves (Mr Buffett the stockmarket. A second has been held pay for their investments by selling insur- not only loves the sugary beverage; he is incommunicado in custody for months. A ance. But the contrasts are just as striking. Coke’s largest shareholder). On May 6th third was hauled in as part of a govern- Over the past decade Berkshire Hathaway thousands of Chinese investors will de- ment investigation. has been able to finance more than four- scend on Omaha forthe annual meeting of This chasm between the veneration for fifths of its investments with cashflow Berkshire Hathaway, his holding company, Mr Buffett and the travails of those who from its operations; Fosun’s cashflow has and many more will tune into a live- supposedly model themselves on him covered less than a quarter of its invest- stream of the event. Mandarin is the only points to the messy reality of Chinese fi- ments. The result has been a much higher foreign language into which the proceed- nance. Investors are becoming more so- reliance on debt forthe Chinese firm. ings will be simultaneously translated. phisticated, with professional fund man- Another Chinese investor described as Those who miss the broadcast can pick up applying the “Warren Buffett model” is Wu one of the hundreds of Chinese books Xiaohui of Anbang. Anbang’s insurance about his approach to minting money. Buffett-beaters business has surged over the past five Mr Buffett’s stature in China stems Book value per share years, with its assets reaching 1.9trn yuan partly from good timing. China’s modern $ terms, 2000 or earliest year available=100 ($286bn) in 2016, more than triple their stockmarket was launched in 1990. Just as 600 2012 level. Anbang, like Berkshire Hatha- neophyte investors grappled with earn- 500 way, has financed most of its investments ings reports and trend lines, the Oracle of Big listed with revenues from selling insurance. But Chinese insurers* Omaha’s reputation as the world’s best 400 unlike Mr Buffett’s stable business, Mr Wu stock-picker was blossoming. Compared 300 has relied on the sales of short-term, high- with the regular booms and busts of the Berkshire yielding insurance policies, tantamount to Hathaway 200 Chinese stockmarket, the steady returns of Fosun a hidden form ofdebt. Berkshire Hathawayare beguiling. For Chi- 100 These Chinese Buffetts now face a stiff nese investors who do make it big, there test. The government appears at last to be are few greater accolades than to be 0 serious about cleaning up financial mar- dubbed the “Warren BuffettofChina”. This 2000 02 04 06 08 10 12 14 16 kets after a decade of runaway debt title has been conferred on or claimed by Sources: Bloomberg; *China Life, China Taiping, growth. Regulators have repeatedly prom- S&P Capital IQ; Wind Info CPIC & Ping An no fewer than ten tycoons. ised to rein in credit issuance, only to back 1 58 Finance and economics The Economist May 6th 2017

2 down when the economy has slowed. In and Xiao Jianhua, managers of secretive Lost in all the hype about these sup- recent months, though, they seem to be investment companies, won accolades as posed Buffetts of China is that there are in mounting a more sustained onslaught. Xi Chinese Buffetts for no reason other than factcompanieswhich have been more Buf- Jinping, China’s powerful president, has their good returns. Both are now in deten- fett-like: big, boring, mainly state-owned declared that the focus of financial policy tion: MrXu was jailed formanipulating the insurers. Hewing to official rules, they should be on limiting risks. The securities stockmarket; Mr Xiao is being held as part have been more cautious about usingdebt. regulator has vowed to catch the “giant ofa corruption investigation. Benefiting from China’s growth, their per- crocodiles” feasting on the savings of or- The second riskisfinancial. In clamping formance (measured by book values per dinary investors. And the banking regula- down on debt, regulators’ targets are the share, Mr Buffett’s preferred gauge) has tor has unleashed what the local press has debt-laden investments favoured by Chi- topped Berkshire Hathaway’soverthe past called a “tightening storm”, choking off na’s insurance upstarts. Both Fosun and decade, albeit with more ups and downs cashflows to shadow banks. Anbanghave had to call offforeign deals in (see chart on previous page). They also The riskto Chinese investors is twofold. the past year. On May 3rd Anbang said it share one other trait with Mr Buffett, who The first is political. The state is closing in would sue Caixin, a business magazine, is famed for his humility. They have not on those it suspects of illegality. Xu Xiang over allegations offinancial irregularities. boasted about their success. 7 Buttonwood Cape Fear

Investors are simultaneously bullish and skittish about valuations EN years ago this month investors way capitalism is currently working. If Twere pretty confident. True, there Peaky blinders profit margins are high, then more capital were signs that problems in the American United States, cyclically adjusted ought to be ploughed into businesses un- price-to-earnings ratio housing market would mean trouble for MAY 2007 til investment-led competition drives mortgage lenders. Butmostpeople agreed 50 margins back down; that has not hap- with Ben Bernanke, the Federal Reserve pened. And low real interest rates reflect, chairman, that “the impact on the broad- 40 in part, the extraordinary measures taken er economy…seems likely to be con- by central banks to revive developed tained.” The IMF had just reported that 30 economies after the financial crisis. “overall risks to the outlook seem less 20 The conventional threats to the equity threatening than six months ago.” marketare twofold: a sharp rise in interest That was reflected in market valua- 10 rates, which would hit indebted individ- tions. In May 2007 the cyclically-adjusted uals and companies; or a decline into re- price-earnings ratio (CAPE), a measure 0 cession, which would dent profits. Nei- 1881 1900 20 40 60 80 2000 17 that averages profits over ten years, was ther looks imminent at the moment, Source: Robert Shiller 27.6 for American equities (see chart). which helps explain why Wall Street Thatratio turned outto be the peak forthe keeps hitting record highs. cycle. As the problems at Bear Stearns, There is no law that says the CAPE has But there are other ways that profit Lehman Brothers and others emerged, to return to its long-run average of 16.7; in- margins could be hit. Protectionist poli- and as the world was gripped by reces- deed, the ratio’s mean over the past 30 cies could disrupt the free flow of goods, sion, share pricesplunged. ByMarch 2009 years has been 24.5. Even in the depths of services and people across borders. A the CAPE had fallen by more than half. the 2008-09 crisis, the ratio only fell below credit crisis could emerge elsewhere in Central banks then kicked into action, the long-run average forten months. the world—in China, for example, where slashing interest rates and buying assets When investors accept a high CAPE for debt has been growing rapidly. Flash- via quantitative easing (QE). The stock- shares, they are confident about the ability points in the Middle East or on the Korean markets recovered rapidly and the S&P of companies to maintain, and increase, peninsula could sparkwar. 500 is now more than 50% higher than it their profits. One reason why the Ameri- Investors are not as complacent as was ten years ago. And the American can market has powered ahead since the they seemed a decade ago. In a poll con- stockmarket’s CAPE, at 29.2, is also higher election of Donald Trump is that investors ducted by BankofAmerica Merrill Lynch, than it was backthen. expect cuts to the tax rate on corporate pro- a net 32% of global fund managers think Investors might worry about equity fits, allowing more of those profits to be shares are overvalued. Despite that, how- valuations but what are their alterna- passed on to shareholders. ever, a net 40% have higher-than-normal tives? Adecade ago, the ten-yearTreasury- As Jeremy Grantham of GMO, a fund- holdings in shares. bond yield was around 4.8%; now it is management group, points out, there does In other words, investors are manag- 2.3%. The Fed may have started to raise seem to have been a step change in the lev- ing to be simultaneously bullish and skit- ratesbutthe return on cash isstill pitiful in el of American profits, as a proportion of tish. By a large majority, fund managers nominal terms and negative in real (ie, both sales and GDP, since 1996. The corol- expect global growth and corporate pro- after inflation) terms. lary has been a lower share of GDP for la- fits to be strong over the next 12 months; But at least the return on cash and bour, one factor behind voter discontent. but they also know such expectations are bonds (held to maturity) is fixed in nomi- Mr Grantham suggests two forces be- already fully reflected in share prices. All nal terms. Investors have already suffered hind the higher profits: enhanced monop- will be well provided there are no shocks. two big bear markets in equities this mil- oly power for American companies; and But history suggests shocks have a nasty lennium. On each occasion, theirlosses in low real interest rates, which have allowed habit ofoccurring. percentage terms were in the double dig- firms to operate with more debt. Both sug- its. What might trigger another collapse? gest there is something wrong about the Economist.com/blogs/buttonwood

60 Finance and economics The Economist May 6th 2017

Government debt over short-term debt. Issuing very long- term debt is, in effect, like paying for insur- Taking the ance against future interest-rate rises. So whether ultra-long bonds would ultra-long view save taxpayers money depends on future inflation and growth. Higher levels of each would probably push up short- and medi- NEW YORK um-term interest rates. But this is not inevitable. Alex Gurevich of HonTe Invest- The Methuselah trade ments, a California-based fund-man- OW can governments borrow most agement firm, says interest rates in Hcheaply? The answer matters hugely America are more likely to remain at cur- fortaxpayers. Take America: it has $14trn in rent levels than to revert to the mean seen outstanding national debt, fully three- in the late 20th century. If Mr Gurevich is quarters of GDP. Interest payments alone right, ultra-long bonds sold today may, are expected to reach $280bn this fiscal ironically, lockin higher rates forlonger. year—ie, more than three times the com- Finally, the demand for ultra-long gov- bined budgets of the Departments of Edu- ernment bonds is unpredictable. Institu- cation, Labour and Commerce. tional investors with long-term liabilities, The problem largely comes down to de- such as pension funds and insurance com- ciding how much long, medium and short- panies, may be happy with 30-year bonds, dated debt to sell. Almost every country is- which most countries already sell, or may sues a combination of these maturities. In opt for higher-yielding long-dated cor- Puerto Rico’s finances the current low interest-rate environment, porate bonds, such as those issued by Cat- however, many argue that governments erpillar, an American construction-equip- To be resolved should sell proportionately more long-dat- ment company. Sales of ultra-long ed bonds to make sure they are able to pay government bonds, despite fanfare, have historically low rates for many decades to so far been one-off events and do not pro- come, thereby saving taxpayers money in vide much of a guide. Low demand would the long run. in turn send yields higher, raising govern- WASHINGTON, DC Some countries have already ploughed ment debt-servicing costs. Puerto Rico declares bankruptcy at last ahead. In recent years Britain, Canada and In some countries, such as Britain, inter- Italy have sold 50-year bonds; Mexico, Bel- est rates on long-term debt are not much HE government of Puerto Rico said in gium and Ireland have issued 100-year higher—or are even lower—than on shor- T2015 that the island could not pay its debt. The latest country to flirt with the ter-term borrowing. For them, borrowing debts. Yet it was only on May 3rd that it idea is America: last month the Treasury at ultra-long maturities is likely to be kicked off the biggest bankruptcy case in sent out a survey to bond-dealers to gauge cheaper than medium-term debt, so it America’s history. Public-sector debts total market appetite for 40-, 50- and 100-year makes sense to replace some mid-length almost $74bn (around 100% of GNP). The bonds. On May 3rd officials said that Steve bonds with ultra-long ones, says Niso drawn-out fiscal crisis has both imperilled Mnuchin, the treasury secretary, had set up AbuafofSamuel A. Ramirez & Company, a Puerto Rico’s economy and upended the an internal working group to take a look at New York brokerage. This helps to explain island’s politics. ultra-long bonds. Mr Mnuchin has ex- why the WAM of British sovereign debt is Something akin to bankruptcy is possi- pressed the view that they could “abso- unusually long, at14.9 years (see chart). ble only because of a federal law passed in lutely” make sense. Ultra-long debt is also very attractive to 2016. Until then, the island’s legal status as Not everyone agrees, including, it governments such as Mexico’s, which a territory afforded it no escape from its seems, the private-sector financiers who have a recent history of fiscal profligacy debts (were Puerto Rico a state, its public make up the Treasury’sown borrowingad- and high inflation, yet are able, while in- utilities could have declared bankruptcy). visory committee, which met this week. vestors still trust them, to borrow for the The law established a “financial oversight Long-term rates are at historic lows but long term very cheaply. In America, how- board”, appointed in Washington, with short-term rates are even lower. The ever, where Treasury bonds serve not just the task of reaching a deal with bondhold- weighted average maturity (WAM) of out- to raise fundsbutto setglobal benchmarks, ers. But it also allowed for bankruptcy-like standing Treasury debt is 5.7 years, and the the calculation is a trickier one. 7 proceedings should negotiations fail. effective interest rate paid on the total pile A two-thirds majority of bondholders of debt is 2.03%. The yield on 30-year Trea- would have forced all of them to accept a suries is 3%, so selling even longer-dated The long and the short of it reduction in the value of their debt. Yet debt will raise the overall cost. Even a 0.1 Central-government debt outstanding agreement was always unlikely. Puerto percentage-point rise would add roughly Weighted average maturity, December 31st 2016, years Rica’s constitution says payments to hold- $14bn to the taxpayer’s burden. 051015ers of so-called “general obligation” bonds Moreover, ultra-long bonds would be Britain have priority over all other expenditure. cost-effective in the long run only if short- Japan But another group of creditors have first and medium-term interestrateseventually dibs on revenue from the sales tax. Clear- exceed the levels of long-term rates today. France ing up this ambiguity seems to require a Otherwise governments could simply roll Italy court battle. Both sets of creditors recently rejected an offerof50 cents on the dollar. Germany Correction: Our article on corporate-bond markets in In the meantime, Puerto Rico is in dire the issue of April 22nd, “Click to trade”, incorrectly Canada straits. The government’s latest fiscal plan, reported that Bloomberg did not yet offer “all-to-all” approved by the oversight board in March, trading. In fact since 2015 it has launched all-to-all United States seeks to balance the budget over three corporate-bond trading in Europe, Asia and America in Source: HM Treasury partnership with external counterparties. Sorry. years. Doing so requires austerity cuts 1 The Economist May 6th 2017 Finance and economics 61

2 worth about 10% of GNP by 2020. The lat- users. Disproportionately, these were well- est federal-budget deal bought a little time offolder men. None used it as an aphrodis- with more money for the island’s Medic- iac. And nothing suggested any stigma in aid programme, which provides health in- usingit: ifanything, illegalityenhanced the surance for the poor (in Puerto Rico, about product’s exclusivity and hence their will- half the population). The cash was not ingness to pay. Asked how their demand enough to dissuade striking anti-austerity would respond to price, users confirmed protesters from filling the streets on May that cheaper horn would increase usage. 1st, disrupting public transport and forcing But if legalisation is risky, so is main- many firms to close forthe day. tainingthe ban. The studyfindsa hard-core Because Puerto Ricans are American user base of around 30% of rhino-horn us- citizens, the island’s taxpayers can escape ers, who want the stuff regardless of the austerity by fleeing to the mainland, leav- penalties. So long as doctors prescribe it ing fewer people to pay off the debt. The demand will be difficult to eradicate. Dou- population ismore than 8% smallerthan in glas MacMillan, an author of the study, is 2010. The economy has been in recession sceptical that information campaigns per- almost continuously since 2006. Unsur- suade many people to shun it. Vietnam has prisingly, the island’s politics are in flux. Ri- already seen vigorous initiatives pointing cardo Rosselló, the governor since January, out that rhino horn is the chemical equiva- promises a referendum on statehood for lent ofhuman hair and toenails. the island in June. A poll in March showed Changes in the law may yield more evi- 57% supportforthe proposition; some ofits Pricier than snake-oil, and deadlier dence. On March 30th South Africa’s con- opponents want a boycott ofthe vote. stitutional court overturned the ban on do- However the island votes, and al- no-horn supply-chain sprawls from South mestic trade. Now, if they have the right though the 2016 Republican election plat- Africa, home to nearly three-quarters of permit, people can trade rhino horn, but form backed statehood, the proposal is un- the world’s rhinos, to Asia, and in particu- not export it. TRAFFIC’s Mr Milliken wor- likely to pass muster in Washington. It lar to Vietnam, where rhino horn is covet- ries that this will lead to the worst of all would almost certainly put two more ed as medicine, prescribed for fevers, alco- worlds. Allowing some legal trade while Democrats in the Senate. But, at least from hol dependency and even cancer. the authorities are not properly enforcing Puerto Rico’s perspective, the arguments Prohibitionists call for better law-en- the ban on illegal trade will muddy already againststatehood are gettingweaker. Tradi- forcement. Demand for rhino horn in Chi- murky waters. Once out of the country, le- tionally, its opponents have said that Puer- na, theypointout, fell sharplyafter the gov- gal and illegal horn will be all but indistin- to Ricans have the best of both worlds: ernment banned its use in 1993. In the guishable. So users in Vietnam will have they use the dollar, get American pass- rhino’s homelands, they say, extra patrols, cheaper supplies; the illegal dealers still in ports, but keep Washington at arm’s fences and harsher penalties have helped control of the export trade will pocket the length. With the oversight board in place, curb poaching in the past couple ofyears. profits; and rhinos will keep falling to the that claim looks a lot less convincing. 7 But some argue the trade ban might ac- poachers’ bullets. 7 tually be making the problem worse. Re- stricted supply pushes up prices and pulls Illegal-wildlife trade in poachers. Private rhino-ranchers argue Car finance in America and Britain that if they could sell their stocks of horn, On the horns they could undercut the illegal trade. Some Subprime, already chop off their rhinos’ horns to make them worthless to poachers. Unlike anyone? elephant ivory, rhino horn grows back after a few years. Michael Knight, who LONDON AND NEW YORK chairsa specialistgroup on rhinosat the In- Saving the rhino means understanding Worries mount that it is too easy to ternational Union for Conservation of Na- supply and demand forits horn borrow to buy a car ture, an NGO, worries that, if rhino-horn DEAD rhino, with a bloody stump in sales remain illegal, ranchers will switch to HOUSANDS of second-hand cars, Aplace of its horn, means different cattle. They bearthe cost ofsecurity. Poach- Tranging from dented clunkers to Bent- things. Forthe speciesitisthe danger ofim- ers make the money. leys, glisten under the evening floodlights minent extinction; for wildlife-lovers it is But by seeming to normalise rhino- at Major World, a car dealership in barbarism; for law-enforcers it is failure. horn use, legalisation might boost demand Queens, a borough ofNew York. “Business For its poachers it means income; the horn along with supply. Prohibitionists worry has been good,” says a crisply-dressed will be exported illegally to fetch tens of that any attempt to lower prices would salesman, scurrying between prospective thousands of dollars. For economists, it both bring in more customers, leaving in- customers. Almosteveryone who wantsto means market forces are at work. centives to poach unchanged, and make it buy a car at Major World can get approved South Africa is in the throes of a poach- fareasier to launder illegal, poached horn. for a loan, he explains, regardless of their ing epidemic. Official figures show poach- For them, the best form ofconservation credit score, or lack of one: when banks ers killed 1,054 rhinos in 2016, up from just is to cut demand. A new study, requested turn buyers down, the dealership offers 13 in 2007. In KrugerNational Park, home to by the Vietnamese and South African gov- them its own in-house financing. the world’s largest rhino population, num- ernmentsand overseen bythe Internation- In both America and Britain new-car bers are dropping despite a fall in recorded al Trade Centre, an independent arm of the sales reached record levels last year (2.7m poaching incidents. Tom Milliken ofTRAF- WTO and the UN, providesinformation on cars in Britain and 17.5m in America), as did FIC, a wildlife-trade monitoring network, where thatdemand comesfrom. Thanksto second-hand-carsalesin Britain. So too did worries that poachers have become better contacts in the traditional-medicine busi- car loans: £31.6bn ($42.8bn) in Britain and at hiding the carcasses. ness, the academic researchers who con- $565bn in America. Even folk with poor The problem is international. The rhi- ducted the study interviewed rhino-horn credit records (“subprime” borrowers) 1 62 Finance and economics The Economist May 6th 2017

2 have been able to find financing. So some The euro-area economy are asking whether this latest credit boom might have sown the seeds ofa new crisis. In America worries have centred on ris- Speeding up ing delinquencies in subprime asset- backed securities (ABSs) based on car GDP in the euro zone rose at a fasterrate than America’s in the first quarter loans. Bundling car-loan repayments into ABSs to sell on to investors represents an HE appeal ofGDP is that it offers, or sion’s economic-sentiment index, based important source offinancing, particularly Tseems to, a summary statistic ofhow on surveys ofservice industries, manu- for non-bank lenders. Cumulative net well an economy is doing. On that basis, facturers, builders and consumers in the losses on subprime car-loan ABSs issued in the euro-area economy is in fine fettle; euro zone, rose to its highest level fora 2015 are at levels not seen since 2008—over indeed, it is improving at a faster rate than decade in April. The bloc’s extra pep is in 6% after only15 months. America’s. Figures released on May 3rd large part because its recovery from Some hearechoesofthe financial crisis. show that GDP in the currency zone rose recession is at a much earlier stage than Yet any comparison with the subprime by 0.5% in the first quarter of2017, an America’s. There is more pent-up con- mortgage-backed securities that brought annualised rate ofaround 2%. That is sumer demand to accommodate and down the world’s financial system a de- quite a bit fasterthan the annualised 0.7% more spare capacity in businesses to cade ago is a stretch. True, subprime lend- rate reported forAmerica’s GDP. meet it. There is a lot ofcatching up to do. ing makes up an even bigger share of car These figures probably overstate the The unemployment rate is 9.5% com- loans (21.1%) than it did of mortgages in gap between the two economies. In pared with 4.5% in America. 2006 (13.6%, compared with just 3.6% in recent years, first-quarter estimates of Differences in monetary policy in 2016). But the car-loan market is tiny com- GDP growth in America have later been Europe and America reflect the different pared with the $2.8trn in mortgages issued revised upwards substantially. Still, the stages ofrecovery. The Federal Reserve in America in 2006. And whereas three- euro-zone economy is clearly picking up has started (slowly) to raise interest rates. quarters of subprime mortgages were se- speed, even as America’s goes through a In contrast, the European Central Bank curitised, spreading the risks far and wide, soft spot. A jump in car sales in March (ECB) has kept its footto the floor. At the only a fifth of subprime car loans are saw Europe as a whole overtake America conclusion ofits monthly monetary- turned into ABSs. So far, subprime car-loan as the world’s second-largest market policy meeting on April 27th, the ECB ABSs have avoided downgrades. (behind China). Euro-zone manufactur- kept its main interest rate at zero and the In Britain the comparison with 2006 is ing grew at its fastest pace for six years in rate it pays on bankreserves at -0.4%. It even harder to sustain. Data are fuzzier April, according to the purchasing man- also left unaltered the pace at which the than in America because standardised agers’ index, a closely watched gauge of ECB is purchasing bonds, €60bn ($66bn) credit scores are not used for car loans, but economic activity. The corresponding a month until at least the end ofthe year. the Finance and Leasing Association (FLA), index forAmerica fell. Mario Draghi, the ECB’s boss, did not give an industry body, reckons that subprime The good news is not confined to any hint that policy might be tightened loans make up only about 3% of outstand- manufacturers. The European Commis- soon. Although he acknowledged that ing British car debt. Rondeep Barua of risks ofeconomic faltering had “further Bank of America Merrill Lynch says that diminished”, Mr Draghi insisted that the British market shows no immediate Transatlantic race underlying inflation in the euro zone was signs of stress; delinquencies have not in- GDP, % change on a year earlier still unduly low. creased, forinstance. Euro area United States He still has much to fret about, in- Some have expressed worries about 4 cluding China’s management ofits debt the potential mis-selling of personal con- mountain and Donald Trump’sprotec- tract plans (PCP), a hybrid form of lending, 2 tionist threats. Elections in Europe may between a loan and a lease, that makes up + throw up an obstacle to growth, ifnot in four-fifths of all British car loans. But, as 0 France than perhaps in Mr Draghi’s na- FLA PCP – Adrian Dally of the points out, s 2 tive Italy. And despite an agreement have accounted for a majority of new car reached this weekbetween the Greek loans in Britain for a decade without lead- 4 government and its creditors on reforms ing to serious problems. it must undertake, that saga will continue Even without a crisis, however, the 6 to haunt the euro zone. But, at the very boom in car lending is bound to create 2006 08 10 12 14 16 least, amid these anxieties, the economy some worries. PCP borrowers in Britain Source: IMF is gaining strength. have a lease-like option allowing them to return their cars after three years, so a glut of second-hand cars could depress prices. tander Consumer USA, the American at an annual rate of 10.9% last November, In America second-hand-car prices have car-lending arm of a Spanish bank, has cut the smartest clip since 2005, fuelled by car already hit a six-year low, contributing to back sharply on making new loans and finance, credit cards and personal loans. the low recovery rates on subprime loans. bolstered its reserves. In America analysts at UBS, a bank, American lenders have also had to moder- In Britain the surge in car-dealership fi- have seen delinquency rates on subprime ate their treatment of defaulters after al- nance has prompted the Financial Con- unsecured loans and credit-card balances leged violations of debt-collection prac- duct Authority, a regulator, to raise con- start to rise (albeit from a low base), and tices. To smooth repossessions, Major cerns about irresponsible lending. Any poorperformance startto spread from sub- World insists that recipients of its in-house problems with car lending would be cause prime car loans to more creditworthy bor- loans have a GPS tracker always on in their for concern if they signalled broader trou- rowers. Subprime car loans may not bring cars, so they can easily be traced. bles with consumer credit. The Bank of down the system on their own, but regula- Certain lenders which have heavy ex- England has expressed worry about the tors are all too well aware of the dangers if posures to subprime borrowers are show- breakneck pace of expansion in British too many households find they have boring some signs of stress. For example, San- consumer borrowing, which was growing rowed too much. 7 The Economist May 6th 2017 Finance and economics 63 Free exchange Algorithms and antitrust

How price-bots can conspire against consumers—and howtrustbusters might thwart them by algorithmic pricing means sellers can co-ordinate price rises more quickly. Price-bots can test the market, going over many rounds ofprice changes, without any one supplierbeing at risk of losing customers. Companies might need only seconds, and not days, to settle on a higher price, note Messrs Ezrachi and Stucke. Their concerns have empirical backing. In a new paper**, the authors outline three case studies where well-intentioned efforts to help consumers compare prices backfired. In one such instance, the profit margins of petrol stations in Chile rose by 10% following the introduction of a regulation that required pump prices to be displayed promptly on a government website. This case underlines how mindful trustbusters must be about unin- tended consequences. The legal headache for them in such cases is establishing sinister intent. An algorithm set up to mimic the prices of rival price-bots is carrying out a strategy that any firm might reasonably follow if it wants to survive in a fast-moving market. Online sellers’ growing use of self-teaching algorithms powered by artificial intelligence makes it even harder for trustbusters to point the finger. A cabal of AI-enhanced price-bots might plausibly hatch a method of colluding that even their han- dlerscould notunderstand, letalone be held fullyresponsible for. ARTHA’S VINEYARD, an island off the coast of Massachu- Since legal challenges are tricky, argue Messrs Ezrachi and Msetts, is a favourite summer retreat for well-to-do Ameri- Stucke, it might be better to direct efforts at finding ways to sub- cans. A few years ago, visitors noticed that petrol prices were con- vert collusion. Trustbusters could start by testing price-bots in a siderably higher than in nearby Cape Cod. Even those with deep “collusion incubator” to see how market conditions might be pockets hate to be ripped off. A price-fixing suit was brought tweaked to make a price-fixing deal less likely or less stable. A against four of the island’s petrol stations. The judges found no “maverick” firm, with different incentives to the incumbents, evidence ofa conspiracy to raise prices, but they did note that the might have a lasting impact; an algorithm programmed to build market was conducive to “tacit collusion” between retailers. In market share, forinstance, might help breakan informal cartel. such circumstances, rival firms tend to come to an implicit under- Regulators might also explore whether bots that are forced to standing that boosts profits at the expense ofconsumers. deal directly with consumers—say, through an app that sends an No one went to jail. Whereas explicit collusion overprices is il- automatic request to retailers when a petrol tank needs filling— legal, tacit collusion is not—though trustbusters attempt to fore- could be enticed to undercut rivals. Or they might test to see ifim- stall it by, for instance, blocking mergers that leave markets at the posingspeed limits on responses to changes in rivals’ prices ham- mercy of a handful of suppliers. But what if the conditions that pers collusion. It may be that batching purchases into bulky or- foster such tacit collusion were to become widespread? A recent ders might thwart a collusive pay-offby makingit more profitable book* by Ariel Ezrachi and Maurice Stucke, two experts on com- forrobo-sellers to undercut rivals. petition policy, argues this is all too likely. As more and more purchases are made online, sellers rely increasingly on sophisticated Never knowingly undersold algorithms to set prices. And algorithmic pricing, they argue, is a The way online markets work calls for new tools and unfamiliar recipe for tacit collusion ofthe kind found on Martha’s Vineyard. tactics. But remedies have to be carefully tested and calibrated—a Considerthe conditions that allow fortacit collusion. First, the fix for one problem might give rise to new ones. For instance, the market is concentrated and hard forothers to enter. The petrol sta- more consumers are pushed to deal directly with price-bots (to tions on the Vineyard were cut off from the mainland. Second, thwart the transparency that allows rival sellers to collude), the prices are transparent in a way that renders any attempt to steal more the algorithms will learn about the characteristics of indi- business by lowering prices self-defeating. A price cut posted out- vidual customers. That opens the door to prices tailored to each side one petrol station will soon be matched by the others. And if customer’s willingness to pay, a profitable strategy for sellers. one station raises prices, it can always cut them again ifthe others Still, there is one old-school policy to lean on: merger control. do not follow. Third, the product is a small-ticket and frequent There is growing evidence in old-economy America that trust- purchase, such as petrol. Markets for such items are especially busters have been lax in blocking tie-ups between firms. A mar- prone to tacit collusion, because the potential profits from “cheat- ket with many and diverse competitors, human or algorithmic, is ing” on an unspoken deal, before others can respond, are small. less likely to reach an effortless, cosy consensus about what is the Now imagine what happens when prices are set by computer “right” price forsellers, and the wrong price forconsumers. 7 software. In principle, the launch of, say, a smartphone app that compares prices at petrol stations ought to be a boon to consum- ...... ers. It saves them the bother of driving around for the best price. * “Virtual Competition: the Promise and Perils of the Algorithm-driven Economy”, Harvard University Press (2016) But such an app also makes it easy for retailers to monitor and ** “Two Artificial Neural Networks Meet in an Online Hub and Change the Future (of match each others’ prices. Any one retailer would have little in- Competition, Market Dynamics and Society)” (April 2017) centive to cut prices, since robo-sellers would respond at once to ensure that any advantage is fleeting. The rapid reaction afforded Economist.com/blogs/freeexchange 64 Science and technology The Economist May 6th 2017

Also in this section 65 The ﬁght against AIDS 66 Pollution and heart disease 66 Conserving megafauna

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

Biotechnology versity. Other recipes, with different starting organisms, are possible. Yeast Primordial gloop works, as does Streptomyces, another bacterium. Cells from tobacco plants or the ovaries of Chinese hamsters are also good places to begin. But all such formulae are variations on the theme ofisolating a cell’s protein-making machinery in a free-float- A new type ofbiological engineering promises to speed up innovation and ing suspension. simplifythe manufacture ofdrugs and otherchemicals Synvitrobio’s engineers have built a ro- HE stuff of life comes wrapped in tiny growing or dividing any actual cells. The botic system to mix the final stage of their Tbags called cells. Inside are DNA mole- initial intention is to create a quicker way recipe. This robot parcels the purified pro- cules that carry the instructions for how to of finding the best genes for making a par- toplasm into an array of384 tiny test tubes, run the cell, to make it grow, and to cause it, ticular product. In the end, those working each with a volume of a few millionths of ultimately, to divide into two cells, if that is in the field aspire to the idea that cell-free a litre. It then drops some DNA molecules to be its fate. Messages made of a slightly production will equal mass production. into each tube and the gloop gets to work different molecule, RNA, carry these in- on the process of turning the information structions to molecular machines called ri- Processing power in those molecules into proteins. Cur- bosomes. A ribosome’s job is to read the A typical recipe for making cell-free proto- rently, the system can handle eight DNA se- RNA messages and translate them into pro- plasmic gloop is this. Take four litres of cul- quences per test tube, meaning 3,072 proteins, the workhorse molecules of cells. ture containing E. coli (a gut bacterium fa- teins can be processed in parallel. The Those proteins then supervise and execute voured by genetic engineers). Split the sequences can be up to 10,000 genetic “let- the running, the growing and the dividing. bacterial cells open by forcing them ters” long—enough to encode almost any It is a system that has worked well over through a tiny valve at pressure, thus protein you care to mention. the 4bn years that life has existed on Earth. shredding their membranes and DNA, and At present, Synvitrobio is using its sys- To some biotechnologists, though, the cell liberating the ribosomes. Incubate the re- tem to test DNA sequences (or, rather, the is old hat. They approve of the machinery sulting mixture at 37°C for an hour, to acti- resulting proteins) to see if they might be of DNA, RNA, ribosomes and proteins, vate enzymescalled exonucleasesthat will worth investigating as antibiotic drugs. which can be engineered to make useful eat up the fragmented DNA. Centrifuge, to Such drugsworkbybindingto a biological- chemicals, ranging from drugs to the build- separate the scraps of cell membrane and ly important molecule and changing that ing-blocks of plastics. But they want to get other detritus from the gloop that contains molecule’s characteristics in some way rid of the bags that contain it, retaining ribosomes. Dialyse to remove unwanted that is detrimental to the organism of only the part of the protoplasmic “gloop” ions. Then stir in amino acids (the building which it is part. To look for this binding, inside a cell needed to do their bidding. blocks of proteins), sugar and an energy- each mini test tube is also supplied with In this way they hope to control, far carrying molecule called adenosine tri- some of the target molecules, each at- more precisely than is possible by conven- phosphate (ATP) to power the process. Fi- tached to a “reporter” molecule that emits tional genetic engineering (or even by im- nally, add a pinch of new DNA to taste, to a flash of light if binding takes place. proved methods of gene modification, instruct the gloop which proteins it is sup- Tubes which flash brightly indicate that such as CRISPR-Cas9, that are now being posed to produce. one or more of the DNA sequences therein developed) which genes are translated by This particular recipe is the one used by are worth a second glance. Synvitrobio’s the ribosomes—and thus what products Synvitrobio of Berkeley, California, a firm technique is thus able to screen potential are churned out. Equally important, cell- founded by Zachary Sun and Richard Mur- drugs at a rate limited only by the availabil- free biotechnology of this sort means no ray of the California Institute of Technol- ity of new DNA sequences. Since synthe- biochemical effort is wasted on running, ogy and George Church of Harvard Uni- sising new sequences on demand is now a 1 The Economist May 6th 2017 Science and technology 65

2 routine technology, that means the world’s gestible analogue of ribose, a naturally oc- national Partnership for Microbicides gene libraries can be plundered for likely curring sugar, for use in zero-calorie bever- (IPM) announced a clinical trial that it candidates, and the best of these then ages. The company says it has already got hopes could help the situation. It has de- tweaked mercilessly until something good its process to the point where it can make veloped a small silicone ring designed to enough for the job turns up. Inserting such thousands oflitres ofsolution ofthis sugar be inserted into the vagina, from where, for sequences into the genomes of organisms at a time. GreenLight is also working on the next three months, it releases steady is far more time-consuming than simply cell-free systems that will generate indus- doses of dapivirine and levonorgestrel. dropping them in some gloop. trial quantities of specially designed RNA The first of those is an anti-HIV drug. The At the moment, that is the point when molecules that interfere with the develop- second is a contraceptive. Synvitrobio passes the newly discovered ment ofinsect larvae, and can thus be used IPM’s device builds on a previous mod- molecule on, for a suitable cut of the pro- as pesticides. Currently, such RNA costs el that contains only dapivirine. Two big ceeds, to someone who can turn it out in $5,000 per kilogram to produce. Green- clinical trials of that device concluded in bulk by the conventional technique of Lightthinksthatbyscalingthe process up it 2016 and showed it could reduce the risk of pasting the relevant gene into appropriate can reduce this to between $50 and $100. catching HIV by about a third. That may cells, and breeding these cells in fermenta- Whether cell-free biotechnology will not sound particularly impressive. But tion tanks similar to those used for brew- be able to displace fermentation by geneti- Zeda Rosenberg, IPM’s founder, says this ing beer. This is because it is expensive to cally modified organisms as a routine way number almost certainly represents only a produce cell-free protoplasm in the vol- of making chemicals remains to be seen. floor on the treatment’s effectiveness. “We umes required to manufacture antibiotics Fermentation is a tried and trusted tech- know from the trial results that not all the for sale. A few firms are, however, doing so nique, used byhumanssince the invention women used the ring consistently,” she fordrugs that can command high prices. of beer around 12,000 years ago. But the says. Those that did will, she thinks, have One such is Sutro Biopharma, based idea of stripping molecular biology down enjoyed substantially better protection. near San Francisco. It uses a cell-free sys- to its bare essentials has an efficiency Combining an anti-HIV drug with a tem to create antibodies for the treatment about it which suggests that, for some ap- contraceptive may give women a reason to of cancer. In April, Sutro announced it had plications at least, the utility of the biologi- use the product more faithfully. Dr Rosen- employed its system to make STRO-001, an cal cell may have run its course. 7 berg points out that in societies that expect antibody that inhibits tumour growth. The women to be demure or chaste, those who firm plans to start trials of STRO-001 in take steps to protect themselves from HIV 2018. Cell-free production of the antibod- The fight against AIDS can often face stigma, since others may as- ies forthat trial is about to begin. sume they are engaging in risky behaviour. Antibodies are specialised proteins, so Safer sex But no such stigma applies to contracep- once Sutro’s system has identified the best tion. In any case, the ring is small and un- candidate for the job, all that is required is obtrusive enough that women can wear it to seed the gloop with the DNA which en- without their partners’ knowledge. codes that candidate. Other firms, though, The first trial is designed only to dem- hope to go further than this, by devising onstrate that the ring is safe, and will be A device that protects women against manufacturing systems that put together conducted in America. Later tests will both HIV and pregnancy entire metabolic pathways for the produc- check how well it works, though the fact tion of chemicals other than proteins. LENTY of progress has been made in that the dapivirine-only ring has already These, as in a natural metabolic pathway, Pthe fight against AIDS. Deaths peaked in passed similar tests should speed that pro- consist of a series of enzymes (another 2005, at around 2m people. By 2015 that cess. IPM hopes to have the first batch of type of specialised protein) that catalyse a number had fallen to 1.1m. One big reason dual-purpose rings ready for shipping by sequence of chemical changes, gradually is that, ofthe 36.7m people currently infect- 2020. Ifthere isdemand, itmighteven offer converting one molecule into another. ed with HIV, 18.2m are taking antiretroviral the rings for sale in the rich world, in the Genomatica, an established biotech- drugs that can hold the virus back for de- hope that the cash so generated could nology firm based in San Diego, is experi- cades. Their number has risen more than cross-subsidise production for poor coun- menting with a cell-free system which pro- twentyfold since the turn ofthe century. tries where the need is greatest. 7 duces 1,4-butanediol in this way from But not all the statistics are so encourag- simple sugars. 1,4-butanediol is a small ing. Around 1.9m adults contracted HIV in molecule that is used to make polymers 2015. That numberhas hardly budged since such as Lycra. Generally, it is cheaper to 2010. The great bulk of those infections, manufacture molecules of this size using about 1.3m in 2015, happen in sub-Saharan chemistry, ratherthan biology, but1,4-buta- Africa. They happen more often to women nediol is an exception. It is already made than to men: 58% ofHIV-infected people in for industry with the aid of genetically the region are female. Women between 15 modified E. coli. Genomatica’s system and 24 are infected at almost eight times churns out the enzymes involved in this the rate ofmen ofthe same age. synthesis, creating an entire cell-free meta- There are several reasons why women bolic pathway—and one in which all the contract HIV more often than men. Some sugarisdevoted to makingthe target chem- are biological: women have a higher ical, rather than a percentage of it being chance of contracting HIV from a given act creamed off to run a cell’s other biochemi- ofunprotected sexthan men do. Butcultur- cal processes. The firm has not yet put the al factors matter too, especially in poor system to commercial use, but has high countries. As in other aspects of society, it hopes forit. is often men who call the shots in the bed- GreenLight Biosciences, a firm in Med- room. Even if a woman wants a sexual ford, Massachusetts, proposes to use its partner to use a condom, she may struggle own cell-free system, also based on E. coli, to convince him to do so. to produce industrial quantitiesofan undi- On May 3rd, a charity called the Inter- Ringing the changes 66 Science and technology The Economist May 6th 2017

Pollutants Conservation Fatal attraction Big is beautiful

Tourists really do seem to help to preserve wild animals HICH countries have the best tion index composed ofthree elements. The missing linkbetween airpollution wildlife-conservation records? That The first was, forevery relevant species, and heart disease may have been found W was the question posed by a group of the fraction ofthe country it inhabited. HY air pollution causes lung disease biologists led by Peter Lindsey ofthe The second was the percentage ofmega- Wis obvious. Why it also causes heart University ofPretoria, in South Africa. fauna habitat which had legal protection. disease is, though, a conundrum. One sug- Their conclusions, just published in The third was the percentage ofGDP a gestion is that tiny particles ofsoot migrate Global Ecology and Conservation and country devoted to conservation. through the lungs, into the bloodstream summarised in the map below, suggest Besides the safari belt, America, Cana- and thence to the walls of blood vessels, one determinant is the economic value da and Scandinavia, excluding Denmark, where they cause damage. Until now, this ofwildlife to a country, with nature- scored well (though, as the researchers has remained hypothetical. But a study tourism destinations in east, central and note, “the financial contribution to preda- published in ACS Nano, by Mark Miller of southern Africa, led by Botswana, dom- tor conservation in Norway probably Edinburgh University, suggests not only inating the list ofhigh performers. includes funds aimed at keeping predator that it is correct, but also that those parti- The team looked at megafauna, de- population as low as possible, which cles are specifically carried to parts of fined as terrestrial mammals weighing hardly qualifies as conservation”). So did blood vessels where they will do maxi- 15kg or more as adults, ifcarnivores, or Bhutan, which came fourth. Low scorers mum damage—the arterial plaques associ- 100kg or more, ifherbivores or omni- included Britain and China (both densely ated with cardiovascular disease. vores. For each of152 countries examined, populated, so lacking natural habitat), One reason the particle-migration hy- they constructed a megafauna-conserva- and, more surprisingly, Australia. pothesis has proved hard to confirm is that it is tricky to follow soot around the body. Soot is made of carbon, and that element, The numbers of the beasts when finely divided and at low concentra- Megafauna conservation index* tion, is difficult to isolate in biological ma- Norway terial. Instead, Dr Miller and his colleagues Denmark used soot-sized particles of gold for their experiments. These are easyto detect, even at low concentrations, by means such as Bhutan mass spectroscopy and Raman spectroscopy. Also, gold is chemically inert and therefore unlikely to be toxic. This is important, because some of Dr Miller’s ex- perimental animals were people. The first group of these human guinea Botswana pigs were 14 healthy men. Each was asked to exercise fortwo hours while inhaling air containing particles of gold. Dr Miller and his colleagues then monitored the volun- Protection of megafauna No data teers’ blood and urine for 24 hours, and Worse Better again three months later. Source: Global Ecology and Conservation *Based on the 2012 IUCN Red List, 2013 GDP and 2016 data on protected areas As expected, none of the volunteers showed signs of gold in their blood or urine before theirexposure to the particles. action to a wound) but threatening when were at risk of suffering a stroke. This par- All but two, however, did so 24 hours later. chronic (as in the inflammation associated ticular trio were asked to breathe in the This proved that tiny particles can indeed with arterial plaques). Dr Miller and his gold dust 24 hours before they underwent migrate from the lungs into the circulation. colleagues thus wondered if their particles surgery intended to cleartheirplaques and Moreover, at the three-month recheck, the were being carried specifically to those unblocktheir constricted vessels. Dr Miller concentrations of gold in their bodily flu- plaques by macrophages. and his colleagues were thus able to exam- ids remained more or less unchanged. Preliminary experiments on mice ge- ine the extracted plaques for the presence Gold, once breathed in, is retained. netically engineered to be prone to vascu- ofgold—which they found, as by now they This experiment did not, however, tell lar disease suggested they were. Dr Miller expected to, in abundance. Dr Miller where the particles were going made these animals breathe in gold parti- It remains to be determined whether and how they (or, rather, their carbon cles twice a week for five weeks. Then, a particles of carbon behave in the same equivalents) can cause heart problems. He day after the final exposure, he killed and way as particles of gold. But, given car- and his colleagues suspected that the cul- dissected them. He found that a given bon’s high chemical reactivity compared prits were immune-system cells called mouse’s diseased arteries contained five with gold’s, it is a fairbet that macrophages macrophages. These exist to engulf foreign times as much gold as its healthy ones did. will be even more likelyto notice and swal- bodies, such as bacteria, and would thus To see if something similar is true in lowit. So, though DrMiller’sworkdoesnot be quite capable of swallowing small par- people, the team then recruited three fur- point towards a better treatment for pollu- ticles of carbon or gold. They are also in- ther volunteers. In this case, those signed tion-induced cardiovascular disease, it volved in inflammatory responses, which up were the opposite ofhealthy. They were does add weight to the arguments of those are helpful when short-lived (such as in re- patientswith plaque-clogged arteries, who who worry about levels ofair pollution. 7 Books and arts The Economist May 6th 2017 67

Also in this section 68 Islamist violence 69 The revival of Western cities 69 How to collect art 70 Alain Mabanckou’s ﬁction 70 Tribeca ﬁlm festival

For daily analysis and debate on books, arts and culture, visit Economist.com/culture

Theatre regret is all the keener. As a director, Sir Nicholas likes to begin All the world’s a stage with the text, but he soon encourages his actors to get up on their feet and physically inhabit a play. “I don’t like a rehearsal studio to feel like a seminar room,” he insists. The fifth artistic director of the NT, he was the fourth to study English at Cambridge Nicholas Hytnerbreathed new life into the National Theatre in London, and University (only Olivier managed with- refashioned it into a world-class institution out). Forthe most part, he wears his consid- HEATRE directors are often judged to erable intelligence lightly. His descriptions Balancing Acts: Behind the Scenes at the be gushing and self-important. Sir of developing new work with Alan Ben- T National Theatre. By Nicholas Hytner. Nicholas Hytner is an exception. “Balanc- nett, Sir David Hare, Sir Tom Stoppard and Jonathan Cape; 314 pages; £20. To be ing Acts”, his memoir of his tenure as Mike Leigh are incisive. Of Mr Bennett, he published in America by Knopf in November artistic director of the National Theatre says: “I sometimes thinkthat he deliberate- (NT) between 2003 and 2015, is a master- ly buries clues in his first drafts. The direc- class in creative leadership. It is as instruc- “His Dark Materials” and “The Curious In- tor has to sniff out the good stuff, like a pig tive about the challenges and compro- cidentofthe Dogin the Night-Time”. Annu- hunting truffles.” Only when recalling his mises of running a large organisation as it al turnover in 2015 had climbed to £117m, of terrific 2013 production of “Othello” does isaboutthe processofputtingon plays that which just15% came from the public purse. he lose his balance, indulging in a longish change lives. Sir Nicholas’s prose is crisp and con- episode of over-satisfied literary criticism The NT was founded in 1963 under Lau- vincing, like his direction. He is candid which, even if it did arise from an actor’s rence Olivier. When Sir Nicholas took over about his limitations. (The NT produced observation in the rehearsal room, feels the organisation, which comprises three few turkeys on his watch, but he answers out ofplace. Elsewhere the memoir is leav- auditoriums of differing sizes, it had a rep- for the ones it did.) Writing with unsenti- ened with waspish wit: Sir Nicholas’s ear utation for unadventurous repertoire, pric- mental honesty, he ascribes to his many for comedy is as sharply attuned for the ey tickets and an ageing and conservative collaborators on the South Bank a bril- page as the stage. audience. Public funding accounted for liance that he denies himself. If much of Britain sits somewhere in the middle of 40% ofits annual income of£37m ($47.8m). the success of the NT under his director- the spectrum when it comes to public sub- He was determined to discern what a na- ship “is the result of grand larceny”, he sidies for the arts. If it does not have the tional theatre should be and for whom; he writes, “I stole from the best.” Hispraise for generous private philanthropic culture had no interest in keeping it for an exclu- actors is precise and specific. He offers in- and tax incentives that exist in America, it sive club. Among other considerations— sights into the technique and working is not continental Europe either, where balancing old plays and new, serious and practice of many cast members. He ad- theatres are often still financed almost irreverent, plays that look out as well as mires Ralph Fiennes for his “speed of entirely by governments and can get away in—he wanted to expand audiences and thought, his vocal penetration and his abil- with scorn for public taste. Along with the give everyone a “really good time”. ity to work through the text to an underly- Royal Shakespeare Company and the Roy- By the time he left, Sir Nicholas had ing emotional truth”. Dame Helen Mirren al Opera House, the NT is one of Britain’s overseen the staging of 100 plays and knows “when to allow laughter as an es- most prominent centrally funded arts established many of the features that peo- cape valve”. The result is an evocation of organisations. Sir Nicholas, who has also ple now take for granted, among them backstage life that is as engrossing as it is been successful on Broadway and on film, cheap tickets and live-cinema relays. He entertaining. If you happened to see the never loses sight of the responsibility that had also helped to produce some of mod- productions in question, they are vividly comes with accepting several million ern theatre’s triumphs: “WarHorse”, “One resurrected by the revelations of how they pounds ofpublic cash. Man, Two Guvnors”, “The History Boys”, were put together. If you missed them, the Nor does he let people forget what 1 68 Books and arts The Economist May 6th 2017

2 becomes possible with it. “If the enemies of arts subsidy had seen two actors walking in a circle with cardboard boxes on their heads pretending to be horses at the taxpayer’s expense,” he recalls of an early workshop of “War Horse”, “they would have had a field day.” It is inconceivable that a commercial producer would have taken a risk on “War Horse” and the pup- pets that were used to bring to life Michael Morpurgo’s children’s classic about the firstworld war. Butafterthe playopened in 2007 it went on to run in the West End for seven years and then in New York, Toronto, Berlin, Amsterdam, Beijing, Cape Town and beyond, and also toured across America and Australia. It won five Tony awards and, by the time it closed in Lon- don last year, had played to more than 7m people. It also returned more than £30m to The bombs that felled Spain’s government the NT’s coffers. A new British tour begins in the should such a nihilistic message be so ap- co-ordinate—the Spanish authorities autumn, but Sir Nicholas will probably be pealing? Mr Roy’s answer is that IS has suc- cracked down, arresting most of the cell’s too busy to catch it. His next project will be cessfully marketed itself to the children of members. But a remnant evaded capture, a 900-seat playhouse, along the Thames modern youth culture. Its recruits know lit- vowing revenge. The second component from the NT, which opens in October and tle about Islam; they like alcohol, rap mu- comprised Moroccan and Algerian jiha- will be the first big new commercial the- sic, martial arts and violent American dists who had taken refuge in Spain. The atre to open in London since the 1930s. Its films. Many have spent time in prison. In third was a gang of young Moroccans liv- inaugural season looks irresistible. At 60, their eyes, IS is heroic and glamorous. ing in and around Madrid and engaged in he appears to be merely getting started. However, Mr Roy rejects the notion that drugs and petty crime—just the sort of de- “What’s past”, as Antonio says in Shake- these young people are simply brain- linquents depicted by Mr Roy. Once radi- speare’s “The Tempest”, “is prologue.” 7 washed. “They do not become radicals be- calised (often in jail), they used their cause they have misread the texts or be- underworld contacts to obtain the dyna- cause they have been manipulated,” he mite used in the bombings. In the bizarre Islamic state declares. “They are radicals because they world of jihadism, an act of holy war was choose to be.” He believes IS’s strongest financed with drug money. Children of jihad weapon is people’s fearofit; in reality it is a The aftermath was as important as the waning force, whose dystopian project is attacks themselves. Spain was deeply po- doomed to fail. All this is a stimulating larised. In elections three days later, voters counterblast to much conventional think- threw out the government, accusing it of ing. But is Mr Roy right to dismiss the rele- lying to them about the bombings. The in- vance of the West’s actions—its policy on coming government withdrew Spanish Jihad and Death: The Global Appeal of Palestine and its disastrous intervention in troops from Iraq, giving the jihadists a pro- Islamic State. By Olivier Roy. Translated by Iraq in 2003—as a radicalising factor? The paganda coup, even though, as Mr Rei- Cynthia Schoch. Hurst; 130 pages; £15.99. To issue is manipulated and distorted in the nares makes clear, the attacks had been be published in America by OUP in July jihadists’ propaganda. But it is central to planned long before Iraq was invaded. Al-Qaeda’s Revenge: The 2004 Madrid Train their narrative, and, if groundless, why Spain’s wounds, he says, have taken more Bombings. By Fernando Reinares. Woodrow should it have such potency? than a decade to heal. Wilson Centre Press/Columbia University Press; In “Al-Qaeda’s Revenge” Fernando Rei- The general reader will find “Al- 231 pages; $50 and £42 nares, a Spanish specialist on terrorism, Qaeda’s Revenge” heavy going. But it is an shifts the focus from ideology to organisa- impressive piece of research, the implica- FTER every act of Islamist violence, tion, examining the links between individ- tions ofwhich stretch well beyond a single Ainvestigators are faced with two mad- ual jihadists and wider networks. On event more than a dozen years ago. It is dening questions. What turns some Mus- March 11th 2004, when ten bombswentoff chilling to discover the extent to which the lims into terrorists? And do they act alone on commuter trains in Madrid, killing 191 bombers’ connections criss-crossed Eu- or as part of a wider network? More than people, the Spanish government was rope—from London (where Abu Qatada, a 20 years after the jihadist phenomenon quick to blame ETA, the Basque separatist radical imam, served as their godfather) to first appeared, the answers remain elusive. group. But this idea was soon discredited, Milan (where one of their senior figures Olivier Roy’s new book, “Jihad and and since then experts have tended to took refuge) to Molenbeek (the Brussels Death”, asks why young European Mus- regard the bombings as the work of local district which achieved infamy after the lims are drawn to Islamic State (IS) and Islamists with little or no connection to Paris attacks ofNovember 2015). But the ex- why the West is so terrified of it. Mr Roy, a outside groups. act role of al-Qaeda’s external leaders is French authority on Islamism, regards IS as Now MrReinares has dispelled this the- harder to establish. They certainly had the monstrously inflated product of its ory, too. Subjecting the attack to minute links to the Madrid group, as Mr Reinares own propaganda; it is, he says, first and forensic scrutiny, he identifies a coalition amply demonstrates. Less clear is whether, foremost a death cult. Despite Islam’s in- of three distinct elements. Al-Qaeda had as he argues, they actually ordered and su- junction against suicide, it persuades Mus- established a cell in Spain a full decade ear- pervised the operation. The vagueness of lims to fight and die under the banner of a lier. After the attacks on the twin towers in that little word, “links”, is likely to perplex chimerical Islamic caliphate. Why, then, New York—which the Madrid cell helped investigators fora long time to come. 7 The Economist May 6th 2017 Books and arts 69

The revival of cities than providing shelter; it had to reflect its seems to be afflicted by what Mr Koolhaas owners’ identity and make them money. calls the “Dubai icon paradox”: “When Back from the As cities began to compete more aggres- everything looks so wildly different, it sively for investment and employment, ends up looking all the same.” brink they were forced to distinguish them- He has a sharper vision of where archi- selves. This, according to Mr Dyckhoff, was tecture is heading. He notes the challenge what lay behind the wave ofgrandiosity in ofworking with heavy, permanent materi- public architecture, his age of spectacle. als in a digital age defined by speed and The Age of Spectacle: Adventures in But it is also here that his argument loses agility. In response, architecture has gone Architecture and the 21st-Century City. By focus. He marvels at the Guggenheim on “a crash diet, losing kilograms, count- Tom Dyckhoff. Random House; 378 pages; £20 Museum in Bilbao designed by Frank less tonnes”; interiors have been stripped N1977 the state of New York hired Milton Gehry, puzzles at Zaha Hadid’s MAXXI gal- back in order to cater to every potential IGlaser, a graphic designer, to help lery in Rome and is alienated by Rem Kool- occupant; a building’s skin has become improve its image. Undoubtedly, it needed haas’s CCTV building in Beijing. It is not more important than ever. In Munich Mr a lift. Wealth had been escaping New York clear if he believes that the movement to Dyckhoff visits Jacques Herzog and Pierre City for years. Manufacturing had fled to create eye-popping buildings in public de Meuron’s football stadium. Clad in cheaper sites and crime had filled the gaps. spaces is a good thing, or if it depends on partly translucent plastic blisters embed- Mr Glaser’s simple INYlogo marked the the architectural merit of each construc- ded with strips of light, “the entire façade beginningofan economicand social reviv- tion. He is wearied by contemporary glow[s] like a low-resolution TV set, bear- al so dramatic that Ed Koch, the mayor, was bridges that insist on the function of cross- ing the team colours.” Here he sees a build- able to declare: “We’re not catering to the ing becoming an experience. “No bridge ing that transcends its weightiness to com- poor any more…there are four other bor- can sit there quietly, keeping itself to itself. municate to its users, and finally finds a oughs they can live in. They don’t have to It has to be interesting.” Mr Dyckhoff thrill in the experience. 7 live in Manhattan.” “The Age of Spectacle” by Tom Dyck- Collecting hoff, a British architecture critic, is the story of the transformation of cities from the dense manufacturing hubs of the early Calling all art lovers 20th century to the consumerist meccas they are today. He begins with Jane Jacobs and Ruth Glass, two social scientists who spotted that middle-class youngsters in Art Collecting Today: Market Insights for 1960sLondon were refusing to move to the Everyone Passionate about Art. By Doug suburbs as their parents had done. This Woodham. Allworth Press; 193 pages; $24.99 was driven both by the “stifling conform- ism” of life on the outskirts, and, according F IT’S Tuesday, this must be Belgium. If to Raphael Samuel, a historian, by a love of Iit’s the second weekofMay it must be “values inherent to the dense, historic city, Venice. At least, it is every other year. On whether its aesthetic form, its layers of his- May13th the artworld descends on the tory, its ability to somehow encourage Adriatic port forthe biennial global neighbourliness or its sheer excitement.” artfest that turns the city into a parallel Mr Dyckhoff notes the casual manner in universe ofthe imagination. Among the which Ms Glass defines this behaviour as hundreds ofthousands ofvisitors will be “gentrification”, identifying a movement Venice Biennale first-timers, all of them which he believes became “the most sig- keen to learn how to tell their Hirst from nificant force in Western cities in the sec- their Hodgkin, the Giardini from the ond halfofthe 20th century”. Giudecca. Gentrification might have proved a These neophytes could do worse than passing fad, had it not been for favourable take along “ArtCollecting Today” by government policy and economic trends. Doug Woodham, Christie’s formerpresi- The authoridentifies the role ofrestoration dent ofthe Americas, an economist who grants and right-to-buy schemes in says he likes to collect “drawings by cementing the movement. But he is also artists associated with minimalism, good at deconstructing the myths that sur- conceptualism and land art”. The latest in why the markets for artists such as Ame- round gentrification: “Nothing did the job Allworth’s series on the nuts and bolts of deo Modigliani, Yayoi Kusama and René better of simultaneously rooting you, dis- the art world, Mr Woodham’s bookis an Magritte are all very different; and why tinguishing you, emancipating you, invest- elegant, amusing and perceptive guide to art-buyers can fall foul ofunintended ing your money in something safe, but a market that is (often) long on hocus- consequences, including spats over risky enough to stimulate dinner-party pocus and short on transparency. cultural property, endangered species conversation—and displaying it for all the Divided into eight clearly written and taxes. world to see—than buying a shabby little chapters, it explores how the art market Art is more than just another asset warehouse or townhouse downtown, and really works. Mr Woodham explains class, which is why some ofthe book’s getting the builders in.” From this point on- why buying art is easy and selling much finest anecdotes appear in special sec- wards, housing was given a wider purpose harder; why Christie’s and Sotheby’s, the tions called “Avoiding the Scoundrel’s main auction houses in the West, are Corner—parts1, 2 and 3”. Mr Woodham Clarification: Further to our review last week of “Option more similar than they think; why there uses real examples to show exactly how B” by Sheryl Sandberg (“To have and to hold”), we would is such a curious relationship between collectors have let themselves be done like to make clear that her husband, Dave Goldberg, suffered from a heart arrhythmia while on an exercise auction houses and private galleries; over in the past. Don’t be a dupe. machine, and died suddenly. 70 Books and arts The Economist May 6th 2017

Fiction from Congo Quentin Tarantino, who appeared onstage with the cast after the screening. Africa’s Samuel Tribeca is by far the youngest of the leading festivals. Established in 2002, after Beckett the September11th 2001attacks, it lacks the venerable history of Venice, Cannes, Ber- lin or Edinburgh, and it cannot supplant Sundance as a mecca for indie film-mak- Black Moses. By Alain Mabanckou. ers. But Tribeca has two things going for it: Translated by Helen Stevenson. Serpent’s its co-founder, Robert De Niro (a star of Tail; 199 pages; £12.99. To be published in “Godfather II”), and its site, New York City America by the New Press in June (also a star ofthe Godfather films). OW wonderfully typical of an Alain This year Andrew Essex, the chief exec- HMabanckou character to fall sick be- utive of Tribeca Enterprises, was deter- cause ofa syntactic error. After the few ups mined to make use of both those strengths and many downs of life as a friendless or- to put on events that created a sense of phan in the Republic of Congo, Little Pep- FOMO (“fear of missing out”). Without per, the narrator of “Black Moses”, sinks headline-grabbing appeal, festivals risk into delirium. Taken to a Paris-trained psy- losing their lustre, if not their relevance. chologist, he insists: “I’m ill because of my This year at Sundance Al Gore, the former adverbials.” Adrift from “time, place or vice-president, took to the stage to speak manner”, he cannot “complete the action after the premiere of “An Inconvenient Se- expressed by the verb”. quel: Truth to Power”, a documentary on Language and literature bestow both his environmental advocacy. Later this blessings and curses on the picaresque month the Cannes film festival will feature heroes in Mr Mabanckou’s novels of his a special screeningofthe firsttwo episodes central African homeland. The formal of the new season of “Twin Peaks”, a TV elegance of French opens doors of oppor- Tribeca film festival show made by David Lynch. (There are tunity. Its weight can also tether these risks as well to overpromising; on April grandchildren of empire to feelings of in- An offering you 28th the Fyre festival, a supposedly high- adequacy, snared “like a snail caught in the end concert event in the Bahamas, failed spiral of its own slime”. “Black Moses” ex- can’t refuse spectacularly, leaving angry audience hibits all the charm, warmth and verbal members desperate to evacuate the island brio that have won the author of “Broken almost as soon as they had arrived.) Glass” and “African Psycho” so many ad- NEW YORK By comparison with its more venerated mirers—and the informal title of Africa’s peers, Tribeca’s slate of events was impres- The godfatherofall film festivals Samuel Beckett. Helen Stevenson, his sive (if not necessarily its films; Sundance translator, again shakes Mr Mabanckou’s HE lights go down, and the familiar and Cannesstill getmore entriesthat cause cocktail of sophistication and simplicity Torchestral score begins playingat Radio a buzz). In all more than 150,000 people at- into richly idiomatic English. City Music Hall. A crowd of more than tended the festival’s offerings, an increase Yet this lost boy’s journey through the 5,000 people cheers wildly, many furtively over last year; nearly 4m more watched port of Pointe-Noire, the author’s birth- taking out their smartphones to snap along on FacebookLive. place, also counts the cost ofgrowing up in photographs of the title sequence. The Half of that online audience tuned in a post-colonial society that was still half- atmosphere is electric, the audience nois- for the finale on April 29th, the Godfather convinced that “anything white was supe- ily saluting famous moments they have panel. Mr De Niro and Mr Coppola were rior, everything black was doomed”. Little seen many times before. Outside, it may be joined on stage by Al Pacino, Robert Pepper—nicknamed for how he used chili a warm spring Saturday afternoon in New Duvall, James Caan, Talia Shire and Diane powderto take hisrevenge on bullies in the York. But inside, “The Godfather” and “The Keaton. For 80 minutes, they traded stories orphanage—goes in search of a family, and Godfather II” are playing on a giant screen, about the films. Some were familiar to a voice. Papa Moupelo, the kindly priest and afterwards the director, Francis Ford fans—like Marlon Brando’s “screen test” at who first called him Moses, is ousted by a Coppola, and the surviving stars of the his home, when he transformed himself careerist director (“an emperor with no films will appear together on stage. This is into Don Corleone in front of Mr Coppola, clothes”), who grovels to a new Marxist re- too big to miss. or the decision by Mr Coppola to add a gime in Brazzaville, the capital. The re- In the age of Netflix and the iPhone, scene showing Luca Brasi, the hit man, gime’s political jargon, gleefully parodied, when any form of entertainment or dis- nervouslyrehearsinghislinesbefore meet- imposes another phoney lingo. traction is a notification away, it is no mean ing the Godfather, since the man playing Life outside, as a streetwise scamp feat to hold people’s attention. The Tribeca the role, Lenny Montana, had trouble with around the docks, proves even harsher. film festival managed it a few times this his lines (he was an actual mob tough, not Only “Madam Fiat 500”, the brothel-keep- year, including two sell-out events at Radio an actor). Others were affecting, like Mr er, and her girls offer the lad a “little adop- City Music Hall: the Godfather event and Pacino reminiscing about walking every tive family”. As his suffering deepens, the opening night, when Aretha Franklin day from the Upper West Side down to nothing can unshackle “the chains of ill led a concert to mark the premiere of “The Greenwich Village, thinking about how to fortune”. The glamour of grammar en- Soundtrack of Our Lives”, a documentary play the part of Michael Corleone. Other dures, though. A fellow-inmate tries to about Clive Davis, a legendary music pro- stories felt like fun insider gossip, as when move a comma in Little Pepper’s testimo- ducer. On April 28th, the evening before Mr Pacino and Ms Keaton got “so loaded” ny, “which I wanted to keep just where it the Godfather event, more than 2,500 peo- one night, and an anxious Mr Pacino was”. For the wretched of the Earth, the ple filled the Beacon theatre on the Upper announced: “It’s over. This is the worst film language of power can be the most potent West Side to watch “Reservoir Dogs” on a ever made.” The audience lapped it up, sorcery ofall. 7 35mm print owned by the film’s director, laughing approvingly. 7 Courses 71

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Economic data % change on year ago Budget Interest Industrial Current-account balance balance rates, % Economic Gross domestic data product production Consumer prices Unemployment latest 12 % of GDP % of GDP 10-year gov't Currency units, per $ † † † † Statisticslatest on 42qtr* economies, 2017 latest plus latest 2017 rate, % months, $bn 2017 2017 bonds, latest May 3rd year ago United Statesour monthly+1.9 Q1 poll+0.7 of+2.2 forecasters +1.5 Mar +2.4 Mar +2.3 4.5 Mar -481.2 Q4 -2.7 -3.5 2.31 - - China +6.9 Q1 +5.3 +6.6 +7.6 Mar +0.9 Mar +2.3 4.0 Q1§ +196.4 Q4 +1.7 -4.0 3.39§§ 6.89 6.47 Japan +1.6 Q4 +1.2 +1.3 +3.3 Mar +0.2 Mar +0.7 2.8 Mar +187.8 Feb +3.5 -5.3 0.02 112 106 Britain +2.1 Q1 +1.2 +1.6 +2.8 Feb +2.3 Mar +2.7 4.7 Jan†† -115.7 Q4 -3.3 -4.0 1.10 0.78 0.69 Canada +1.9 Q4 +2.6 +2.1 +3.9 Feb +1.6 Mar +1.9 6.7 Mar -51.2 Q4 -2.9 -2.7 1.55 1.37 1.27 Euro area +1.7 Q1 +1.8 +1.7 +1.2 Feb +1.9 Apr +1.6 9.5 Mar +398.9 Feb +3.1 -1.5 0.34 0.92 0.87 Austria +1.7 Q4 +2.0 +1.6 +3.1 Feb +2.0 Mar +1.8 5.9 Mar +6.6 Q4 +2.4 -1.1 0.61 0.92 0.87 Belgium +1.5 Q1 +2.1 +1.4 +4.0 Feb +2.3 Apr +2.1 6.9 Mar -2.0 Dec +1.0 -2.7 0.73 0.92 0.87 France +0.8 Q1 +1.0 +1.3 -0.7 Feb +1.2 Apr +1.3 10.1 Mar -28.5 Feb -1.1 -3.1 0.82 0.92 0.87 Germany +1.8 Q4 +1.7 +1.6 +2.3 Feb +2.0 Apr +1.8 3.9 Mar‡ +287.3 Feb +8.1 +0.5 0.34 0.92 0.87 Greece -1.4 Q4 -4.8 +1.2 +10.7 Feb +1.7 Mar +1.0 23.5 Jan -0.7 Feb -0.8 -4.2 6.01 0.92 0.87 Italy +1.0 Q4 +0.7 +0.8 +1.9 Feb +1.8 Apr +1.4 11.7 Mar +46.8 Feb +2.4 -2.3 2.27 0.92 0.87 Netherlands +2.5 Q4 +2.5 +2.2 +5.1 Feb +1.1 Mar +1.2 6.1 Mar +64.8 Q4 +8.7 +0.6 0.55 0.92 0.87 Spain +3.0 Q1 +3.2 +2.6 -1.7 Feb +2.6 Apr +2.1 18.2 Mar +25.9 Feb +1.6 -3.3 1.65 0.92 0.87 Czech Republic +2.0 Q4 +1.6 +2.5 +2.7 Feb +2.6 Mar +2.4 3.4 Mar‡ +2.3 Q4 +0.7 -0.5 0.82 24.5 23.5 Denmark +2.3 Q4 +1.9 +1.4 +2.3 Feb +1.0 Mar +1.4 4.3 Mar +24.9 Feb +7.1 -1.2 0.61 6.82 6.46 Norway +1.8 Q4 +4.5 +1.7 -4.0 Feb +2.4 Mar +2.4 4.3 Feb‡‡ +18.1 Q4 +4.9 +2.7 1.64 8.62 8.09 Poland +3.3 Q4 +6.6 +3.2 +11.1 Mar +2.0 Apr +2.0 8.1 Mar§ +0.4 Feb -1.2 -3.2 3.47 3.85 3.82 Russia +0.3 Q4 na +1.4 +0.8 Mar +4.2 Mar +4.3 5.4 Mar§ +34.9 Q1 +2.8 -2.8 8.13 57.3 66.7 Sweden +2.3 Q4 +4.2 +2.6 +4.1 Feb +1.3 Mar +1.7 6.8 Mar§ +23.7 Q4 +4.8 -0.4 0.60 8.82 8.02 Switzerland +0.6 Q4 +0.3 +1.3 -1.2 Q4 +0.6 Mar +0.5 3.3 Mar +70.6 Q4 +9.9 +0.2 -0.10 0.99 0.95 Turkey +3.5 Q4 na +2.8 -1.7 Feb +11.9 Apr +10.0 13.0 Jan§ -33.7 Feb -4.4 -2.0 10.42 3.53 2.85 Australia +2.4 Q4 +4.4 +2.7 +1.0 Q4 +2.1 Q1 +2.2 5.9 Mar -33.1 Q4 -1.3 -1.8 2.59 1.34 1.33 Hong Kong +3.1 Q4 +4.8 +2.8 -0.9 Q4 +0.5 Mar +1.6 3.2 Mar‡‡ +14.5 Q4 +6.5 +1.5 1.50 7.78 7.76 India +7.0 Q4 +5.1 +7.1 -1.2 Feb +3.8 Mar +4.6 5.0 2015 -11.9 Q4 -1.1 -3.2 6.96 64.1 66.5 Indonesia +4.9 Q4 na +5.2 +3.3 Feb +4.2 Apr +4.2 5.6 Q3§ -16.3 Q4 -1.9 -2.2 7.00 13,306 13,195 Malaysia +4.5 Q4 na +4.3 +4.7 Feb +5.1 Mar +4.0 3.5 Feb§ +6.0 Q4 +2.8 -3.1 3.97 4.32 3.93 Pakistan +5.7 2016** na +5.4 +8.1 Feb +4.8 Apr +4.6 5.9 2015 -7.1 Q1 -2.6 -4.8 8.98††† 105 105 Philippines +6.6 Q4 +7.0 +6.6 +10.8 Feb +3.4 Mar +3.3 6.6 Q1§ +0.6 Dec +0.3 -2.4 5.15 50.0 46.9 Singapore +2.9 Q4 -1.9 +2.1 +10.2 Mar +0.7 Mar +1.3 2.3 Q1 +56.7 Q4 +19.2 -1.0 2.12 1.40 1.35 South Korea +2.8 Q1 +3.6 +2.6 +3.0 Mar +1.9 Apr +1.8 4.2 Mar§ +92.9 Mar +6.3 -1.0 2.24 1,131 1,140 Taiwan +2.6 Q1 +2.9 +1.8 +3.2 Mar +0.2 Mar +2.1 3.8 Mar +70.9 Q4 +12.1 -0.7 1.13 30.0 32.2 Thailand +3.0 Q4 +1.7 +3.5 -0.5 Mar +0.4 Apr +1.3 1.3 Mar§ +42.3 Q1 +11.7 -2.3 2.55 34.5 34.9 Argentina -2.1 Q4 +1.9 +2.7 -2.5 Oct — *** — 7.6 Q4§ -15.0 Q4 -2.6 -4.2 na 15.3 14.2 Brazil -2.5 Q4 -3.4 +0.7 +1.1 Mar +4.6 Mar +4.3 13.7 Mar§ -20.6 Mar -1.4 -7.7 9.89 3.15 3.57 Chile +0.5 Q4 -1.4 +1.8 -8.3 Mar +2.7 Mar +3.0 6.6 Mar§‡‡ -3.6 Q4 -1.3 -2.2 3.89 669 669 Colombia +1.6 Q4 +4.0 +2.2 -3.2 Feb +4.7 Mar +4.1 9.7 Mar§ -12.5 Q4 -3.5 -3.1 6.21 2,928 2,895 Mexico +2.7 Q1 +2.4 +1.7 -1.7 Feb +5.4 Mar +5.2 3.5 Mar -27.9 Q4 -2.5 -2.5 7.19 18.8 17.6 Venezuela -8.8 Q4~ -6.2 -5.5 na na +562 7.3 Apr§ -17.8 Q3~ -1.5 -19.6 10.43 9.99 9.99 Egypt +3.4 Q3 na +3.9 +23.9 Feb +30.9 Mar +19.2 12.4 Q4§ -20.1 Q4 -6.2 -10.8 na 18.1 8.88 Israel +4.3 Q4 +6.3 +3.4 +0.3 Feb +0.9 Mar +1.0 4.2 Mar +12.4 Q4 +4.4 -2.6 2.23 3.61 3.78 Saudi Arabia +1.4 2016 na +0.8 na -0.4 Mar +2.0 5.6 2015 -24.9 Q4 -2.1 -7.4 3.68 3.75 3.75 South Africa +0.7 Q4 -0.3 +1.1 -2.4 Feb +6.1 Mar +5.8 26.5 Q4§ -9.5 Q4 -3.4 -3.1 8.67 13.3 14.6 Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. ~2014 **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. ***Official number not yet proved to be reliable; The State Street PriceStats Inflation Index, Jan 29.53%; year ago 30.79% †††Dollar-denominated bonds. The Economist May 6th 2017 Economic and ﬁnancial indicators 73

Markets % change on The Economist poll of forecasters, May averages (previous month’s, if changed) Dec 30th 2016 Real GDP, % change Consumer prices Current account Index one in local in $ Low/high range average % change % of GDP week Markets May 3rd currency terms 2017 2018 2017 2018 2017 2018 2017 2018 United States (DJIA) 20,957.9 -0.1 +6.0 +6.0 Australia 2.2 / 2.9 2.5 / 3.2 2.7 3.0 (2.9) 2.2 (2.1) 2.3 -1.3 -2.2 (-1.7) China (SSEA) 3,283.2 -0.2 +1.0 +1.9 Brazil 0.1 / 1.3 1.5 / 4.0 0.7 (0.6) 2.5 (2.4) 4.3 (4.5) 4.5 (4.6) -1.4 (-1.6) -1.8 (-2.0) Japan (Nikkei 225) 19,445.7 +0.8 +1.7 +5.6 Britain 1.1 / 2.0 0.7 / 1.7 1.6 (1.7) 1.2 2.7 2.8 (2.7) -3.3 (-4.0) -2.8 (-3.4) Britain (FTSE 100) 7,234.5 -0.7 +1.3 +5.7 Canada 1.5 / 2.8 1.5 / 2.7 2.1 (2.0) 2.0 1.9 1.9 -2.9 (-2.7) -2.6 (-2.3) Canada (S&P TSX) 15,543.1 -0.7 +1.7 -0.5 China 6.2 / 6.8 4.5 / 7.0 6.6 (6.5) 6.2 2.3 2.4 1.7 1.7 Euro area (FTSE Euro 100) 1,217.0 +0.2 +9.4 +13.2 France 1.2 / 1.6 1.1 / 1.8 1.3 1.5 1.3 1.3 -1.1 (-1.0) -1.1 (-1.0) Euro area (EURO STOXX 50) 3,586.3 +0.2 +9.0 +12.7 Germany 1.1 / 2.1 1.3 / 2.0 1.6 1.6 1.8 1.7 (1.6) 8.1 (8.2) 7.8 (7.9) Austria (ATX) 2,997.4 +0.8 +14.5 +18.4 India 6.3 / 7.6 6.5 / 8.0 7.1 (7.2) 7.5 4.6 4.8 (4.9) -1.1 (-1.0) -1.4 Belgium (Bel 20) 3,932.9 +1.1 +9.1 +12.8 Italy 0.6 / 1.0 0.6 / 1.1 0.8 (0.9) 0.8 (0.9) 1.4 1.2 2.4 (2.5) 2.1 (2.3) France (CAC 40) 5,301.0 +0.2 +9.0 +12.7 Japan 0.9 / 1.6 0.6 / 1.7 1.3 (1.2) 1.1 (1.0) 0.7 1.0 3.5 3.7 (3.6) Germany (DAX)* 12,527.8 +0.4 +9.1 +12.8 Greece (Athex Comp) 748.6 +6.0 +16.3 +20.3 Russia 0.8 / 2.6 0.9 / 3.0 1.4 1.8 (1.7) 4.3 (4.5) 4.2 (4.4) 2.8 2.6 (2.5) Italy (FTSE/MIB) 20,759.3 -0.4 +7.9 +11.6 Spain 2.4 / 2.9 1.6 / 2.5 2.6 2.1 (2.2) 2.1 (2.2) 1.5 1.6 (1.5) 1.6 (1.5) Netherlands (AEX) 525.2 +0.1 +8.7 +12.4 United States 1.9 / 2.4 1.8 / 3.6 2.2 (2.3) 2.5 2.3 (2.4) 2.3 -2.7 (-2.8) -2.8 (-3.0) Spain (Madrid SE) 1,090.8 +0.7 +15.6 +19.6 Euro area 1.3 / 2.1 1.2 / 1.9 1.7 (1.6) 1.5 1.6 1.5 (1.4) 3.1 (3.0) 3.0 (2.9) Czech Republic (PX) 996.3 -0.2 +8.1 +12.8 Sources: Bank of America, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Decision Economics, Deutsche Bank, Denmark (OMXCB) 887.7 +2.8 +11.2 +14.9 EIU, Goldman Sachs, HSBC Securities, ING, Itaú BBA, JPMorgan, Morgan Stanley, Nomura, RBS, Royal Bank of Canada, Schroders, Scotiabank, Société Générale, Standard Chartered, UBS. For more countries, go to: Economist.com/markets Hungary (BUX) 32,077.7 -3.4 +0.2 +2.5 Norway (OSEAX) 771.1 +0.6 +0.8 +0.6 Poland (WIG) 62,066.7 +0.6 +19.9 +29.9 Other markets The Economist commodity-price index Russia (RTS, $ terms) 1,096.4 -2.0 -4.9 -4.9 2005=100 Othermarkets % change on % change on Sweden (OMXS30) 1,634.0 +0.8 +7.7 +10.9 Dec 30th 2016 The Economist commodity-priceone index one Switzerland (SMI) 8,891.9 +0.7 +8.2 +10.9 Index one in local in $ Apr 25th May 2nd* month year Turkey (BIST) 93,862.7 -0.7 +20.1 +19.6 May 3rd week currency terms Dollar Index Australia (All Ord.) 5,919.9 -0.3 +3.5 +6.5 United States (S&P 500) 2,388.1 nil +6.7 +6.7 All Items 140.8 142.7 +0.1 +4.5 Hong Kong (Hang Seng) 24,696.1 +0.5 +12.3 +11.8 United States (NAScomp) 6,072.6 +0.8 +12.8 +12.8 Food 149.4 152.1 +0.9 -3.8 India (BSE) 29,894.8 -0.8 +12.3 +18.8 China (SSEB, $ terms) 333.8 -0.4 -2.3 -2.3 Indonesia (JSX) 5,647.4 -1.4 +6.6 +8.0 Japan (Topix) 1,550.3 +0.8 +2.1 +6.0 Industrials Malaysia (KLSE) 1,772.5 +0.2 +8.0 +12.1 Europe (FTSEurofirst 300) 1,528.2 +0.1 +7.0 +10.6 All 131.8 132.9 -0.8 +16.3 Pakistan (KSE) 48,605.1 -2.5 +1.7 +1.3 World, dev'd (MSCI) 1,883.1 nil +7.5 +7.5 Nfa† 137.0 138.3 -0.8 +13.7 Singapore (STI) 3,237.8 +2.0 +12.4 +16.4 Emerging markets (MSCI) 985.7 +0.3 +14.3 +14.3 Metals 129.5 130.5 -0.8 +17.6 South Korea (KOSPI) 2,219.7 +0.5 +9.5 +17.0 World, all (MSCI) 456.6 +0.1 +8.2 +8.2 Sterling Index Taiwan (TWI) 9,955.3 +1.0 +7.6 +15.4 World bonds (Citigroup) 907.8 +0.1 +2.7 +2.7 All items 199.6 200.8 -3.6 +17.6 Thailand (SET) 1,564.1 -0.2 +1.4 +5.3 EMBI+ (JPMorgan) 820.6 +0.7 +6.3 +6.3 Argentina (MERV) 21,212.0 +0.9 +25.4 +30.1 Hedge funds (HFRX) 1,230.2§ +0.1 +2.2 +2.2 Euro Index Brazil (BVSP) 66,093.8 +1.9 +9.7 +13.3 Volatility, US (VIX) 10.7 +10.9 +14.0 (levels) All items 160.2 162.7 -2.1 +10.4 Chile (IGPA) 24,349.3 nil +17.4 +17.6 CDSs, Eur (iTRAXX)† 65.2 -2.8 -9.6 -6.5 Gold Colombia (IGBC) 10,202.5 -0.1 +1.0 +3.5 CDSs, N Am (CDX)† 62.7 -0.9 -7.4 -7.4 $ per oz 1,268.1 1,254.6 -0.2 -2.4 Mexico (IPC) 49,100.0 -0.9 +7.6 +17.7 Carbon trading (EU ETS) € 4.4 -3.5 -33.1 -30.8 West Texas Intermediate Venezuela (IBC) 58,342.8 -4.8 +84.0 na Sources: IHS Markit; Thomson Reuters. *Total return index. $ per barrel 49.2 47.7 -6.6 +8.8 Egypt (EGX 30) 12,603.6 -0.5 +2.1 +2.2 †Credit-default-swap spreads, basis points. §May 2nd. Israel (TA-100) 1,271.8 -0.2 -0.4 +6.1 Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO; Indicators for more countries and additional ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Saudi Arabia (Tadawul) 6,967.7 +0.7 -3.7 -3.7 Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional South Africa (JSE AS) 53,586.6 -0.2 +5.8 +8.4 series, go to: Economist.com/indicators †Non-food agriculturals. 74 Obituary Albert Freedman The Economist May 6th 2017

answers, Mr Freedman insisted—he “assumed he knew how to play it” to catch Mr Stempel up and, with luck, out. The rest was advice on performance, which any director would give. It was like Shakespeare, he told the literary Mr Van Doren: just entertainment. He instructed him to pause more, look worried, “forget” things and return to them. If he felt queasy about this, though he had no reason to, he should consider what good publicity he was giving to teachers like himself. Mr Stempel, who was also coached by a co- producer, acted the unlikeable robot, dab- binghissweatybrowin the torrid isolation booth. Mr Van Doren’s role was to “make it natural” and “make it real”: more real. The result was great television. For that, MrFreedman would notapologise. “Twen- ty One” made millions ofviewers at home very happy. Contestants won a lot ofmoney. The show changed their lives. It inspired middle America to buy television sets as never before. The shame in his view wasthatitssuccess, and MrVan Doren’sce- lebrity, also ended the years of innocence. Television became a phenomenon so powerful that, in his own now-loaded That’s entertainment words, it was out of control. The press at- tacked it as a hated rival, and the authorities started snooping; so though his shows had broken no laws (there being none in force), he was hauled before a grand jury, lied to it, recanted, and narrowly escaped a Albert Freedman, producerofthe most famous rigged quiz show ofthe 1950s, died perjury rap. His TV career was over, after on April 11th, aged 95 that. He moved to London to work for HERE was no doubt who sponsored want to switch. But with his background in European Penthouse and assorted sex pub- T“Twenty One”, the NBC quiz show variety TV, on the Pinky Lee and Groucho lications: another area, he said defensively, Albert Freedman took over in 1956. The Marx shows, and with his “eighth sense” full ofmisplaced guilt and ignorance. word “Geritol” appeared above the stage for good contestants, he knew what was and on the lectern of the host, Jack Barry. needed. And what he needed appeared. In Acts of generosity Barry gave “America’s number-one tonic” a fluke of history, a touch of fate or God, he The moment he revisited most wistfully a plug at the start, and in the intermission met Charles Van Doren at a party in the Vil- was meeting Mr Van Doren at that party. If up popped the salesman like a conjurer lage. Mr Van Doren was not only charming he hadn’t gone—and liked him, and sug- from the curtains, cradling that familiar and bright but turned out to be electrifying gested that he could pep up his pitiful sala- brown bottle and promising that ifyou felt on screen. The show, once he joined it, ry by a couple of thousand by coming on weak and run-down, Geritol would vita- piled on viewers, so that 50m were watch- the show—he would never have got into minise yourtired blood in a matterof days. ing on the night, December 5th 1956, when trouble. For that act of generosity, worth So when the boss of Geritol com- Mr Stempel was at last kicked off. $129,000 by the end, Mr Van Doren should plained that “Twenty One” too was tired, The fact that Mr Van Doren had been have thanked him. In fact, all humanity and threatened to take it off the air, Mr coached was something only he and Mr should have thanked him for entertaining Freedman was recruited to save it. Briefly Freedman knew for sure. The contestant— them. Instead, to gather by the film “Quiz put, he had to get rid of Herb Stempel, an once the beans had been spilled, in 1958, by Show” of1994, hiscontrol of“TwentyOne” expressionless, awkward nerd from Mr Stempel and others—bitterly regretted had started a moral rot that led inexorably Queenswho, with hisextraordinarymem- his behaviour. Mr Freedman didn’t. Con- to Vietnam, Watergate, and liesand corrup- ory, just kept on winning, and find some- trol—the words “fixed” or “rigged” never tion on a national scale. one more sympathetic to replace him; crossed his lips—was common in quiz He resented that, almost as much as he someone exciting. That was the purpose of shows, which were hugely popular then. loathed the invasion of television by Hol- this shiny new medium, television, after CBS’s “The $64,000 Question” was con- lywood glitz, violence and wild unreality. all. It offered spectacle, showmanship, illu- trolled, as was “Tic-Tac-Dough”. Producers Looking back to the quiz shows with their sion, escape; it carried, like those Geritol and viewers both thought, “So what?” You simple format, basic staging and ordinary commercials and the ever-smiling blondes needed drama, suspense. You had to spike people in sober discussion of books or his- who decorated the sets, a whiff of the fair- the rivalry between the contestants with tory, he felt that a better, more straightfor- ground. And Mr Freedman, at 34, having more ties, more dropping behind and pull- ward era had disappeared, and mourned said yes, was on his way to contriving the ing ahead. Simply to have two dummies in it. Surely all he had done was give “Twenty biggest American scandal ofthe 1950s. earphones proving they knew science was One” a dose ofGeritol (“You’ll feel better in Content as he was producing his own unbelieveably boring. By giving Mr Van seven days, or your money back!”) as the quiz show, “Tic-Tac-Dough”, he did not Doren the questions in advance—not the sponsor recommended? 7 FINANCE DISRUPTED: ASIA

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