https://t.me/finera

How the rich Corbyn-proof their wealth Venezuela: Guaidó v Maduro Fusion power from the private sector North Korea by night

MAY 4TH–10TH 2019 Tech’s raid on the banks Financial Era Advisory Group Contents The Economist May 4th 2019 7

The world this week Britain 10 A round-up of political 25 The rich Corbyn-proof and business news their wealth 26 A mole hunt gets its man Leaders 28 New carbon targets 13 Financial services 28 The end of fracking? Tech’s raid on the banks 29 Funding social care 14 Venezuela How to get rid of Maduro 29 Brexit paralysis 30 Food and globalisation 14 India’s election Orange peril 31 Bagehot The followership problem 15 Crisis in the Sahel The West’s forgotten war Europe On the cover 16 Drug resistance Netflix and pills 32 Spain’s general election The smartphone is disrupting 33 Merkel’s long goodbye banking at last: leader, page 13. Letters 34 Russian spy whales Young people and their On Notre Dame, South mobiles are shaking up the 18 34 Poland’s “LGBT Africa, diplomacy, private industry, see our special dictatorship” education, YIMBYs report, after page 44. Facebook 35 Charlemagne Abolishing has a plan to overpower its France’s most elite college opponents, page 60 Briefing 21 YouTube United States • How the rich Corbyn-proof Now playing, everywhere their wealth The top 1% are 36 Fringe ideas in foreign preparing for the day when policy Labour takes power, page 25 Special report: Banking 37 Richard Lugar A bank in your pocket 38 Congressional subpoenas • Venezuela: Guaidó v Maduro After page 44 An attempt to depose the 38 All the president’s banks dictator appears to have failed. 39 Conviction-review units It is time to try again: leader, Trouble at the NRA page 14. What went wrong, 39 page 42 40 Chicago and Liberia 41 Lexington No sex please, • Fusion power from the we’re millennials private sector After decades spent within the purview of governments, fusion energy is The Americas attracting the interest of 42 Venezuela’s failed uprising business, page 75. A government- 43 Grammar schools in Chile funded reactor may yet supply 44 Feminist funk (music) in fusion—in 2045, page 77 Brazil • North Korea by night Satellite data shed new light on the Kim empire’s opaque economy, page 85 Bagehot Britain suffers Middle East & Africa not just from a lack of 45 The West’s war in Africa leadership, but also from 46 Militias in the Sahel a poisoned followership, page 31 47 Clerics against clerical rule 48 Eurovision in Israel

1 Contents continues overleaf https://t.me/finera

8 Contents The Economist May 4th 2019

Asia Finance & economics 49 Elections in India 66 The boom in compliance 50 Banyan Kim Jong Un’s 68 Buttonwood Berkshire options Hathaway 51 Democracy in Australia 69 Turkey’s central bank 51 Indonesia’s capital in flux 69 No sign of recession in 52 The Solomon Islands America 53 Japan and Shinto 70 A cryptocurrency crackdown China 70 FX trading goes digital 54 A century of dissent 71 America’s best young economist 55 Space-themed tourism Free exchange Parenting 56 Chaguan Hollywood’s 72 rivals in China like a dismal scientist

Science & technology 75 Has fusion’s time come? International 77 Fusion’s biggest reactor 57 The rise in meat-eating

Books & arts 78 When contemporary art Business went global 60 Facebook’s WeChat 80 Millennials in China moment 80 A geriatric crime caper 61 American tech earnings 81 Ethics and evolution 61 Trouble in Deutschland AG 62 Bartleby Struggling with Economic & financial indicators style 84 Statistics on 42 economies 63 Fast times at PSA Group Ailing antibiotics-makers 63 Graphic detail A billion-yuan bet 64 85 Lights at night reveal a deep recession in North Korea 65 Schumpeter Revving up Unilever Obituary 86 Lyra McKee, uncoverer of Northern Ireland’s secrets

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Baghdadi notes his group’s population of 30m, is congest- been drawn by the state legisla- defeat at Baghuz, its last ed and polluted. Although a ture to favour Republicans and stronghold in Syria, but vows new location has not yet been ordered that they be redrawn in to fight on. chosen, Palangkaraya, a city of time for the 2020 election. 260,000 in the Indonesian part Several courts have ruled that The White House said it was of Borneo, is being considered. partisan gerrymandering can working towards designating be unconstitutional. the Muslim Brotherhood as a Riots engulfed Honiara, the terrorist organisation. The capital of the Solomon decision would bring sanc- Islands, after parliament That elusive winning line tions on what was once the picked Manasseh Sogavare to Spain’s ruling Socialist Party world’s pre-eminent Islamist serve a fourth non-consecutive won the most seats in a general Juan Guaidó, who is recognised movement. Egypt’s president, term as prime minister. An election, though it is still well as interim president of Abdel-Fattah al-Sisi, who opponent had secured a court short of a majority. Pedro Venezuela by many democ- toppled a Brotherhood-led order delaying the vote, but the Sánchez, the prime minister, racies, appeared outside an government in 2013, reportedly governor-general ignored it. may try to continue in office as air-force base in Caracas and requested the move. head of a minority govern- urged the armed forces to ment, or cobble together a overthrow the socialist dic- The imf said Iran’s gdp would Done, but not dusted coalition. There are obstacles tatorship of Nicolás Maduro. contract by 6% this year, William Barr, America’s to reaching a deal with either Leopoldo López, an opposition caused in large part by Ameri- attorney-general, was grilled in Podemos or Ciudadanos, two figure kept under house arrest can sanctions on Iranian oil Congress over his handling of possible partners. Vox, a by the regime, appeared with exports. Annual inflation the publication of the Mueller nationalist party, entered Mr Guaidó after being freed by could reach 37%, the fund report. Mr Barr issued a sum- parliament for the first time. security personnel. America warned. The crisis is fuelling mary of the report before its reiterated its support for Mr popular discontent with the full publication, but two letters The president of France, Guaidó. Backed by Russia and government and ruling clerics. emerged this week from Robert Emmanuel Macron, made new Cuba, Mr Maduro said he had Mueller criticising that sum- promises after long talks with defeated an attempted coup. The African Union extended a mary for its lack of context. voters. They included tax cuts, Amid more protests, Mr deadline imposed on coup tax exemptions for bonuses Guaidó called for strikes to leaders in Sudan to hand pow- A gunman opened fire at a and a commitment to close the topple the government. er to a civilian administration. synagogue near San Diego, elite civil-service college, ena. The military junta was initially killing a woman. The 19-year- The gilets jaunes protesters Unions staged a national strike given15 days. This has been old suspect had posted an seemed unmollified. More in Argentina to protest against extended by another 60 days. anti-Semitic diatribe online than 200 arrests were made in the austerity policies of Maur- shortly beforehand. The Anti- Paris during riots on May Day. icio Macri, the president. Mr Defamation League recorded a Macri’s popularity has taken a The limits to friendship big increase in the harassment Julian Assange was sentenced dive of late, and he is up for China dropped its objection to of, and assaults on, Jews in by a British court to 50 weeks re-election in October. Cristina a proposal in the un to list America last year. in prison for jumping bail in Fernández de Kirchner, a Masood Azhar, the leader of a 2012, when he took refuge in spendthrift populist ex-presi- Pakistani jihadist group, as a the Ecuadorean embassy in dent, could unseat him, a terrorist. This allowed the un London. Mr Assange still faces prospect that scares investors. to declare sanctions on Mr extradition to America, where Azhar, including the freezing he has been charged in relation China sentenced a Canadian of his assets and a travel ban. to the leak of a trove of classi- citizen to death for drug-traf- His group, Jaish-e-Muham- fied documents by WikiLeaks, ficking. It is the second time mad, claimed responsibility which he founded. this year a Canadian has for a suicide-bombing that received a death sentence in killed 40 soldiers in Indian- Gavin Williamson was sacked China. Some observers think administered Kashmir in as Britain’s defence secretary this is in reprisal for Canada February. China had previously for leaking information from a arresting the finance director opposed such sanctions, national-security meeting that of Huawei, a Chinese tele- apparently in deference to Joe Biden said he would seek had discussed allowing coms-equipment company. Pakistan, a close ally. the Democratic nomination for Huawei to build 5g networks. president of the United States. Theresa May, the prime min- Akihito, the emperor of Japan, He went to Pennsylvania, ister, dismissed him after a Reports of my death… abdicated. He was succeeded where he touted his working- speedy inquiry. Mr Williamson Abu Bakr al-Baghdadi, the by his son, Naruhito. Akihito class credentials and played denies the allegation and leader of Islamic State, won acclaim during his 30-year down the kind of identity complains of a “kangaroo appeared in a video for the first reign for apologising for politics that his rivals espouse. court”. The new defence secre- time since proclaiming the Japan’s misdeeds in the second The 76-year-old former vice- tary is Penny Mordaunt, who creation of a caliphate across world war. president is leading the polls at wrongly claimed during the parts of Iraq and Syria five this early stage. Brexit campaign that as an eu years ago. (He has been heard The Indonesian government member Britain would have no in audio recordings since declared its intention to move A court ruled that Michigan’s veto if Turkey tried to join the then.) In the new video Mr its capital. Jakarta, with a congressional districts had European Union. 1 https://t.me/finera The world this week Business The Economist May 4th 2019 11

Apple’s latest quarterly earn- range. The startup is totemic of survived an attempt to split his approval from lawyers before ings were viewed positively on the market’s current taste for dual role as chief executive and tweeting about Tesla’s fi- balance. Revenue from the plant-based food companies. chairman, though 34% of nances, potential deals, pro- iPhone continued to slow, shareholders voted for the duction or any venture the falling by17% in the first three Occidental appeared to have proposal. Meanwhile, Ameri- company is considering. Mr months of the year compared scuppered Chevron’s deal to can Airlines cut its profit Musk may also want to think with the same quarter in 2018; take over Anadarko, when the forecast for the year, in part twice before poking fun at the the device accounts for an latter said that it now consid- because of the grounding of sec on Twitter. ever-smaller share of Apple’s ers Occidental’s offer to be the 737 max, which has caused revenues. And overall sales superior. Occidental has val- it to cancel hundreds of flights. from China, where Apple faces ued the transaction at $57bn; It’s a marvel stiff competition, were down its proposal includes a $10bn The euro zone’s economy grew Marvel films by a fifth. But compensating capital injection from Warren by 1.5% in the first quarter at an Cumulative box-office receipts* for the bad news the company’s Buffett. Anadarko has huge annual rate, a much improved $bn, 2019 prices revenues from services—apps, shale assets in America’s Perm- showing on the last three 25 music-streaming and the ian Basin, making it an attrac- months of 2018. That was still 20 like—grew by16%. tive partner for energy firms. some way behind America, 15 10 which chalked up a growth rate 5 By contrast, Alphabet’s earn- In an unprecedented show of of 3.2% in the quarter. 0 ings were interpreted negative- no confidence in the manage- 1 5 10 15 20 22 ly. Although revenues at Goo- ment of a German company, The John Bates Clark Medal, Film in MCU series† gle’s parent company grew by 56% of shareholders in Bayer awarded annually by the Source: Box *To April 30th 2019 Office Mojo †Marvel Cinematic Universe 17%, that was the slowest pace voted against a measure sup- American Economic Associa- in three years. Booking its porting its business conduct. tion to an economist under the “Endgame” is a fitting title to latest antitrust fine from the Investors are peeved at the age of 40, was won by Emi an all-dominating film fran- eu caused net income to collapse of the German con- Nakamura. A professor at chise. The 22nd film in Mar- plunge, to $6.7bn. The com- glomerate’s share price follow- Berkeley, Ms Nakamura won vel’s Cinematic Universe took a pany also announced that Eric ing costly litigation related to a the award in part for her “dis- record-breaking $357m in its Schmidt, who was Google’s glyphosate-based weedkiller tinctive approach” to a opening weekend in America. boss for ten years until 2011, is made by Monsanto, which “painstaking analysis of data”. Less than a week into its run, it to step down from the board. Bayer took over last year. The is already the fourth-most vote has no legal force, but it is A judge approved a new agree- successful in the brand. The the first time that a big German ment between the Securities first, “Iron Man”, took a com- “The future is private” company has been censured by and Exchange Commission paratively puny $680m world- Stung by accusations of ethical a majority of its shareholders. and Elon Musk that restricts wide during 2008. Including shortcomings, Facebook held what he can say on Twitter “Avengers: Endgame”, total a conference to discuss its new Boeing’s annual general meet- about Tesla. Mr Musk has revenue for the series is ex- “privacy-focused vision”. It ing was also a testy affair. fallen foul of the regulator for pected to top $22bn. With box also rolled out a programme Following the grounding of the tweeting what it says are mis- office like that, it is not surpris- whereby research academics 737 max aircraft after two fatal leading statements. Under the ing that plenty more Marvel will gain access to user data. crashes, Dennis Muilenburg new deal, Mr Musk has to seek films are in the pipeline. Facebook stressed that privacy was being protected, and that it had consulted privacy experts. If anyone had private doubts about its new-found devotion, it is also testing a “differential privacy” application. All this comes as Facebook negotiates with regulators about beefing up its oversight of privacy, which reportedly may mean it appoints a privacy tsar.

Uber offered an initial price range for its forthcoming ipo of between $44 and $50 a share. That is a bit lower than had been expected, and would value the ride-hailing firm at up to $92bn when it lists (it may alter the price range).

In another highly anticipated stockmarket flotation, Beyond Meat priced its ipo at $25 a share, the top end of its price Financial Era Advisory Group Leaders Leaders 13 Tech’s raid on the banks

Digital disruption is coming to banking at last ver the past two decades people across the world have seen vested $37bn in upstart financial firms last year. Odigital services transform the economy and their lives. Tax- The benefits of technological change are likely to be vast. is, films, novels, noodles, doctors and dog-walkers can all be Costs should tumble as branches are shut, creaking mainframe summoned with a tap of a screen. Giant firms in retailing, car- systems retired and bureaucracy culled. If the world’s listed making and the media have been humbled by new competitors. banks chopped expenses by a third, the saving would be worth Yet one industry has withstood the tumult: banking. In rich $80 a year for every person on Earth. In 2000 the Netherlands countries it is perfectly normal to queue in branches, correspond had more bank branches per head than America; it now has just a with your bank by post and deposit cheques stamped with the third as many. Rotten service will improve—it is easier to get logo of firms founded in the 19th century. money to a friend using a chat app than it is to ask your bank to Yet, as our special report this week explains, technology is at transfer cash. The system will get better at its vital job of allocat- last shaking up banking. In Asia payment apps are a way of life ing capital. Richer data will allow banks to take risks that cur- for over 1bn users. In the West mobile banking is reaching critical rently baffle underwriters. Fraud should be easier to spot. Lower mass—49% of Americans bank on their phones—and tech giants costs and the democratising effect of social media will give more are muscling in. Apple unveiled a credit card with Goldman people better access to finance. And more firms with good ideas Sachs on March 25th. Facebook is proposing a payments service should be able to get loans faster, boosting growth. to let users buy tickets and settle bills (see Business section). Yet change also poses risks. Because the financial system is The implications are profound because banks are not ordin- embedded in the economy, innovation tends to create turbu- ary firms. It is one thing for Blockbuster Video to be wiped out by lence. The credit card’s arrival in 1950 revolutionised shopping a technological shift, but quite another if the victim is Bank of but also sparked America’s consumer-debt culture. Securitisa- America. It is not just that banks have over $100trn of assets glob- tion lubricated capital markets in the 1980s but fuelled the sub- ally. Using the difficult trick of “maturity transformation” (turn- prime crisis. In addition, it is unclear who will win today’s battle. ing deposits that you can demand back at any time into long- One dystopian scenario is that power becomes more concentrat- term loans) they enable savers to defer consumption and invest- ed, as a few big banks learn to exploit data as ruthlessly as social- ment and borrowers to bring them forward. media firms do. Imagine a crossbreed of Face- Banks are so vital that the economy reels when book and Wells Fargo that predicts and manipu- they stumble, as the crisis of 2008-09 showed. lates how customers behave and is able to use Bankers and politicians may thus be tempted proprietary economic data to squeeze rivals. to resist technological change. But that would Another dystopia involves fragmentation be wrong because its benefits—a leaner, more and destabilisation. Banks could lose deposi- user-friendly and more open financial system— tors to untested neobanks, creating a mismatch easily outweigh the risks. between their assets and liabilities that could Banking is late to the smartphone age be- lead to a credit crunch. If bank customers trans- cause entrepreneurs have been put off by regulations. And, since act via tech or payment platforms, banks could end up with huge the financial crisis, Western banks have been preoccupied with balance-sheets but without a direct connection to their clients. If repairing their balance-sheets and old-fashioned cost-cutting. they thus became unprofitable, they could be broken up, with Late is better than never, however. Several new business models the job of financing mortgages and absorbing short-term savings are emerging. In Asia payment apps are bundled with e-com- left entirely to capital markets, which are volatile. merce, chat and ride-hailing services offered by firms such as To tap the benefits of technology safely, governments should Alibaba and Tencent in China and Grab in South-East Asia. These give consumers control over their data, protecting privacy and networks link to banks but are vying to control the customer re- preventing firms hoarding information. Innovation-friendly lationship. In America and Europe big banks are still more or less regulation would help; in 2017 the industry faced a regulatory in control and are rushing to offer digital products—JPMorgan alert every nine minutes (see Finance section). And govern- Chase can open a deposit account in five minutes. But threats ments should keep the system’s safety buffers at today’s overall loom. Mobile-only “neobanks” that do not bear the cost of size (global banks hold $7trn of core capital). If new entrants are branches are nibbling at customer bases. Payments firms like properly capitalised, central banks could extend to them the PayPal work with Western banks but are expected to capture a lender-of-last-resort facilities that provide shelter in a storm. greater share of profits. Lucrative niches like foreign exchange Banking’s dirty secret is that it is backward, inefficient and and asset management are being harried by new entrants. hidebound. Banks have formidable lobbying power, however. The pace of change will accelerate. Younger people no longer Wary of change, customers, politicians and unions complain stay with the same bank as their parents—15% of British 18- to 23- when branches are closed and jobs cut—witness the recent col- year-olds use a neobank. Tech firms that people trust, such as lapse of a German mega-merger that depended on both. Regula- Apple and Amazon, are natural candidates to grow big financial tors love dealing with a few big firms. The thing is that global arms. The biggest four American banks are spending a total of growth is sluggish and productivity gains are hard to come by. A over $25bn a year on perfecting better customer applications and smartphone revolution in finance offers one of the best ways to learning to mine data more cleverly. Venture-capital firms in- boost the economy and spread the benefits. 7 https://t.me/finera

14 Leaders The Economist May 4th 2019

Venezuela How to get rid of Maduro

An attempt to depose the dictator appears to have failed. Try again pril 30th dawned promisingly in Venezuela. Juan Guaidó, duro had got wind of the plan. The plotters got cold feet. Aacknowledged as the country’s interim president by many The false start, if that’s what it was, shows the way ahead. Both democracies and millions of Venezuelans, appeared outside an Mr Guaidó and the administration of Donald Trump will need to air-force base in Caracas flanked by national guardsmen to de- induce the top brass to switch sides by making clear that there is clare that the end of the dictatorship was imminent. By his side a role for them in a democratic Venezuela. The army gave up was a leader of the opposition, Leopoldo López, who had some- power in 1958 and helped usher in civilian rule. Today’s opposi- how been freed from house arrest. His presence, and that of the tion and soldiers could co-operate in a similar fashion. Although guards, suggested that Venezuela’s security forces were ready at Mr Maduro and his closest associates need to go, Mr Guaidó last to withdraw their support for Nicolás Maduro, who has ruled should welcome less tainted leaders of the chavista regime into a his country catastrophically and brutally for the past six years. transitional government, which would relieve the humanitarian Thus began two days of rumour, intrigue and violence (see crisis while preparing for free elections. That could yet take Americas section). As The Economist went to press the regime many months. was still in charge and the generals were proclaiming their loyal- The Trump administration has lumped Venezuela in with ty to it. Mr Maduro had appeared on television to Cuba and Nicaragua in a “troika of tyranny”. It declare that the “coup-mongering adventure” seems as eager to dislodge Cuba’s 60-year-old had failed. Yet this week’s events reveal that his communist regime as it is to get rid of Mr Madu- hold on power is weaker than he claims. Mr ro. To that end it recently intensified America’s Guaidó, the United States, which supports him, embargo on the island, including by letting and the commanders of Venezuela’s security ap- American citizens sue European and Canadian paratus must work together to put an end to it. companies that do business using Cuban assets That may well have been the plan. John Bol- stolen after the revolution. ton, America’s national security adviser, said on American disdain for Cuba’s regime is justi- April 30th that senior regime officials, including the defence fied. Its hundreds of spies in Venezuela help keep Mr Maduro in minister and the commander of the presidential guard, had power. But the swipes at Cuba will tighten this bond precisely agreed to dump Mr Maduro and transfer power to Mr Guaidó. when America should be trying to prise it apart. Lawsuits against Mike Pompeo, America’s secretary of state, later insisted that Mr European firms will frustrate concerted diplomatic action Maduro had been worried enough to have a plane waiting to spir- against Venezuela. In the cause of removing Mr Maduro, Ameri- it him to Havana but was dissuaded by his Russian allies. ca should for the time being set its quarrel with Cuba to one side. How true these claims are and what went wrong is uncertain. The crucial choice lies with Venezuela’s army commanders. A letter on social media attributed to the general in charge of Mr Maduro’s misrule offers them no future. It has crushed the Venezuela’s intelligence service, who has abruptly left his job, economy, starved the people, strangled democracy and forced gave Mr Bolton’s assertion some support by saying that people more than 3m Venezuelans into exile. The hardship is bound to close to Mr Maduro were negotiating behind his back. Some worsen with new American oil sanctions this year. The generals newspaper reports say that the plan was to remove him on May must begin to act like patriots. They need to destroy the regime, 2nd but that Mr Guaidó had acted early, perhaps because Mr Ma- before the regime destroys their country. 7

India’s election Agent Orange

Under Narendra Modi, the Bharatiya Janata Party poses a risk to democracy hen the Bharatiya Janata Party (bjp) won a landslide vic- stand up to Pakistan for having abetted terrorism. In fact, send- Wtory in India’s general election in 2014, its leader, Narendra ing warplanes to bomb India’s nuclear neighbour earlier this Modi, was something of a mystery. Would his government initi- year was not so much an act of strength as recklessness that ate an economic lift-off, as businessfolk hoped, or spark a sectar- could have ended in disaster. Mr Modi’s tough-guy approach has ian conflagration, as secularists feared? In his five years as prime indeed been a disaster in the disputed state of Jammu & Kashmir, minister, Mr Modi has been neither as good for India as his where he has inflamed a separatist insurgency rather than quell- cheerleaders foretold, nor as bad as his critics, including this ing it, while at the same time alienating moderate Kashmiris by newspaper, imagined. But today the risks still outweigh the re- brutally repressing protests. wards. Indians, who are in the midst of voting in a fresh election This impetuousness disguised as decisiveness has infected (see Asia section), would be better off with a different leader. economic policymaking, too. In 2016 Mr Modi abruptly can- Mr Modi is campaigning as a strongman with the character to celled most Indian banknotes in an effort to thwart money-laun-1 Financial Era Advisory Group The Economist May 4th 2019 Leaders 15

2 dering. The plan failed, but not without causing huge disruption puppy comes under the wheel” of a car. to farmers and small businesses. He has pushed through a na- This is not just despicable, it is dangerous. India is too com- tionwide sales tax and an overhaul of the bankruptcy code, two bustible a place to be put into the hands of politicians who cam- much-needed reforms. But the economy has grown only mar- paign with flamethrowers. As it is, vigilantes often beat up or ginally faster during his tenure than it did over the previous ten lynch Muslims they suspect of harming cows, a holy animal for years, when the Congress party was in government, despite re- Hindus. Kashmiris studying in other parts of India have been set ceiving a big boost from low oil prices. Unemployment has risen, upon by angry nationalist mobs. And even if the bjp’s Muslim- breaking promises to the contrary. baiting does not ignite any more full-scale pogroms, it still Indians hear such criticisms less often because Mr Modi has leaves 175m Indians feeling like second-class citizens. cowed the press, showering bounty on flatterers while starving, Congress, the bjp’s only national rival, may be hidebound and controlling and bullying critics. He himself appears only at ma- corrupt, but at least it does not set Indians at one another’s jor events. He has also suborned respected gov- throats. It has come up with an impressive man- ernment institutions, hounding the boss of the ifesto, with thoughtful ideas about how to help central bank from office, for example, as well as the poorest Indians. Its leader, Rahul Gandhi, al- loosing tax collectors on political opponents, though a much-derided dynast, has helped mo- packing state universities with ideologues and dernise the party a little, raising its profile on so- cocking a snook at rules meant to insulate the cial media, for example. It is a worthier army from politics. recipient of Indians’ votes than the bjp. Mr Modi’s biggest fault, however, is his re- With less than a tenth of the seats in parlia- lentless stoking of Hindu-Muslim tensions. He ment, Congress will not improve its showing personally chose as chief minister of Uttar Pradesh, India’s most enough to form a government on its own. If it and its regional al- populous state, a fiery Hindu cleric who paints the election cam- lies do better than expected, they may just be able to cobble to- paign as a battle between the two faiths. Mr Modi’s number two gether a majority. But even if, as is more likely, the bjp remains in calls Muslim migrants from neighbouring Bangladesh “ter- charge, it would be preferable if it were forced to govern in co- mites”, but promises a warm welcome to Bangladeshi Hindus. alition. (The current government is technically a coalition, but One of the bjp’s candidates is on trial for helping orchestrate a since the bjp has the numbers to rule without its partners, they bombing that killed six Muslims. And Mr Modi himself has never have little influence.) The risk is that reforms get delayed yet apologised for failing to prevent the deaths of at least 1,000 peo- again—but they were not progressing quickly anyway. A degree ple, most of them Muslims, during sectarian riots in the state of of bickering and stasis would be a price worth paying to curb the Gujarat while he was chief minister there. The closest he has bjp’s excesses. At the very least, coalition partners might be able come has been to express the sort of regret you might feel “if a to bring down a truly wayward bjp government by leaving it. 7

Crisis in the Sahel The West’s forgotten war

The fight against jihadists is moving to Africa ooking somewhat dishevelled and sometimes confused, Somalia in the east to the Atlantic Ocean in the west. It is concen- Lthe leader of Islamic State (is), Abu Bakr al-Baghdadi, issued trated in some of the poorest countries on Earth, where it is fu- his first video message in five years on April 29th. His tone was elled by bad governance. Some of these states barely control mostly gloomy. His followers have been vanquished in battle. much of their own supposed territory. Many jihadist recruits His “caliphate” in Iraq and Syria lost its last bit of territory in come from ethnic minorities, such as the Fulani, who see offi- March. Yet the fanatic who popularised beheading videos also cials as alien and predatory. Many join up after being beaten or offered his followers some hope. He welcomed the recent robbed by police. Global warming, meanwhile, has withered pas- pledges of allegiance to is from jihadist groups in Mali and Bur- tures, intensifying conflict over land. kina Faso, and singled out for praise Abu Walid al-Sahrawi, the These pressures are most keenly felt in the Sahel, on the leader of Islamic State in the Greater Sahara. The front line of the southern fringe of the Sahara desert. In Mali, Burkina Faso and jihadists’ war against everyone else has moved to Africa. Niger the number of people killed by jihadists has doubled in Last year almost 10,000 people, mostly civilians, were killed each of the past two years, to more than 1,100 in 2018. In the Sahel in jihadist-related violence in Africa. That is almost as many as as a whole, some 5,000 have been killed in the past five months. were killed in conflict with jihadists in Iraq and Syria. The num- In the area around Lake Chad some 2.4m people have fled from ber of Western and allied troops battling jihadists in Africa may attacks by Boko Haram, a group that straps bombs to children. also soon surpass those fighting them elsewhere. On any given The number of jihadist groups in the Sahel has multiplied, from day America’s armed forces have about 7,000 people deployed on one in 2012 to more than ten at the last count by America’s de- the continent. France has perhaps 4,500 in the Sahel. Throw in fence department. Germany and Italy, each with almost 1,000, and allies such as The jihadists have deftly prised open pre-existing fracture Canada, Spain, Estonia and Denmark, and the number surpasses lines. The mayhem is metastasising into a broader conflict be- the 14,000 Americans in Afghanistan. tween ethnic militias, farmers and herders. In many cases jiha- The conflict is spread across a broad expanse of Africa, from dists have started a cycle of tit-for-tat killings by attacking vil-1 https://t.me/finera

16 Leaders The Economist May 4th 2019

2 lages and provoking reprisals by militias. In March a militia could work harder to curb corruption and human-rights abuses hacked, shot and burned over 170 Fulani men, women and chil- by their armies and police forces. Since economic growth would dren to death in central Mali, in apparent revenge for an attack foster stability, they should also open up to investment and im- on the army by jihadists. In Burkina Faso in January a militia prove infrastructure such as roads, ports and power. killed about 210 people in and around Yirgou, a desert village. Given the potential for African jihadism to spread attacks Sahelian governments deserve much of the blame for all this abroad, outsiders have an interest, too. America, under Donald bloodshed (see Middle East & Africa section). Several have sup- Trump, revealed plans last year to reduce its forces in Africa by ported ethnic militias, which they see as a cheap, arm’s-length 10%. That is premature. Western troops will be needed in the re- way of killing jihadists and their supporters. This tactic has back- gion for years, training and supporting local forces. Military sup- fired. The militias are so brutal and ill-disciplined that they al- port should aim to go hand in hand with democratisation and most certainly increase support for the jihadists. The conflict economic reform—rather than propping up regimes whose cor- could break apart fragile states, displacing millions of people. ruption sparked unrest in the first place. The jihadist African insurgency has too many deep-seated Like the cold war before it, the struggle against those who take causes to be put down easily or fast. All the more reason, there- up arms in pursuit of an imaginary Islamist Utopia will probably fore, to get some essential things right. Governments in the Sa- last for decades. And as in the struggle against communism, hel should start by disarming the militias. At the same time, they winning hearts and minds will be the key to victory. 7

Drug resistance Netflix and pills

A vital part of the drugs industry is broken. Take inspiration from the entertainment industry world without antibiotics is horrible to contemplate. The first is that the antibiotics business needs to offer the AThey underpin much of modern medicine and are essential prospect of decent profits. Asking people to pay more for drugs at for patients undergoing chemotherapy for cancer, organ trans- a time of public outrage over the cost of medicines, from insulin plants or common surgeries such as caesarean sections. Yet the to cystic-fibrosis treatments, is hard. But there are already moves global rise of antimicrobial resistance, exemplified by the spread in this direction. In America Medicare is paying more for some of Candida auris—the latest infection terrorising hospitals—and new antibiotics. And Britain’s notoriously tight-fisted drug- super-resistant gonorrhoea, is alarming. Resistance could kill reimbursement agency has agreed to look at how its method for 10m people a year by 2050, up from 700,000 today. This week a assessing value can be adjusted to incorporate the broader soci- un commission recommended immediate and co-ordinated ac- etal benefits of having a new antibiotic. tion to avoid a calamity whose economic cost, the World Bank The second idea is to accept some unusual new ways to gener- reckons, could rival that of the financial crisis of 2008-09. ate those higher profits, other than selling by the dose. Econo- That the pharmaceutical market does not always work well is mists, including Jim O’Neill, have recommended that “market hardly news. It has failed to develop many kinds of drugs, in- entry” prizes of $1bn or more should go to drugmakers that cluding new vaccines and treatments for diseases that mainly af- launch the most valuable new antibiotics. Split between g20 flict the poor. But when it comes to antibiotics, countries, a prize kitty even ten times as large matters are particularly bad. To prevent mi- New antibiotic approvals would be affordable—and value for money. crobes from developing resistance to them, 50 But the most promising idea is for drugs novel antibiotics tend to be reserved for use by 40 firms to change how they charge governments 30 doctors as a last line of defence and used for 20 and health insurers for antibiotics, by switching short periods. Hence volumes are meagre. That 10 to a Netflix-style subscription model. Just as would not matter if prices were high. But unlike 0 Netflix subscribers pay the same each month, new drugs for cancer or rare diseases, prices of 1930s 90s70s50s 2010-18 whether they binge-watch boxsets all day or antibiotics are kept low in many countries, cre- watch nothing at all, so health-care providers ating little incentive for drug companies to develop new ones. As would pay a flat rate for access to an antibiotic, regardless of the a result, investors avoid new antibiotic firms and are fearful that volume. When the drug is new and being saved as a last line of they will run out of cash. The recent bankruptcy of Achaogen, a defence, the drugs company still gets paid. And if the antibiotic biotech firm, suggests they are right to fret (see Business sec- has to be more widely used, the price does not go up. It may tion). Big drug companies have largely bowed out of the game. sound crazy, but subscriptions are already being tried in America Governments and charities have scrambled to stimulate ac- to pay for hepatitis c drugs. Using this model for antibiotics can tivity by putting money into basic research, giving grants to square the circle of incentivising drugs companies to develop a drugs startups and taking equity stakes in them, but that has not treatment that doctors will then try to use as little as possible. been enough. Bringing a drug from the laboratory to the clinic This will not solve antibiotic resistance all on its own. Reduc- typically takes a decade and costs around $1bn. A more extreme ing the misuse of existing antibiotics, in medicine and agricul- option would be to nationalise antibiotic production, but that ture, is also necessary. And more could be done to improve san- would only cause private-sector innovation to shrivel even fur- itation and processes, in hospitals and elsewhere, to minimise ther. Instead, stimulating the development of new antibiotics the risk of infection in the first place. Fixing the pricing model is requires governments to embrace two ideas. not a silver bullet, then. But it is a vital part of the answer. 7 Financial Era Advisory Group 18 Letters The Economist May 4th 2019

him against the crooks in his ures in Libya or the Middle East sophomores in the oecd’s pisa France’s national symbol party is deeply flawed, as no should not overshadow the studies have placed America Your leader about Notre Dame mechanism exists for this. relative successes on China, below the mean of all coun- cathedral attributed the enor- The anc’s candidate lists Russia, Iran, the Sahel and tries. A measure to test college mous emotional response to prove he has already lost that Somalia. Other powers will readiness for maths in 2018 the fire to such factors as global battle. They are jam-packed always seek to divide eu revealed that 60% had failed. tourism and a uniting love of with crooks. This is the same member states in order to That is after a decade of more culture (“The human spark”, crowd that supported Jacob weaken them. So an effective school choice. More research April 20th). All true. Yet for the Zuma through eight motions voice in the world requires to explain this decline is French, Notre Dame is the of no confidence as he hanging together rather than needed. closest physical embodiment destroyed the country’s hanging apart. It requires bertrand horwitz of their deep sense of nation- institutions. South Africa is on infinite patience and endless Asheville, North Carolina hood. Their concern arises its knees after 25 years of one- ingenuity with no guarantee of directly from the sudden phys- party dominance by a patron- success; but that’s diplomacy. You cited data showing the ical threat to this unparalleled age-driven party that works nicholas westcott greater efficiency (outcome per national symbol. The response only to enrich a connected Director dollar) of private education in is above all a powerful and elite. Our democracy urgently Royal African Society India. Yet the reverse is the positive expression of national needs a strong alternative. London case in developed countries. As identity, culture and history; a A strong showing for the you noted, educational out- contrast to the destructive liberal Democratic Alliance comes are about equal in priv- “rising threat” of nationalism will make the anc more Eton mess ate and public systems in oecd that you mentioned. responsive to the country’s The arguments you presented countries, even though spend- david griffiths interests and prevent it, in favour of private education ing per student is substantially Chiddingfold, Surrey together with the socialist don’t stack up against the higher in the private sector. Economic Freedom Fighters, evidence (“A class apart”, April Efficiency and equity therefore You pondered the human from achieving the majority 13th). Studies from the oecd, imply using the tax system to instinct “to care more about a required to change the consti- unesco and the World Bank, increase spending in public building than about people”. tution to enable expropriation among others, clearly find that education, rather than encour- Let’s do a thought experiment. without compensation. As for private schools do not perform aging private expenditure. Donald Trump tweets, “I am Mr Ramaphosa’s supposed better than public schools. Moreover, public education more concerned about the fire “reform agenda”,there is little Private education also perpetu- is a means of achieving in- at Notre Dame than I am about evidence of this other than his ates disadvantage and exclu- tegration in societies with lots 1,000 black Africans.” It is easy tepid fight against corruption. sion. The eu has adopted a of migrants. Yet, in Australia at to imagine the reaction. I’m He has supported the attack on resolution stipulating that least, subsidies to private sure The Economist would be property rights and the forced member states must not use education have enabled recent first in line to condemn him investment of pension funds development aid to support migrant groups to segregate with no small hint of into chronically corrupt, commercial educational estab- their children into low-fee superciliousness. bankrupt state-owned en- lishments, because they go private schools. nishu sood terprises as well as the nation- against the grain of the eu’s In a free society, parents New York alisation of the central bank principles, aligned to the un’s must be able to choose private and of the health system. Mr goal of inclusive education. education. This does not imply I hope that, like Quasimodo, Ramaphosa was tasked with Empowered educators and the right to public subsidies. you ultimately realise that fixing Eskom in 2015; today the robust teachers’ unions make rex deighton-smith gargoyles and statues are an power utility is in a death for strong education systems, Paris inadequate substitute for true spiral and looks set to take our according to the oecd. Teach- human connection. A single economy down with it. ers and their unions are part of life is more valuable than any The Economist’s endorse- the solution. Instead of urging nimby, yimby, yiyby building. ment places it on the wrong governments to weaken un- The acronym yimby, “yes in my adam nelson side of history. ions, you should persuade backyard”, is not quite right Oakland, California john steenhuisen them to work with unions to (“Sorry, we’re full”, April 20th). Chief whip of the Democratic strengthen public education. When you look closely at the Alliance in the National david edwards backers of this movement for South Africa’s election Assembly General secretary new development and housing Your endorsement of the Cape Town Education International in the crowded Bay Area, you ruling African National Brussels find that the acronym is more Congress ahead of South accurately yiyby, “yes in your Africa’s general election was Europe’s diplomatic successes I wish you had devoted more backyard”. unconscionable (“South Afri- Charlemagne justifiably argues analysis to the American sys- george doddington ca’s best bet”, April 27th). The that a common European tem. During the gradual move Walnut Creek, California anc is a criminal syndicate foreign policy is hard to towards more “choice” in that will destroy South Africa if achieve given historic differ- education, such as charter it remains in power for another ences among member states schools and the use of vouch- Letters are welcome and should be decade. Your argument that a (April 20th). But don’t under- ers, mathematics results have addressed to the Editor at The Economist, The Adelphi Building, stronger mandate will help estimate the value of trying. declined in America when 1-11John Adam Street, London WC2N 6HT President Cyril Ramaphosa Without the effort to achieve a ranked with other countries or Email: [email protected] push through a reform agenda common view, divergences in time-series tests. The More letters are available at: by somehow strengthening would be all the greater. Fail- performance of high-school Economist.com/letters https://t.me/finera Briefing YouTube The Economist May 4th 2019 21

source of news and information as well as Now playing, everywhere entertainment (see chart 1on next page). Ms Wojcicki is confident that she can sort out policing YouTube. “I actually think I can solve it or at least I think I can provide a blueprint about how to address these is- sues that no one else has figured out.” Thus far such confidence is difficult to credit. SAN BRUNO But how YouTube chooses to moderate its Can the world’s biggest video-sharing site police itself? content, and how governments compel it usan wojcicki, the ceo of YouTube, re- copies of the video continued to be accessi- to do so, will affect not only the world’s Sceived the first message about the mas- ble using generic keyword searches. New most popular video service. It will also help sacre in New Zealand at around 8pm. As- versions were being uploaded more quick- shape the acceptable contours of free saults on two mosques in Christchurch had ly than they could be identified and taken speech online, and the lives of the people begun minutes earlier. The shooter had down. Finally, at 6am, Ms Wojcicki decided who produce, consume or are otherwise af- live-streamed the killings on Facebook and to remove all videos flagged as suspect, fected by digital content. the footage from the social-media site was without waiting for a human review—a being shared on YouTube as the killer had first for YouTube. Hours later, the site also Press play clearly hoped. Ms Wojcicki checked in with blocked users from filtering searches by From its inception in 2005, YouTube has her team. Executives and software engi- new uploads, another first. “We don’t want delivered a new kind of entertainment to neers were looking for different versions of to be the place where people are finding people almost everywhere: the rest of hu- the video so that machine-learning pro- that,” says Ms Wojcicki. manity (and their pets). User-generated grams could be trained to hunt for them. The company is not alone in its interest videos, uploadable and viewable by all, Thousands of human reviewers were in policing what people upload to it. An in- made it possible for anyone to find an audi- scouring through videos that had been creasing number of governments and reg- ence online. Since then YouTube has be- automatically tagged, sorting news reports ulators around the world think social-me- come the free television service for much and the like from the offending footage. dia firms must change their ways. of the world (like Facebook and Twitter, it is The world’s largest video platform—owned Facebook takes most of the flak but You- blocked in China). More than 2bn people by Google, the world’s most powerful Tube’s problems are particularly tricky be- now visit the site at least once a month. It search engine—was mobilised to cleanse cause videos are difficult to monitor at accounts for 11% of the world’s bandwidth itself of the horrific clip. such scale—500 hours of new ones are on the internet, second only to Netflix, It failed. Before she went to bed at 1am uploaded every minute. Children and teens with its much higher-resolution videos, Ms Wojcicki was still able to find the video consume it in their masses. And its videos according to Sandvine, a research firm (see (she chose not to watch it). In the morning are increasingly viewed as an important chart 2). The volume of entertainment, 1 Financial Era Advisory Group 22 Briefing YouTube The Economist May 4th 2019

posted a video at the end of 2017 of a dead whatever subject they happen upon—a 1 Watch and learn body he found in a “suicide forest” in Ja- “rabbit hole” that can lead those curious United States, adults who say whether pan. In early 2017 PewDiePie, who had 53m about a global tragedy into conspiracy the- YouTube is important for: subscribers (then the most of any channel), ories or rants by white nationalists. A se- 2018, % polled* was reported to have made anti-Semitic nior executive said in 2017 that recommen- Very Somewhat Not very Not at all references in his videos. PewDiePie, whose dations drive 70% of the site’s viewing. 0 20 40 60 80 100 real name is Felix Kjellberg, apologised; The site’s engagement-driven model in Working out how YouTube dropped him from a lucrative ad- turn rewards those who provide more out- to do things they haven’t before vertiser programme, but he was allowed to rageous content. Users lap it up with gusto, remain on the site. Later in 2017 he used a training the algorithms to serve more of it, Passing the time racial slur about black people and apolo- and so on. In April a story on Bloomberg, a gised again. On April 28th he posted a video news service, alleged that some executives Deciding whether asking fans to stop spreading a “Subscribe discouraged taking into account such risks to buy a particular product to PewDiePie” meme, which was refer- in the pursuit of a billion hours of user time Understanding enced by the shooter in Christchurch. He a day—a goal set in 2012 which Ms Wojcicki what is happening has now amassed 95m subscribers. embraced, after she became ceo in 2014, as in the world Politicians at first paid only passing at- a “north star” for the company and which it Source: Pew Research Centre *May 29th-June 11th 2018 tention to much of this. After the presiden- achieved in 2016. The site’s engineers have tial election in America in 2016 public ire tweaked the algorithm, based in part on 2 education, information and dross on offer was mostly directed at Facebook over fake user surveys, to account for “satisfaction” is hard to fathom. It would take 100,000 news and breaches of privacy, as well as en- in watch time. But the goal remains the years to watch it all at a single sitting. abling hate groups. That allowed YouTube’s same—to keep people on the site as long as Every day tens of millions of fans, many missteps to go by without serious reper- possible and maximise profits. of them children, tune in to watch their fa- cussions for the firm. “Thank God for Face- vourite stars, who have built huge follow- book” became a popular expression in the Ad infinitum ings on YouTube. They dispense silliness, company’s hallways. YouTube’s immense popularity makes the confessional tales and practical tips. Gam- But since last year YouTube itself has question of how best to moderate social- ers in Europe narrate virtual conquests, come under fire for providing an outlet for media platforms more urgent, and also women in India and Saudi Arabia give hateful figures from the alt-right and for more vexing. That is partly because of the make-up tips in Hindi and Arabic, teens in promoting all sorts of conspiracy nuts with view taken in Silicon Valley, inspired by America share their anxieties, an elderly its recommendations, including flat Earth- America’s right to free speech guaranteed quilter in Missouri teaches her craft. ers and anti-vaxxers. In February paedo- by the First Amendment, that platforms For YouTube and its most successful philes were found swapping notes in the should be open to all users to express stars that has proved lucrative. The firm comments section of children’s videos, themselves freely and that acting as a cen- does not disclose its revenues, but midia pointing out parts they liked. YouTube has sor is invidious. With that as a starting Research, a consultancy, estimates them at now disabled comments on most videos point platforms have nevertheless regulat- nearly $17bn in 2018, close to half of which that feature children. On May 1st YouTube ed themselves, recognising that they went to content creators on the platform. (and Facebook) were also accused of allow- would otherwise face repercussions for not The top channels for children rake in mil- ing scenes of atrocities committed in Lib- acting responsibly. They began by setting lions of dollars a year through advertising. ya’s civil war to circulate unchecked. guidelines for what could not be posted or The most famous YouTubers—personal- As a result, criticism of YouTube has in- shared—targeted hate speech, pornogra- ities who have built huge followings of tensified. Like Facebook and Twitter, it is phy and the like—and punished violators young fans—earn millions a year as well. accused of merely reacting when specific by cutting off ads, not recommending YouTube’s stars hold sway over their problems are exposed by the media or ac- them and, as a last resort, banning them. fans. In a survey by the firm, 40% of young tivists, but not before its algorithm has As governments and regulators around subscribers said that YouTubers under- served up offending content millions of the world have started to question the plat- stood them better than their friends or times. These scandals, say detractors like forms’ power and reach, and advertisers family, and 60% said YouTubers had Guillaume Chaslot, a former Googler who have pulled back, the firms have gradually changed their lives or worldview. worked on YouTube’s algorithm, are the tightened their guidelines. But by doing so But there is a dark side to hosting over a bitter fruits of the site’s “manipulative de- they have plunged deeper into thorny de- billion hours of user-generated content sign”. An algorithm and user interface en- bates about censorship. Last year YouTube online, algorithmically sorted and recom- gineered to maximise “watch time” keeps banned certain kinds of gun-demonstra- mended to billions of viewers. A series of users on the site in part by serving them tion videos. In January the platform said it scandals suggest that YouTube is having progressively more extreme videos on would no longer recommend videos that difficulty coping with the volume and div- misinform users in harmful ways, like cer- ersity of the content it is hosting, recom- tain conspiracy theories and quack medi- 2 mending and monetising. In 2017 adverts Taking up cyber-space cal cures. It also banned videos of danger- were found running alongside violent vid- Application’s share of global internet bandwidth* ous pranks, some of which have caused eos made by Islamic State. That prompted 2018, % children to hurt themselves. On April 29th big brands to remove advertising for a 0 3 6 9 12 15 Sundar Pichai, boss of Google, declared, in while. The same year young boys and girls Netflix an earnings announcement that disap- were found in videos that appeared abusive pointed investors, that “YouTube’s top pri- or salacious and which were recommend- YouTube ority is responsibility”. He said there would ed millions of times before offending be more changes in the coming weeks. Amazon Prime channels were shut down. Governments meanwhile are taking di- Some of the site’s most famous stars PlayStation rect action to curb content that they deem have breached the boundaries of decency. Download inappropriate. On April 21st, after bomb- Logan Paul, famous for his lowbrow antics, Source: Sandvine *Downstream ings in Sri Lanka killed 250 people, its gov-1 https://t.me/finera

The Economist May 4th 2019 Briefing YouTube 23

2 ernment took the draconian step of tempo- book (see Business section). His apologies 3 rarily banning social-media sites, Modern parenting for Facebook’s breaches of trust, and his including YouTube, to stop what it called United States, parents who say they let their promises to do better, have rung hollow. “false news reports”. After the Christ- children* watch videos on YouTube Jack Dorsey, boss of Twitter, has also been church massacre, Australia passed a hastily 2018, % polled† excoriated for doing too little to control written law requiring platforms to take abusive trolls and hate speech. Regularly On occasion Never down “abhorrent violence material” and to 34 47 19 Ms Wojcicki, in contrast, strikes even do so “expeditiously”. Even in America, some critics as the “good ceo” of the social- where social media has been largely unreg- *Aged 11 or under media giants, the one with a soul. She Source: Pew Research Centre †May 29th-June 11th 2018 ulated, members of Congress are drafting sounds utterly convincing when she talks measures that would give significant pow- about trying to make YouTube a force for ers of oversight to the Federal Trade Com- netising terrorist groups. There have been good and seems more sincere than Mr mission and restrict how online platforms a couple of sequels to Adpocalypse, both re- Zuckerberg when it comes to minimising supply content to children, an area where lated to children’s content, and both first the harm her company causes. But even Mr YouTube is especially vulnerable. uncovered by outsiders. This adds to the Zuckerberg has conceded that Facebook Ms Wojcicki says she needs no persuad- impression that YouTube lacks a sense of needs more government regulation. ing to take further action against unsa- urgency in identifying its problems, and voury material. Yet YouTube does not plan responds most rapidly when advertisers Everything in moderation to rethink the fundamental tenets that it are aggrieved. While the need for regulation might be should be open to free expression, that Ms Wojcicki disputes this, saying she clear, the details of what should be regulat- people around the world should have the began to recognise the increasing risks of ed, and how, are messy and controversial. right to upload and view content instantly abuse of the platform in 2016, as it became Few free-speech advocates, even in Silicon (and live), and that recommendation algo- clear more people were using YouTube for Valley, are zealous enough to want to per- rithms are an appropriate way to identify news, information and commentary on mit beheading videos from Islamic State or and serve up content. What is needed, she current events. She says that was when she the live-streaming of massacres. Yet most says, is a thoughtful tightening of restric- started to focus on “responsibility”. In 2017, of the questions about content moderation tions, guided by consultation with experts, as a result of Adpocalypse, she began ex- that YouTube wrestles with are much less that can be enforced consistently across panding the firm’s staff and contractors fo- clear-cut. YouTube appears to be weighing YouTube’s vast array of content, backed by cused on content issues; they now number whether to ban white nationalists, for ex- the power of artificial intelligence. more than 10,000, most of them content ample. If it does so, should the site also ban reviewers. Chris Libertelli, the global head commentators who routinely engage in Video nasties of content policy, says that Ms Wojcicki more subtle conspiracy theories meant to YouTube’s record thus far does not inspire and Neal Mohan, the chief product officer, incite hatred? Should it ban popular per- much confidence. Children’s program- have told him there are no “sacred cows” in sonalities who invite banned figures to ming, one of the most popular sorts of con- deciding what content should be limited, “debate” with them as guests? Ms Wojcicki tent, is a case in point. Parents routinely demonetised or banned. Ms Wojcicki says is conscious of the slippery slope platforms use their iPads or smartphones as baby-sit- that with wiser and tighter content poli- are on, and fears being criticised for cen- ters, putting them in front of children and cies, and the company’s technology and re- sorship and bias. letting YouTube’s autoplay function rec- sources, she and YouTube can solve the Another important question will be ommend and play videos (see chart 3). Chil- problems with toxic content. how to go about enforcing restrictions. dren are served up nursery rhymes and Dis- This rhetoric will sound familiar to any- When you serve a billion hours of video a ney, but sometimes also inappropriate one who has heard Mark Zuckerberg, who day the number of hard calls and “edge content and infomercials. built a reputation for cutting corners in the cases”, those that are hard to categorise, is YouTube executives say that if parents pursuit of global dominance, when he talks enormous. The tech firms hope that ai will let their children watch videos unsuper- about the challenges confronting Face- be up to the job. History is not reassuring. vised, it should be on YouTube Kids, a sep- ai has been trained for straightforward arate platform created in 2015. But in reality tasks like spotting copyright violations. most children watch the main site and are But even with low error rates the volume of exposed to the same “manipulative design” mistakes at scale remains immense. An ai as their 40-year-old uncles. Some chil- capable of reliably deciding what counts as dren’s advocates are furious because they harassment, let alone “fake news”, is a pipe consider this an easy fix. They argue that dream. The big platforms already employ the site’s algorithm knows when children thousands of human moderators. They will are using it and could be programmed to have to hire thousands more. switch off autoplay and tightly curate con- Given the complexities, wise govern- tent. When pressed on the subject, execu- ments will proceed deliberately. They tives insist that the site is not meant for should seek data from platforms to help re- children under 13 years old without adult searchers identify potential harms to us- supervision. ers. Regulations should acknowledge that YouTube has acted more decisively in perfection is impossible and that mistakes other circumstances. Its crack down on ter- are inevitable. Firms must invest more in rorist-recruitment and -propaganda vid- identifying harmful content when it is eos in early 2017 used machine learning uploaded so that it can be kept off the plat- and newly hired specialists. There was an form and—when that fails—hunt for it and obvious incentive to do it. In what became remove it as quickly as possible. With the known as “Adpocalypse”, big firms fled great power wielded by YouTube and other after learning that some of their ads were social-media platforms comes a duty to en- running with these videos, essentially mo- sure it is used responsibly. 7 Financial Era Advisory Group Britain The Economist May 4th 2019 25

Also in this section 26 The Huawei mole is caught 28 A new climate-change target 28 The end of fracking? 29 Funding social care 29 Brexit paralysis 30 Food and globalisation 31 Bagehot: The followership problem

Labour and the rich pension tax relief for high earners. On in- come tax, it has promised to reintroduce The pips squeak again the 50% rate on earnings over £123,000 (rather than £150,000) and add a 45% rate that kicks in at £80,000. It is likely to re- verse the Tories’ cuts to capital-gains tax. And it is expected to tighten the inheri- tance-tax regime, possibly by reducing or removing allowances for those giving to Efforts to protect wealth should Labour take power are being stepped up discretionary trusts or handing property or eremy corbyn may have it in for tax ha- ister. If that happened, says the chief exec- gifts to relatives. To cap it all, Labour prom- Jvens, but they are not all cursing the La- utive of a ftse100 company, the rich would ises to levy vat on private-school fees. bour leader. Well-heeled types worried “take all the money offshore, wait for the The second area is brand new taxes. La- about the prospect of a Corbyn-led govern- economy to crash, and come back and get bour hopes to raise almost £5bn a year from ment have been buying property on Guern- richer.” Private-client advisers have a new financial-transactions levy. This sey with a view to moving to the island, at- warned of Britain’s multi-millionaires would cream 0.2% off every transaction ex- tracted by its flat 20% income-tax rate and moving up to £1trn ($1.3trn) out of the ecuted by financial firms. Some hedge lack of capital-gains or inheritance taxes. country. But the “mass affluent”, those with funds are reportedly considering moving Demand for homes there is buoyant, and Jo liquid assets in the hundreds of thousands, overseas in response. The bigger worry is Stoddart of Locate Guernsey, an invest- also have cause to fret. the possibility of a wealth tax on assets, ment-promotion agency, says queasiness Such fears have fluctuated in line with perhaps focused on high-value homes, to over Mr Corbyn is one of the main reasons. recent political turmoil. Wealth advisers help fund social care. In 2012 John McDon- The opposition leader makes no secret agree that clients worry more about Mr nell, who has since become shadow chan- of his disdain for the rich. The real divide in Corbyn than Brexit—though the two are cellor, backed a proposal for a one-off, 20% Britain, he said recently, is not over Brexit linked, as some fear a disorderly Brexit pre- wealth tax to help reduce government debt. but “between the many, who do the work, cisely because it could usher in a Labour The third category—and the biggest bo- create the wealth and pay their taxes, and government. Iain Tait of London & Capital, geyman—is the spectre of capital controls, the few, who set the rules, reap the rewards who advises dozens of rich families, says measures to restrict the flow of capital in and dodge their taxes.” The super-rich, he anxiety about Labour has reached its high- and out of the country, in the event of se- has warned, are “on borrowed time”. est point yet in the past couple of months. vere economic turbulence. Labour has re- Small wonder, then, that plutocrats are When clients of Saunderson House, a peatedly denied it would consider such a seeking advisers’ counsel—and increas- wealth manager, were asked in October measure, last seen in Britain in the late ingly taking action—to keep their incomes, about the biggest threat to their finances, 1970s. Even Mr Corbyn’s critics see it as a mansions and pensions out of Labour’s the most likely answer, mentioned by 42%, long shot. Nevertheless, contingency plans clutches. “How to Corbyn-proof your was a change of government. The number are being put in place. A year ago, says Mr wealth”, an event held in London in Febru- would almost certainly be higher now. Tait, it would have seemed “ludicrous” to ary by an investors’ club, sold out. The worries fall into three categories. be mulling measures to protect against Bookmakers offer odds as short as 3/1on The first concerns existing tax and pension capital controls. Yet clients raised the issue Mr Corbyn becoming the next prime min- arrangements. Labour is likely to target in “around half” the meetings he attended 1 https://t.me/finera

26 Britain The Economist May 4th 2019

2 in the run-up to Easter. As an insurance the rich there is less to separate the two Williamson was liked by defence chiefs for policy, some have arranged for custody of main parties than the Tories admit. As well winning more money for his department, their investment accounts (used to buy and as turning the screws on non-doms, the but became a tabloid figure of fun after sell securities) to be moved to the Channel Conservatives have cut high-earners’ tax- squeaking that Russia should “go away and Islands or Switzerland. Changing the juris- free pension allowances and are mulling shut up”. As a former chief whip he gave the diction in which accounts are booked is all an inheritance-tax grab. The chancellor, prime minister valuable insight into the about “asset access”, nottax, says Mr Tait. Philip Hammond, has warned that taxes unhappy mood of the party. Yet when the With a property-based wealth tax in must rise to fund an ageing population. inquiry fingered him, Mrs May wasted no mind, some rich folk are accelerating the Still, tone matters, and there is a differ- time. She has not revealed the evidence transfer of homes to children. “They might ence between measured tax increases and against him and calls the matter “closed”. have done this anyway when the kids were what looks to some like anti-capitalist But opposition parties are calling for a in their 20s. Now they’re doing it in their bloodlust. Mr Corbyn has said he is “com- criminal investigation; Mr Williamson teens,” says one adviser, who has “dozens” ing for” the rich. Some of Labour’s plans himself says the police would clear him. of clients who have opted to speed up suggest a taste for confiscation. The party The subject matter of the leak was sensi- handovers. Some are also using up tax-free wants to nationalise several industries, in- tive. America has for months been lobby- pension allowances, or vesting tax-free cluding water, for which it is considering ing its allies to freeze Huawei out of their cash, earlier than required, for fear of such basing compensation for investors on 5g telecoms networks, arguing that China benefits evaporating under Labour. “book” value—currently a third of the in- could use the firm’s gear for spying or sabo- dustry’s market value—or even less. A plan tage. It has had only mixed success. Austra- Sunny places for gloomy people to snatch 10% of shares in big British firms lia banned Huawei outright. New Zealand A smaller number are considering moving and give them to workers and the state has turned down a request from a local firm to offshore. Rather than emigrating now, nauseated many business leaders. “The use Huawei’s gear. But Germany has most of these Jeremiahs are considering rich are prepared for higher taxes,” says pushed back, as has the European Union. buying foreign residence permits to hold Bobby Vedral of Macro Eagle, an advisory Britain’s decision to give Huawei a limited alongside their British passports, in order business, “but not for expropriation.” role makes it the most prominent refuse- to be well placed to hop abroad if things Mr Vedral caused a ruckus in 2017 when nik. Its signals-intelligence agency, gchq, turn nasty. Advisers say they are looking he predicted a Britain led by Mr Corbyn works hand-in-glove with its American not only at obvious places like Monaco and would be like “Cuba without the sun”. That counterpart, the National Security Agency. the Channel Islands but also at eu coun- is unfair—but ever more of the monied America has said it may cut back intelli- tries that have become friendlier to rich seem unwilling to take any chances. 7 gence-sharing with countries that ignore foreigners, such as Portugal (where a “gold- its warnings. That is probably bluster: if en visa” can be bought for €500,000, or nothing else, Britain’s geographical loca- $561,000) and Italy (where income from A cabinet sacking tion makes it too useful to simply abandon abroad can be taxed at a flat €100,000). (many transatlantic internet cables come Among those tempted to up sticks are Leak, plugged ashore in Britain). Instead, the Americans resident “non-doms”: foreigners who live may hope that by keeping up the pressure in Britain but declare their domicile as they may persuade a future government to elsewhere to avoid tax on their non-British reverse the decision. The nsc was split on income. The Tories took away some of their whether to allow Huawei in. Mrs May ig- privileges in 2016, but the non-doms are nored its more hawkish members and gave The defence secretary is fired for still handled fairly generously for up to 15 the green light. But she is unlikely to be spilling secrets about Huawei years. The threat of a Corbyn government, prime minister for much longer. though, is leading some who were waver- eaks in westminster are common. Several likely candidates for her job, in- ing to go elsewhere. Another wealth advis- LLeaks from meetings of the National Se- cluding Ms Mordaunt, Jeremy Hunt, the er has Swedish and French clients who are curity Council (nsc), which include cabi- foreign secretary, and Sajid Javid, the home returning home. “Sweden and France, net ministers, generals and an array of secretary, were among those who voted those well-known tax havens!” he guffaws. spooks, are not. When details of Theresa no—as did Mr Williamson. Unlike the rest Were Britain’s 90,000 or so non-doms May’s decision to allow Huawei, a Chinese of this small cast, Mr Williamson now has to leave, many Corbynistas might say good telecoms group, to build next-generation little chance of having another say. 7 riddance. Some Labour strategists believe infrastructure in Britain appeared in the the public would welcome a falling-out Daily Telegraph on April 24th, an inquiry with the super-rich. Mr Corbyn has long ac- was duly launched. It took barely a week to cused them of dodging tax and contribut- find its man. The supposed mole? Gavin ing little to the economy. But non-doms Williamson, the defence secretary. paid a not-so-paltry £9.4bn in tax—equiva- Despite swearing his innocence (“on my lent to a third of the transport budget—in children’s lives”), Mr Williamson was the year to April 2016. sacked by Mrs May on May 1st. Her letter to Mr McDonnell’s team dismisses the him was brutal. There was “compelling” ev- bleating from Belgravia as alarmist. Fears idence that he had leaked details of the over a wealth tax are as misplaced as those meeting. No other “credible” story existed. concerning capital controls, aides say. Yes, Mr Williamson has been replaced by Penny income tax will rise, but to nowhere near Mordaunt, previously secretary for inter- the rates of the 1970s. Mr McDonnell may national development, who also attended have an avowedly Marxist past, but he has the fateful meeting but managed to keep been on a charm offensive in the City, as- her mouth shut. She in turn is replaced by suring moneymen he has nothing up the the ambitious Rory Stewart. sleeves of his branch-manager suit. Mrs May has now lost ten cabinet mem- Moreover, when it comes to squeezing bers in less than three years in office. Mr Going away but not shutting up Financial Era Advisory Group 28 Britain The Economist May 4th 2019

Climate change els by 2050, leaving room for some indus- Energy tries to under-achieve. Net-zero allows no Net-zero Britain such wriggle room. The ccc calls for a mas- Bad vibrations sive boost in electricity supply to phase out fossil-fuel use, particularly in transport and domestic heating. All cars would need to be electric well before 2040, the date the government has pencilled in. Gas boilers An expert panel draws up one of the would have to be replaced with electric world’s most ambitious targets Britain’s fracking dream is dying heating or heat pumps (which draw he scale of what is needed to stave off warmth from the air or the ground and uch of the time and money spent Tthe worst impacts of climate change is pump it into buildings). The public would Mtrying to ignite a shale-gas boom in often compared to a war effort. On May 2nd need to eat 20% less beef, lamb and dairy Britain over the past decade or so has gone an official advisory panel drew up Britain’s products. The list goes on. not on drilling boreholes for hydraulic battleplan. The Committee on Climate In all, says the ccc, these and other mea- fracturing (“fracking”) but on lobbying for Change (ccc) said the country should aim sures could cut emissions by 95% by 2050, permission. Fracking’s backers have had to eliminate net emissions of greenhouse with the remainder soaked up by a vast politicians to woo, regulators to persuade gases by 2050. This would mark the end of tree-planting programme and a new indus- and a wary public to reassure. It seemed to Britain’s contribution to global warming, try to capture CO2 and store it underground be working. In October, after years of vigor- notwithstanding “exported” emissions re- or beneath the North Sea. ous promotion, a firm called Cuadrilla sulting from products made abroad. The These are big asks. Heat pumps, hydro- started fracking at two wells on a site near government is considering the report; Mi- gen and carbon-capture—existing technol- Blackpool. chael Gove, the environment secretary, has ogies that need investment and trials in or- But frackers appear to have been out- indicated that he is open to a stricter target. der to be scaled up—have received little classed on the public-relations front. On Members of Extinction Rebellion, a attention. “It is not credible to set this tar- April 26th the government’s shale-gas tsar, group that has staged protests around Lon- get unless there is a very significant change Natascha Engel, said she was resigning, don in recent weeks, will be dismayed; they in the policies to deliver it,” says Chris after just six months in the job. The govern- have called for emissions to end by 2025. Stark, the ccc’s chief executive. ment pays more attention to anti-fracking But science and common sense alike sug- Working in the target’s favour is the fall- campaigning by environmental groups gest that is virtually impossible. In fact, the ing cost of technology. In 2008 the ccc esti- such as Greenpeace than to businesses ccc’s target is one of the most ambitious in mated that lowering emissions by 80% by ready to invest, she complained. the world. 2050 would cost 1-2% of gdp annually by The antis cite earthquakes, water pollu- First, it does not include international then. Unforeseen drops in the cost of re- tion and global warming as reasons to fight “credits”, whereby a country eliminates newable energy and batteries, among other fracking (shale gas emits far less than coal most but not all emissions and offsets the things, mean the committee now says net- but is a fossil fuel). Well-organised protes- rest, for instance by subsidising green zero can be achieved for the same price. ters have dug in at Cuadrilla’s Preston New power in poor countries. Norway and Swe- “This is not about what we hope or we think Road site. The final straw for Ms Engel ap- den already have net-zero targets, for 2030 ought to happen, it’s about what can hap- pears to have been the attention lavished and 2045 respectively, but both allow for pen,” said Lord Debden, the ccc’s chair- on Greta Thunberg, a teenage Swedish offsets. This is convenient nationally, but man, at the report’s launch. “We can do it, protester against climate change who told incompatible with global decarbonisation. and therefore if we don’t it’s because we Parliament last month that British support Second, the ccc recommended that have chosen not to.” 7 for shale gas was “beyond absurd”. Britain should stop emissions of all green- Fracking experts retort that the real ab- house gases, not just carbon dioxide. The surdity is the regulatory straitjacket that Intergovernmental Panel on Climate Britain has imposed in response to public Change, a un body, has found that to have a fears incited by ngos. Upon Cuadrilla’s higher than 50% chance of avoiding more first frack, at another site near Blackpool in than 1.5°C of global warming, worldwide 2011, earth tremors of magnitude 2.3 and 1.5 emissions of CO2 alone must come down to were set off and operations had to stop. The zero by mid-century, and all emissions firm’s main backer, aj Lucas, an Australian must cease by 2070. mining-services firm, had been too Third, the target includes Britain’s gung-ho, says an industry insider (both share of international aviation and ship- firms deny this). In 2014 David Cameron, ping, which are frequently left out of such then prime minister, promised to go “all accounting. Aviation, in particular, may out” for shale, to replicate America’s boom- make up only around 2% of emissions ing industry and improve energy security. worldwide, but it is a growing industry But rules later obliged firms to suspend with few affordable low-carbon alterna- fracking whenever tremors reached mag- tives. France is the only other country to nitude 0.5. In many places, including have proposed a net-zero target that in- America, magnitude of up to 4 is allowed. cludes aviation and shipping. (The French Cuadrilla is now finding it cannot frack target, like the British one, has yet to be effectively within the limit. Once its injec- written into law.) tion of high-pressured water has created The ccc insists that its target is achiev- the right fracture network through which able using existing technologies. That does gas can escape upwards, says Quentin Fish- not mean it will be easy. Under Britain’s Cli- er, a fracking expert at Leeds University, the mate Change Act of 2008, emissions are resulting tremors hit the threshold before supposed to fall 80% below their 1990 lev- On the march engineers can get enough sand in to keep 1 https://t.me/finera

The Economist May 4th 2019 Britain 29

2 the flow-paths open. So far Cuadrilla has sued a joint report calling for a new tax on made no return from shale gas, after in- those aged over 40 to fund social care. On vesting around £200m ($260m). April 29th Damian Green, a former Tory Nor has the firm been the best standard- cabinet minister, published his own pro- bearer for fracking. The tremors in 2011 posal in a paper for the Centre for Policy handed ammunition to Greenpeace and Studies, a right-leaning think-tank. Mod- other opponents. As for its objection to the elled on the pension system, it would offer 0.5-magnitude limit, defenders of the rule everyone free basic care, partly funded by note that the company accepted the frame- higher taxes on older taxpayers. People work and made no complaint until this would be prodded to pay for insurance pro- year, when it ran into difficulties. ducts that offered a better standard of care, Without an upward revision of the seis- using savings, their house or other assets. micity ceiling, says Ms Engel, time is run- Funding would be handled by Whitehall ning out for fracking in Britain. She wants rather than local councils, which are strug- the government to ask regulators to review gling with miserly budgets. the 0.5-magnitude limit, or to indicate that Social-care experts quibbled with Mr it will do so, by the end of the year. Green’s sums and his confidence in the That might be politically unfeasible, emergence of an insurance market for old- even if the government were not distracted age care. But the more damaging attacks by Brexit. Nor would it make that much dif- came from Labour. John McDonnell, the ference to the industry’s future, argues shadow chancellor, claimed Mr Green had Lord Browne, a former boss of bp and, until “let the cat out of the bag about Tory inten- 2015, Cuadrilla’s chairman. The real road- tions to punish older people with a tax on block to fracking, he notes, is not so much An old problem getting old”. Meanwhile Matt Hancock, the seismicity but that people believe it dis- health secretary, ruled out any option that turbs the countryside, with lorries carrying grown by 19% and the number of working- would include the family home when tot- sand and water on small roads. Achieving age people requiring care is also on the rise. ting up somebody’s assets. Their interven- sizeable supply would require thousands Public funding is provided by local au- tions highlight the fact that politicians of wells, and infrastructure to serve them. thorities and is available only to those with have more to gain from shooting down pro- Resurgent greens, risk-averse politicians assets of less than £23,250 (the calculation posals than coming up with their own. A and homeowners in the shires seem an in- excludes their house if the person remains solution to social-care funding appears a surmountable fracking obstacle. 7 at home). Cuts have also bumped up costs long way off. 7 for those paying for their own care, whom providers increasingly use to subsidise res- Funding social care idents funded by the state. Politics in stasis Cross-subsidy is not a long-term sol- Who cares? ution to the difficulties providers face, Brexit paralysis however. On April 30th one of the biggest, Four Seasons Health Care, followed in the footsteps of many smaller ones by an- nouncing that it had gone into administra- tion. The problem is that in poor parts of In the absence of a plan from the Both government and opposition the country, where lots of people receive government, others are filling the gap appear incapacitated by Brexit publicly funded care, providers have little t the time it did not seem like a partic- choice but to put up with harsh budget estminster is becalmed. No big bills Aularly bold pronouncement. Two years cuts. In 2016 the Competition and Markets Ware under debate or even planned. ago Philip Hammond promised £2bn Authority, a regulator, surveyed social-care mps seem to have little to do but plot. On ($2.4bn) extra for social care in his spring provision and found that although the in- April 30th the Commons even adjourned budget. While doing so, the chancellor dustry as a whole was just about able to before teatime. It is almost as if no serious struck a characteristically dour tone, warn- cover its costs, the same was not true of political issue faces the country. ing that the sector required more than just care providers that mainly served state- Except, of course, that one does. After the occasional injection of dosh; it needed funded residents. the European Union’s latest deadline ex- a strategic, long-term plan. A few months The funding system discourages invest- tension, Brexit is due on October 31st. Yet later came an unexpected general-election ment in other ways, too. Because it is hard there is little sign of a compromise that campaign, in which the Conservatives’ so- to predict how long care will be needed, would pass in Parliament, which has re- cial-care proposal won the moniker of the people tend to underspend to ensure they jected the current deal three times. Negoti- “dementia tax”, since it would have forced have enough money to last their dotage. ations between the government and the many with the disease to sell their home to Others hope that they will require no care opposition were stepped up this week, fund their care. The policy was widely at all, or do not understand how the system with hints that Theresa May might even blamed for the party’s terrible perfor- works and think they will not have to pay concede Labour’s demand for a permanent mance. The long-term plan—still prom- for it, and therefore fail to save enough. The customs union. But Tory Brexiteers’ hostil- ised—has yet to arrive. result is both worse care and a lack of inno- ity to a plan that would crimp hopes of free- Unsurprisingly, a strategic approach to vation. Productivity in the sector has fallen trade deals around the world is intense. social care has not emerged in its absence. by12% over the past two decades. There is a clear risk that any Labour votes Despite additional cash injections, public In the absence of proposals from the won by adding a customs union to the deal funding of social care is 3% lower in real government, others are floating ideas. Last would be offset by lost Tory ones. terms than it was in 2010. In the same per- summer the House of Commons commit- And there is little time left. Six months iod, the number of people over 65 has tees for health and local government is- may sound a lot, but both the quantity and1 Financial Era Advisory Group 30 Britain The Economist May 4th 2019

2 the complexity of legislation needed to im- Food and culture plement Brexit are daunting. Political events like this week’s local elections or the European elections on May 23rd will divert Peas please me Tories into ever more convoluted conspira- cies to dump Mrs May as prime minister. BARNSLEY How globalisation created British cuisine—and ruined its reputation No rival wants to replace her before a Brexit deal is done and dusted, but none wants he only food-based Instagram pic- than the result of the fact that industrial- her to continue into next year either. Tture tagged “Hilton’s Café, Barnsley isation happened earlier and quicker in Mrs May herself is boxed in. The idea of market” shows a bright, colourful salad: Britain than in its neighbours. One effect jumping ahead by putting the Brexit with- golden corn, pink prawns and juicy was that Britain prized energy over food, drawal bill directly to mps is too risky, be- cucumber topped with a dollop of cole- producing 100 times as much coal as cause if it were voted down it could not be slaw. But look around the dining hall of wheat in the first half of the 20th century. reintroduced in the current session. And the market, where Hilton’s shares space Moreover, the movement of people from although this session has already lasted an with Kay’s and Paul’s, and the tablescape the land to cities created a food culture unusual two years, she cannot start a new shows a preponderance of browns: chips, that prioritised convenience and low one with a fresh Queen’s Speech because strong milky tea and pies served with cost over quality. In 2017 Britons spent she is unable to get through any serious mushy peas, “as visually off-putting as only 8.2% of their income on food, the legislation. She would also find it difficult, the town centre itself”, admits Pete lowest in the eu (the Italians spent and maybe impossible, to renew the confi- Brown, a food-and-drink writer and son 14.2%). Euromonitor, a research firm, dence and supply deal with the Northern of Barnsley in his new book, “Pie Fidelity: puts Britain in second place out of 54 Irish Democratic Unionists that sustains In Defence of British Food”. countries for the amount of calories her government in office. “People talk about how good British consumed from packaged foods. Revived talk of changing the Brexit deal, food is in relation to how terrible it used The British have also historically been through alternative arrangements that su- to be,” says Mr Brown as he washes down less precious about local produce. Mr persede the much-disliked Irish backstop his pie with a pint of Barnsley Bitter at Brown writes that the French village of to avert a border in Ireland, is pointless, as the Old No 7 pub down the street. “My Roquefort was granted a monopoly on Brussels (and Dublin) will never agree to it. contention is that it didn’t use to be ripening cheese in nearby caves in 1411. A no-deal Brexit has been rejected by both terrible at all.” The British, by contrast, had no interest mps and the eu. The prime minister herself The claim carries a taste of parochi- in protecting cheddar: in 1856 the son of a is now clear that such an outcome must be alism. But Mr Brown’s argument is built Somerset farmer came up with a winning avoided, not least because she fears that around globalism. His defence is not that recipe and gave it away. It is a similar the fallout in both Northern Ireland and a full English bests a croissant (though it story with drink. Even as the French were Scotland could lead to the break-up of the obviously does), but that the virtue of busy defending the geographical bound- United Kingdom. Britain’s cuisine lies in the country’s aries of champagne, the British makers At first blush Jeremy Corbyn, Labour’s historical openness to the world. The of Bass Ale prioritised protecting their leader, seems in a better place than Mrs country has long been what David Edg- trademark—the first granted in the coun- May. So far, his ambiguous position of re- erton, a historian, calls “the hub of an try—while competing on quality. Britain jecting her Brexit deal in favour of a better extraordinary gastro-cosmopolitanism”. has a third as many protected foods as Labour one, while not clearly promising a Seen this way, the dismal reputation France and a quarter as many as Italy. second referendum, has served him well. of British food is less a failure of cuisine The openness worked both ways. Fish This week he secured the backing of La- and chips was a marriage of potatoes, bour’s National Executive Committee for a which arrived from Latin America in the European election manifesto that refers 16th century, and fried fish, introduced only to the option of another vote if needed by Jewish migrants in the early 19th to stop a bad Tory Brexit or a no-deal one. century. Antonio Carluccio, a restaura- Yet many Labour mps and candidates teur, once declared that spaghetti bolo- want to go further by campaigning for a gnese, a British favourite, did not exist in confirmatory referendum for any Brexit Italy. The British version of Indian curry deal, with the choice of remaining in the eu is an indigenous invention, created by on the ballot. And polling evidence sug- Bangladeshi migrant chefs to cater to gests that, although Mr Corbyn’s approach local tastes. may keep some pro-Brexit Labour voters on Even when a dish is recognisably board, it risks losing many more anti- British, its ingredients may not be. In the Brexit ones to parties like Change uk, the early 20th century the full English break- Greens or the Liberal Democrats that are fast typically included Danish bacon, openly calling for another referendum. Dutch eggs and bread made from Canadi- What might break the logjam? An agree- an or Argentine wheat, writes Mr Edg- ment between the Conservatives and La- erton in “The Rise and Fall of the British bour still looks a long shot. A new Tory Nation”. Like American cuisine, which leader may be even less ready to compro- gave the world takeaway pizza, hard- mise. Some eu countries threaten to veto shell tacos and chop suey, British cuisine any extension of the deadline beyond Octo- is an amalgam of foreign influences, at ber. Yet nobody wants no-deal. One official once national and international. The says the only way to get mps to vote for a salad at Hilton’s Café in Barnsley market deal is if they believe the alternative is a no- may be more Instagrammable than the deal Brexit. But such a threat will almost Cod’s own country pie—but it is no less British. certainly never be true. 7 https://t.me/finera

The Economist May 4th 2019 Britain 31 Bagehot The followership problem

A lack of leadership is not Britain’s only difficulty under which people vote for those who represent folk like them- selves. The third is competence, when people vote for a candidate the same way they might hire a plumber—because they can fix a problem. Britain used to be remarkable for its ability to combine all three methods, for example putting trade unionists into the House of Lords for their services to class politics, or ennobling civil servants for their services to competent government. But today all three are in trouble. Deference has faded. Class consciousness is fuzzier than it used to be. And thanks to the Iraq war, the global fi- nancial crisis and the Brexit negotiations, voters no longer trust the established parties to provide competent government. This collapse of legitimacy has been hastened by a widening of the gap between leaders and followers. The gap is usually ex- plained in terms of the insulation of the elite, as politics has been taken over by a class that glides from studying ppe at Oxford to a ca- reer at Westminster without holding what most people regard as a “real” job. But it can also be explained in terms of the erosion of a civic culture that once linked Westminster to local politics. In 1963 two American academics, Gabriel Almond and Sidney Verba, ar- gued that Britain combined a high degree of faith in political insti- tutions with a flourishing local civic life. Since then civic life has received a succession of blows: the contraction of the trade-union ack in 1997 Warren Bennis, a management guru, invited this movement, the centralisation of decision-making in Whitehall, Bcolumnist, who then had the onerous job of reporting on Cali- and the hollowing-out of regional economies. fornia, to a soirée in his house on Santa Monica beach to discuss The loss of confidence in leaders has sent new forces surging the evergreen topic of leadership. A junior guru presented a paper through the body politic. One is know-it-all cynicism. A striking on how today’s leaders needed all sorts of touchy-feely qualities number of Britons are becoming like sports commentators who such as empathy. Yours truly annoyed everyone by arguing that are ready with criticism but who couldn’t kick a ball if one landed Margaret Thatcher had been a pretty good leader without know- at their feet. A second—and opposite—problem is sudden, incho- ingly engaging in empathy. Then Peter Drucker, speaking in a ate enthusiasm, such as the green Extinction Rebellion that re- heavy Viennese accent and dressed in a three-piece suit, threw his cently paralysed much of central London. But the most dangerous own hand-grenade. “I don’t know why people are so fixated on the of all is the combination of anger, disappointment and bloody- subject of leadership,” he said, or words to that effect. “What we mindedness that political scientists label “resentment”. The new really need to think about is followership.” Brexit Party is on course to top this month’s European election be- It is worth remembering Drucker’s words whenever people talk cause of Nigel Farage’s mastery of the politics of resentment. about Britain’s crisis of leadership. There is no doubt that Theresa May and Jeremy Corbyn are singularly unimpressive figures. But Rebels without a cause Parliament also contains a fair number of people with sparkling It is hard to see how these forces can solve Walter Bagehot’s twin cvs, such as Rory Stewart, or remarkable life stories, such as Ange- problems of gaining and using authority. Know-it-alls corrode au- la Rayner. Regardless of their abilities, political leaders have to thority. Enthusiasts ignore the trade-offs that are at the heart of all perform before an increasingly hostile audience which routinely serious politics. And masters of resentment like Mr Farage discov- questions their motives and trashes their achievements. Follow- er betrayal in every compromise. Britain’s political parties are all ers are a tougher crowd than they used to be. suffering badly. Labour is under-performing because a band of en- Ipsos mori’s annual survey of the trustworthiness of profes- thusiasts have installed a second-rate purist in the top job. The sions repeatedly shows that people don’t trust politicians. Last Conservatives are languishing because a different band of enthu- year they came second-to-bottom, just above advertising execu- siasts have undermined a pragmatic prime minister. Change uk tives, with 19% of the public trusting them. A study of what words has failed to launch because a bunch of professional politicians people associate with politicians discovered that the most com- cannot decide whom to make leader. And even the Brexit Party, rid- mon were sharply negative: contemptible, disgraceful, parasitical, ing high for now, has bet its future on one man and one issue. sleazy, traitorous. The crisis in followership is spreading from the The only way to create a bond between leaders and followers in citizenry to the political class itself—and even into the govern- a post-deferential and post-industrial era is to restore office- ment. The past couple of months have seen cabinet ministers vot- holders’ reputation for competence. Mrs May tried to do this with ing against a three-line whip and a defence secretary sacked for her combination of respecting the referendum result (“Brexit leaking to the press from the National Security Council. means Brexit”) and tackling its causes (“burning injustices”). But Walter Bagehot argued that, in order to survive, a political re- she merely compounded the problem, beginning the Brexit talks gime needed to gain authority from the citizenry, and then use that without a plan, bungling an election and drawing red lines that she authority to get the work of government done. Since Bagehot’s would inevitably smudge. Perhaps a more skilful prime minister time, British politicians have employed three mechanisms to gain will succeed where Mrs May has so singularly failed. But Drucker’s that authority. The first is deference, when voters support leaders insight points to a darker possibility: that the politics of resent- they consider their social superiors. The second is class-loyalty, ment will trump the politics of problem-solving for some time. 7 Financial Era Advisory Group 32 Europe The Economist May 4th 2019

Also in this section 33 Merkel’s long goodbye 34 Spy whales 34 Poland’s “LGBT dictatorship” 35 Charlemagne: Public ENAmy

Spain’s general election The right splintered into three, and paid a price for that in lost seats. The pp lost more Sánchez’s new day than half its seats and 3.5m votes, its worst result since its foundation in 1989. Ciudad- anos, a formerly liberal party that has moved to the right, came within 220,000 votes of it. The hard right, in the shape of MADRID Vox, a newish nationalist party, will be rep- The Socialists have won the most seats, but forming a viable new government resented in Congress for the first time will take time and allies since 1982. But with only 24 seats and 10.3% lose to midnight on April 28th, with erned for ten months through gestures—a of the vote, it fell short of forecasts. Cthe vote-count in the general election big rise in the minimum wage, which em- What Mr Sánchez mocked as “the prim- all but over, the scenes outside the head- ployers say discourages job creation—and ary of the right” stamped an ill-tempered quarters of Spain’s two main political par- symbolic acts, such as a yet-to-be-fulfilled character on the campaign. Mr Casado, ties said it all. “We’ve sent a message to Eur- commitment to move the remains of Gen- Ciudadanos and Vox all tried to make the ope and the world…that you can defeat eral Franco, Spain’s former dictator, from election about national unity. That was reaction [and] authoritarianism,” Pedro his grandiose memorial. But although he threatened in 2017 when the separatist ad- Sánchez told a cheering crowd of several opted to call fresh elections after failing to ministration in Catalonia staged an uncon- hundred activists from his Socialist party. pass a budget, the Socialists gained 2m stitutional referendum and a unilateral A couple of kilometres away, barely a dozen more votes and 38 more seats compared declaration of independence. The right people stood outside the offices of the con- with the previous ballot in 2016. castigated Mr Sánchez for having held in- servative People’s Party (pp) until workers The election increased the fragmenta- conclusive talks with Catalan officials. Mr dismantled, unused, an elaborate stage. tion of what was once a two-party system. Casado called him a “felon”, and Albert Ri-1 Speaking inside to journalists, a dejected Pablo Casado, the pp’s leader, admitted: “It’s been a very bad result.” Mr Sánchez led Red wave the Socialists to their first win (in the sense Spain, general-election results April 2019, seats in congress (June 2016 result) of taking the most seats, though still well short of a majority) since 2008, while the Podemos Socialists Others Ciudadanos People’s Party Vox pp’s very future, and certainly that of its 42 (71) 123 (85) 38 57 (32) 66 (137) 24 (0) leader, looks uncertain. Majority Back last May when he filed a censure Possible coalitions motion that brought him to office and end- Centre Left-wing, Catalan and Basque Nationalist ed more than six years of pp rule under Socialists + Ciudadanos Socialists +Podemos + ERC* + PNV† Mariano Rajoy, Mr Sánchez brushed off de- 123 57 123 42 15 6 mands for an immediate election. With Source: Ministry of Interior *Esquerra Republicana de Catalunya †Partido Nacionalista Vasco less than a quarter of the Congress, he gov- https://t.me/finera

The Economist May 4th 2019 Europe 33

2 vera, the leader of Ciudadanos, declared bringing in an inexperienced team. His at- csu respectively, beamed as they swapped that he was “not a constitutionalist” and tempt to echo rather than challenge Vox, platitudes on stage and gave their blessing that Spain faced a “national emergency”. whose origins lie in a breakaway from the to Manfred Weber, a csu man running for Both wanted to impose direct rule in Cata- pp, failed. The pp lost 1.6m of its voters to the European Commission presidency. lonia; Vox wants to abolish Spain’s regional Vox, as well as1.4m to Ciudadanos, accord- Only one family member was missing. governments altogether. ing to an analysis for El Mundo, a news- Angela Merkel’s absence in Münster Mr Sánchez insisted he had done no paper. One of them was Alfonso Pérez, a was no less strange for being long-trailed. It deals with the separatists—their failure to bank worker. “The union of Spain is funda- was as if the Avengers held a reunion and support his budget triggered the election— mental,” he said as he listened to Vox’s final Captain America had a diary conflict. Dur- and will never agree to an independence campaign rally in Madrid. ing the previous European election cam- referendum. He said the issues were “con- For Mr Sánchez, who was briefly ejected paign, in 2014, the chancellor’s face was cord” and social justice after the spending as party leader in 2016-17 and was widely plastered all over the cdu’s posters. This cuts following the economic slump of written off by Socialist grandees, the elec- time she will make just two appearances, 2009-13. In the event, the spectre of Vox tion was a personal triumph. The days of one of them abroad. She will also skip three helped Mr Sánchez mobilise his voters. A absolute majorities in Spain are over for state elections in east Germany this au- high turnout of 76% on a spring day also the time being. But the country’s prime tumn, to the relief of some local party bar- helped the Catalan separatists, who won 22 minister has delivered rare good news for ons. “The chancellor is already in early re- seats, up from 17, though the big winner social democracy ahead of the election for tirement,” said Christian Lindner, leader of among them was Esquerra, the most prag- the European Parliament. 7 the opposition Free Democrats, this week. matic of the pro-independence parties. Not quite. Having handed over the cdu If he wants to be able to tackle deep- leadership to Ms Kramp-Karrenbauer in seated problems, such as high youth un- Germany December, Mrs Merkel evidently wants to employment and unsustainable pensions, give her protégée space to introduce her- Mr Sánchez will need allies to govern in the The long goodbye self to voters. But while her party col- 350-seat Congress. Securing them will be leagues focus on winning elections and complicated. “From our position on the managing the coalition with the restive So- left, we will extend our hand to all political cial Democrats (spd), the chancellor has forces [who operate] within the constitu- shifted her attention outward. tion,” he said on election night. One option BERLIN These days her engagements are typi- Germany’s chancellor, Angela Merkel, is to join forces with Podemos, a much-fur- cally devoted to shoring up multilateralism is slowly leaving her party ther-left outfit with 42 seats (down from or celebrating Germany’s constitution, the 71), and make up the numbers with the e are family!” blared the loud- sorts of themes one might expect from a moderate Basque nationalists and assorted “Wspeakers, as the grandees of Ger- ceremonial president. But on foreign poli- regional parties. Pablo Iglesias, Podemos’s many’s Christian Democratic Union (cdu), cy, Mrs Merkel remains vigorously leader, has been pressing for a formal co- and its Bavarian sister party, the Christian hands-on. This week, along with Emman- alition, which would be a first in Spain’s Social Union (csu), merrily marched on uel Macron, she corralled eight Balkan current democratic period. But this would stage in Münster on April 27th. For once, leaders for a meeting in Berlin before jet- still be short of a majority. And many So- the musical choice seemed apt. Last year a ting off on a three-day tour of the Sahel. Im- cialist voters recoil at Podemos’s commit- sororal row over immigration between the mediately after the European elections she ment to an independence referendum in two conservative parties nearly tore Ger- will deliver the commencement speech at Catalonia. Businesses, too, are scared of many’s government apart. But all was for- Harvard University. Rumours persist that Podemos entering government, even gotten as they launched their joint cam- she may offer to send herself to Brussels for though Mr Iglesias has moderated his paign for the European election on May a senior European Union post this year. stance and is not quite the firebrand of the 26th. Annegret Kramp-Karrenbauer and Mrs Merkel insists that she has no plans left he once was. Markus Söder, new leaders of the cdu and to quit the chancellery before her term ex- A stronger, but politically harder, op- pires in 2021. But Ms Kramp-Karrenbauer is tion would be a coalition with Ciudadanos. being groomed for the top job, and the in- This week Mr Rivera again ruled that out. novation of splitting the two posts guaran- Socialist activists listening to Mr Sánchez tees endless speculation about the timing outside party headquarters chanted “Not and manner of a handover that would with Rivera”. But the main business organi- probably shatter the coalition and trigger sations have urged both men to reconsider, an election. This week Mrs Merkel had to or at least that Ciudadanos (and the pp) ab- deny rumours that a cdu “retreat” in early stain to allow Mr Sánchez to be invested as June, hastily announced by Ms Kramp-Kar- prime minister. renbauer, was designed to occasion a trans- For the moment, Socialist leaders say fer of power. So far Mrs Merkel has stage- they will govern alone, seeking support as managed her exit to perfection. But there is needed, where they can. Whether that re- a feeling that control is slipping away. mains the position will become clear only Despite the jitters, the smart money still after the new Congress convenes on May says that Mrs Merkel will serve out her 21st and after yet another election, this one term. The chancellor who, as a child, once on May 26th for mayors, 12 regional govern- hesitated on a diving board for an hour be- ments and the European Parliament. fore finally jumping, will not be rushed The Spanish right faces a hard task of re- from office, and there is no public clamour building. Unless the pp does much better for her to do so. As for Ms Kramp-Karren- on May 26th, Mr Casado may be forced out. bauer, the more German voters see of her He chose to turn the pp’s broad church into earthy conservatism the less they seem to an ideological sect, purging moderates and Going…going… like it, and the cdu’s poll numbers are also 1 Financial Era Advisory Group 34 Europe The Economist May 4th 2019

Poland Spy whales On His Majesty’s cetacean service Family first

Norwegians suspect an inquisitive whale is working for the Kremlin annibal used war elephants. Chi- the Soviet Union, though at least some WARSAW Poland’s ruling party confronts the na’s Song dynasty tried incendiary were sold to Iran in 2000. Ukraine re- H “LGBT dictatorship” monkeys. The cia even experimented started the programme in 2012—only to with surgically-bugged cats. Russia, it have Russia snatch it back when it seized oland faces an “attack on the family”, seems, is now employing spy whales. In Crimea two years later. In 2016 the Rus- Psays Jaroslaw Kaczynski, chairman of late April, according to nrk, Norway’s sian defence ministry published a tender the ruling Law and Justice (pis) party. In national broadcaster, Norwegian fisher- for five new dolphins. Russian media 2015 the party swept back to power by men in the country’s far north Finnmark reports the following year suggested that claiming it would protect the country region began noticing a friendly beluga the Murmansk Sea Biology Research against refugees from the Middle East. whale frolicking among their boats, Institute had looked into using beluga Now Mr Kaczynski has identified a new attempting to pull straps from the hull. It whales for duties in the Arctic, but found threat: gay people. The Polish religious wore a harness, complete with camera them unsuited to the icy temperatures. right has long waged war on “gender ideol- mounts, inscribed with the words: Meanwhile, Russia and Norway are ogy”, a catch-all term for feminism, gay “Equipment of St Petersburg”. dealing with a more conventional spy rights and anything else that involves sex Russian researchers disclaimed all scandal. On April 16th Russia jailed a and shocks grandpa. As Poles prepare to knowledge, and suggested it was the Norwegian man, who had acted as a elect their representatives to the European work of the Russian navy—whose North- courier for Norwegian intelligence, for 14 Parliament on May 26th, in what parties ern Fleet is headquartered at nearby years on charges of espionage against see as a rehearsal for a national parliament- Severomorsk. The militarisation of Russian submarines. ary election in the autumn, pis has reviled marine mammals would not be unusual. queerness, backed by the Catholic church. The American navy’s own pro- The row began with a declaration in fa- gramme, which began in 1960, experi- vour of lesbian, gay, bisexual and transgen- mented with sharks, sea turtles and birds der (lgbt) rights signed by Rafal Trzaskow- before settling on California sea lions ski, Warsaw’s newly elected liberal mayor, and bottlenose dolphins. The latters’ in February. Its proposals include a shelter sonar was ideally suited to hunting out in Warsaw, anti-discrimination measures buried mines or enemy divers (the navy and more sex education in schools. insists the animals were never trained to For pis, this is an affront to children. kill). Dolphins served with distinction as Since coming to power in 2015, the party sentries and minesweepers during the has championed traditional families. To Vietnam war, in Bahrain during Ameri- encourage women to have more babies, it can skirmishing with Iran in the 1980s introduced a hefty monthly handout of 500 and in Iraq from 2003. zloty ($130) per child. Under pressure from A cia report from 1976 warned that the the church, it has considered tightening re- Soviet Union, spurred on by American strictions on abortion. Funding for ivf work in the area, had built several facil- treatment has been scrapped. ities to train bottlenose dolphins. Within The row has split Poland. The Polish two years, noted the cia, Soviet dolphins Bishops’ Conference calls non-heterosex- could be capable of placing “packages”— ual arrangements “completely alien to whether trackers or explosives—on ships European civilisation”. During Easter in the open ocean. mass, the Metropolitan Archbishop of The Crimea-based mammals were Gdansk condemned the “idol of tolerance”. inherited by Ukraine after the collapse of An “lgbt dictatorship” is approaching, warned a recent cover of Do Rzeczy, a right- wing weekly. Meanwhile, Poland’s om- 2 sagging. These are not propitious circum- it will be left to Ms Kramp-Karrenbauer to budsman has urged other cities to adopt stances for an early handover. quell the furies in the cdu/csu ranks. declarations like Warsaw’s. Yet the current strategy carries risks, In some respects Mrs Merkel’s transfor- More than half of Poles support civil too. Mrs Merkel remains popular in Ger- mation into an apolitical chancellor sim- partnerships. For same-sex marriage, how- many but her authority is waning. Ms ply caps a process that has defined her long ever, the opponents still outnumber pro- Kramp-Karrenbauer’s forays into Euro- career. The chancellor has always had an ponents, as they do for adoption by gay pean politics have confused partners like arm’s-length relationship with the party couples. “Hands off our children!” growled France. More immediately, as chancellor it she led for 18 years, and some in the cdu’s Mr Kaczynski at a pis conference in March. will fall to Mrs Merkel to make the case for conservative heartlands never quite took to With the European elections just weeks Mr Weber as commission president, as part their leader, an Ossi (easterner) with an un- away, pis has held on to its lead. A poll this of the horse-trading among European lead- usual biography and relentlessly centrist week gives the party almost 39%, ahead of ers over top eu jobs that begins after the instincts. It was Mrs Merkel’s pleasant hab- the broad opposition coalition led by the election. But her government is rumoured it of repeatedly winning elections that centrist Civic Platform, Mr Trzaskowski’s to want to push for a German president of helped the sceptics overcome their doubts. party, which has 33%. Third, with 8%, is the European Central Bank instead. Should It now falls to Ms Kramp-Karrenbauer to Wiosna (Spring), a new left-wing party that Mrs Merkel throw Mr Weber under the bus, prove she has the same talent. 7 wants to legalise gay marriage. 7 https://t.me/finera

The Economist May 4th 2019 Europe 35 Charlemagne Public ENAmy

Why Emmanuel Macron wants to abolish France’s most elite college tion then was “to make rational and homogeneous the recruit- ment and training of the main servants of the state”. ena was to turn out an impartial, unified army of administrators, motivated by the “noble” calling of public service, in order to rebuild a pow- erful, stable France. It supplied the overseers of the trente glo- rieuses, or 30 post-war years of prosperity and planned industrial growth. Those who were to serve the country, said De Gaulle un- apologetically, had to form “an elite in all respects”. Amid today’s angry, ruthless populism, however, the very con- cept of an elite is denounced on the streets and roundabouts of France. Far from admired as a dedicated public servant, the énar- que has come to embody the perceived arrogance and disconnec- tion of the governing class, skilled at devising technocratic poli- cies and blind to their effect on ordinary people. It was in car-dependent France profonde, after all, far from the bike-sharing quarters of Paris, that the government’s planned raising of the car- bon tax first provoked the gilets jaunes. The solution, one of them said, was to “get rid of the énarques” and put some “real people” in government instead. With their calculators and spreadsheets, graduates of ena have replaced the silk-stockinged nobility of pre- revolutionary France as the public enemy of choice. The reality of course is more complex, and more nuanced, than ifteen years ago this spring, students at France’s elite post- Mr Macron is letting on. The president knows full well that France Fgraduate civil-service college were preparing to celebrate their will still want a top administration college, even if he closes the graduation. Behind them lay the Alsatian city of Strasbourg, its one with the now-damaged acronym. He also knows that the pro- beer halls, and two years of intense study at the Ecole Nationale blem is not the concept of a high-flying school itself, but recruit- d’Administration (ena). Ahead stood fast-track jobs in the parquet- ment to and from it. Over the years, partly because applicants from floored corridors of power in Paris, and the guarantee of brilliant bookish families better survive the marathon years of preparation careers. As the top-ranked graduating student stepped towards the required to get in, ena has admitted fewer, not more, pupils from front of the amphitheatre, however, she handed the astonished poorer backgrounds. In the quarter-century after 1985, the share of director a 20-page report, written by pupils and entitled “ena: the pupils at the school whose fathers were blue-collar workers fell urgency of reform”. Among its signatories was a fellow graduating from 10% to 6%. Broadening access cannot be ena’s problem student with a shock of unkempt hair, Emmanuel Macron. alone. It also means ensuring that more school pupils from mod- The student rebel, it seems, has turned into the presidential est backgrounds apply to classes préparatoires, which train appli- revolutionary. On April 25th, in response to the gilets jaunes (yel- cants to France’s grandes écoles. This is the baffling parallel world of low jackets) protesters and their rage against the out-of-touch elite higher education that leads (among other things) to ena, con- elite, Mr Macron announced the abolition of ena. “Makeshift re- fuses the uninitiated, and crowns the university system. pairs”, the president declared, would not do: “If you keep the same This privileged perch also gives ena a monopoly on jobs in structures, habits are just too strong.” It was the most controversial France’s elite “grand corps”, a sort of top civil-service officer class, and spectacular of all the announcements made to mark the end of the most prestigious of which is the inspection des finances (which his months-long “great national debate”. At a stroke, Mr Macron Mr Macron joined). Graduating pupils are guaranteed a spot in one gave in to a populist demand, and sent both his own alma mater or other, according to their exit ranking, rather as in Imperial Chi- and a symbol of modern France to the guillotine. na. Indeed, this turns time spent there into a race for position rath- All countries select a governing elite. Six of the 13 post-war er than a chance for reflection or creativity. And the school’s tiny American presidents attended either Harvard or Yale. Ten of the 14 intake forges an exceptionally tight network of alumni, which fu- post-war British prime ministers graduated from Oxford. But els suspicions of caste-like behaviour by its members. Enarques France takes the principle to extremes. Though its annual intake is trust, recruit and even marry each other. a minute 80 postgraduate students (compared with around 2,000 undergraduates for Harvard and around 3,000 for Oxford), ena has enathing else but this supplied the country with four of its eight Fifth-Republic presi- With his own satchel of diplomas, Mr Macron knows all these ar- dents, including Mr Macron, and eight of its 22 prime ministers, guments by heart. But he is treading a perilous path. That ena has including the current one, Edouard Philippe. Today énarques, as its flaws, few contest—not least its tiny size. Yet it has done its bit to graduates are known, run the French central bank, the finance help create in France a deep culture of public service. And the ministry, the presidential office, the Republican party, the external country itself, with its much less entrenched private-school sys- intelligence service, the constitutional council, the state railways tem, is in many ways better placed than Britain or America to and a raft of top French private-sector companies. achieve merit-based education. Mr Macron’s real challenge is to When Charles de Gaulle founded ena in 1945, from the ashes of give a meaningful nod to the ambient distrust of elite institutions, Nazi occupation and the second world war, the Resistance leader while making sure that any reincarnation preserves what ena gets explicitly sought a meritocratic antidote to the chronic cronyism right, and fixes what it gets wrong. Otherwise, its abolition will be a of the pre-war era. In his memoirs, le général wrote that his ambi- self-defeating populist gesture. 7 Financial Era Advisory Group 36 United States The Economist May 4th 2019

Also in this section 37 Remembering Richard Lugar 38 Congressional subpoenas 38 All the president’s banks 39 Conviction-review units 39 The National Rifle Association 40 Chicago and Liberia 41 Lexington: No sex please

Democrats and foreign policy voured a tougher approach to China, op- posed the surge in Afghanistan and the in- There’s something happening here tervention in Libya. But broadly he supported “95% of Mr Obama’s policies”, says a former foreign-policy adviser. As president, Mr Biden would be internation- alist, experienced and familiar. Yet there are rumbles of revisionism. In Many Democrats dream of getting back to business as usual in world affairs. the party’s mainstream Mr Sullivan and A few have other ideas Ben Rhodes, another senior adviser in the his too shall pass,” Joe Biden told what Mr Trump has done. Jake Sullivan, Obama administration, have launched Na- “TAmerica’s allies at the Munich Secu- who was an adviser to Hillary Clinton’s tional Security Action, a ginger group to at- rity Conference in February. “We will be 2016 campaign, talks of a “back to basics” tack the Trump administration’s “reckless back.” The applause he received reflects a dimension to Democrats on foreign policy: policies” but also to search for fresh alter- longing to return to a world order that ex- value alliances, stress diplomacy. “Com- natives. A number of voices on the left are isted before President Donald Trump start- pared with domestic policy,” he says, “there calling for a more radical rethink. ing swinging his wrecking ball. Now that is less focus on new ideas.” Mr Biden, vice-president under Barack Democrats would take America back What it is ain’t exactly clear Obama for eight years, has entered the race into the Paris agreement, pressing the “Defending the rules of the road is fine, but to challenge Mr Trump in 2020, the contest world for a new level of ambition in car- it won’t mobilise anyone,” believes Kate has acquired a foreign-policy heavyweight bon-cutting. They would rejoin the nuclear Kizer, policy director at Win Without War, who embodies the pre-Trump era. deal with Iran, though some may want to an advocacy group. Post-Trump, just get- But would a future Democratic admin- set conditions for lifting sanctions. They ting back to business as usual is not good istration simply turn the clock back? In the would reassure nato allies of their whole- enough, she says; some on the left want to crowded field of Democratic candidates, hearted commitment. They would not re- “reconceptualise how we see security”. In a apart from Mr Biden, only Senators Bernie verse Mr Trump’s more confrontational ap- paper published last month by the Centre Sanders and Elizabeth Warren have so far proach to China—there is now bipartisan for a New American Security, a think-tank, made serious forays into foreign policy. agreement on the need to stand up to the she argues for a new American grand strat- Still, those efforts, and stirrings of debate rising superpower—but would aim to work egy, driven by values rather than military among activists, point to the potential for a in a more collaborative way with allies. muscle and involving “a reorientation of future American foreign policy that could Mr Biden’s candidacy will draw atten- national-security spending to prioritise look very different not just from that of the tion to the foreign-policy record of the human needs at home and abroad.” current administration but also from the Obama administration. Mr Biden did not This fits with a broad critique of Ameri- consensus that prevailed before. always agree with his boss. He pressed for a can policy after the collapse of the Soviet On the surface the thrust of the Demo- more muscular pushback against Russia Union: that it overreached. Well-inten- crats’ approach is simple: reverse much of (including arming the Ukrainians), fa- tioned moves to spread democracy became 1 https://t.me/finera

The Economist May 4th 2019 United States 37

2 counter-productive, involving the country Foreign Corrupt Practices Act. America Remembering Richard Lugar in “forever wars” and doing enormous col- would then be in a strong position to lead a lateral damage. The strategy of preserving fight against kleptocracy around the world. or extending American dominance around Identifying tools that can interrupt the cor- The right side the world is “increasingly insolvent”, con- rupt flows of money that empower oli- cludes Peter Beinart, from City University garchs, princes and China’s state-owned WASHINGTON, DC World peace does not win primaries of New York, writing in the Atlantic. enterprises could prove popular. The issue Support for greater restraint is gaining of corruption is unifying the world more ichard lugar was not a colourful ground, according to Stephen Wertheim, a than anything else, believes Tom Malinow- Rsenator. One federal bureaucrat historian who teaches at Columbia Univer- ski, a congressman who sits on the House joked that Mr Lugar “maintained that sity. But can the ideas of “the restrainers”, foreign-affairs committee. Tackling it, he childhood capability of walking into an as he calls them, move from the fringe to says, may be “one way America gets its empty room and blending right in.” the mainstream? Three reasons suggest mojo back after Trump.” “Dick was looked upon as being one this might be more than mere wishful Another favourite theme of those on the smart dude,” said Rex Early, who ran thinking on their part. left is a desire to see greater democratisa- one of Mr Lugar’s campaigns. But First, there are advocates for restraint tion of foreign policy-making itself, a do- “would I want to go fishing with him? on the right as well as on the left. Take the main seen as excessively controlled by an Probably not.” Deprived of potential bill passed by Congress to end America’s establishment clique, and above all by the fishing buddies, Mr Lugar had to settle support for the Saudi-led war in Yemen. Mr president. That means in part strengthen- for making the world safer. Trump has vetoed the resolution, which ing congressional scrutiny, something that He helped override Ronald Reagan’s was energetically championed by Demo- has begun to happen with Democratic con- veto of a bill imposing hefty sanctions crats such as Ro Khanna in the House and trol of the House. But it also means wel- on apartheid-era South Africa. He Mr Sanders, along with Chris Murphy, in coming wider participation in policy de- bucked Reagan again by publicly stat- the Senate. But it got through the Senate be- bate. Elizabeth Beavers, associate policy ing that Ferdinand Marcos owed his cause it also had support from several Re- director for Indivisible, which cultivates 1986 re-election in the Philippines to publicans, including the bill’s libertarian- anti-Trump grassroots movements, sug- fraud. Reagan initially backed Marcos, leaning co-sponsor, Mike Lee from Utah. gests that “talking about democratising but soon withdrew support, leading to Second, opinion polls suggest there is foreign policy is something where Demo- Marcos’s exile. During Mr Lugar’s sec- fertile ground for restrainers’ ideas to crats have a real opportunity.” ond stint chairing the Senate Foreign flourish. A survey by the Eurasia Group Relations Committee he had doubts Foundation found a big gap between the There’s a man with a gun over there about the second Iraq war. foreign-policy experts who espouse activ- Grassroots pressure is a means towards the After the collapse of the Soviet ism and the wider population favouring re- objective of ending wars. Congress has put Union, he and Sam Nunn, a centrist straint. Polling by the Chicago Council on down a marker with its Yemen bill. Ms Bea- Democratic senator, wangled some Global Affairs shows that millennials, born vers now has her sights on the Authorisa- funds from Congress to dismantle between 1981 and 1996 and now becoming tion for Use of Military Force (aumf), put in weapons of mass destruction. Nunn- the biggest cohort of voters, take a more place after the attacks of 2001 and used by Lugar, as the programme is known, modest view of America’s role in the world successive presidents to facilitate inter- funded the deactivation of thousands than baby-boomers, born between 1946 ventions around the world. As with Yemen, of weapons, as well as tens of thou- and 1964. Only 26% of millennials favour Democrats will find allies among “restrain- sands of tonnes of chemical agents. increasing defence spending and 44% sup- ers” on the libertarian right. That was not enough to save him from port maintaining superior military power Rows among Democrats are likely, for his party: in 2012 he lost a primary to a worldwide; among boomers the figures are example, over military spending: radicals Tea-Partying Republican. Mr Lugar’s 41% and 64% respectively. want to cut it, mainstreamers are more legacy, said Barack Obama when award- The third reason for supposing that the cautious. Policy towards the Middle East, ing him the Presidential Medal of Free- left’s foreign-policy ideas might penetrate and Israel in particular, could also prove di- dom in 2013, “is the thousands of mis- the Democratic mainstream is that some- visive. Democrats are vulnerable to accusa- siles and bombers and submarines and thing similar has already happened in oth- tions by Mr Trump that they are soft on de- warheads that no longer threaten us.” er areas, such as “Medicare for all”. “We fence and woolly on protecting American need to stop siloing domestic and foreign interests. Republicans stubbornly out- policy,” says Matt Duss, Mr Sanders’s advis- score Democrats when it comes to public er on foreign affairs. trust to protect national security. One promising avenue for this to hap- Yet some Democrats are keen to chal- pen is an attack on inequality and corrup- lenge the assumption that strength has to tion. Both in America and abroad, Mr Sand- be demonstrated by spending more on de- ers said in a well-crafted speech on foreign fence and a willingness to use military policy last October, “the struggle for de- force. “We have an opportunity as a party to mocracy is bound up with the struggle close the national-security gap,” insists against kleptocracy and corruption.” Mrs Senator Murphy. “We have to talk about our Warren echoed the theme in an article in national-security vision.” Foreign Affairs, urging aggressive promo- So far, most of the Democratic presiden- tion of transparency around the world. tial contenders prefer to talk about their Treating corruption as a strategic mat- domestic vision. Yet foreign policy “will ter offers rich pickings for policy. The effort creep up on the candidates,” predicts Mr could begin at home with legislation to Wertheim. A full-blown debate on what a make it harder to launder money through post-Trump foreign policy ought to look shell companies and cash property deals, like would be healthy. It could also prove This disarming man and with beefing up instruments like the surprising. 7 Financial Era Advisory Group 38 United States The Economist May 4th 2019

Congressional subpoenas All the president’s banks An oversight Sue you

WASHINGTON, DC FRANKFURT Congress’s ability to scrutinise the The president sues Deutsche Bank and White House can easily be frustrated Capital One n 1924 a Senate committee investigating n one respect President Donald Trump, Ithe Teapot Dome bribery scandal issued a Iwho at times likes to claim Swedish an- subpoena to Mal Daugherty, a bank presi- cestry, is true to his German origins. Like dent and brother of Harry Daugherty, who most German family companies, his busi- would soon resign as attorney-general. ness has a Hausbank, a go-to bank with When Mal failed to appear the Senate dis- whom he has a long-standing relationship. patched its deputy sergeant-at-arms to But unlike those companies, he did not Ohio to arrest him. Daugherty challenged choose his Hausbank because of geographi- his arrest, arguing that the Senate had ex- cal proximity or family tradition. He did ceeded its authority. The Supreme Court business with Deutsche Bank because no disagreed. Not only can Congress compel other big bank would lend him millions testimony essential to “a legislative func- after several of his businesses went bank- tion”; “it is to be presumed” that congres- rupt in the 1990s. Germany’s biggest bank sional investigations are intended “to aid We have ways of making you talk was so keen to be a prominent player in [Congress] in legislating,” and “it is not a New York property that it ignored multiple valid objection to such investigation that it ing that charge is trickier. The days of ap- red flags about the financial health of Mr might disclose wrongdoing or crime by a prehension by the sergeant-at-arms fol- Trump’s empire. It reportedly lent him public officer.” lowed by detention are over; that power $2bn over nearly two decades. President Donald Trump has sued two has not been used since 1935, when a Hoo- The once-cordial relationship between banks to stop them complying with House ver administration official was held at the Mr Trump and Deutsche has soured. When subpoenas (see next story), and asked a Willard hotel. Contempt of Congress has he became a serious contender for the pres- federal court to block another to an ac- been a federal crime since 1857, but Mr Barr idency in 2016 Deutsche stopped lending counting firm used by the Trump Organisa- is unlikely to approve prosecuting either him money (he still owes the bank tens of tion. He has vowed to fight one subpoena his boss or anyone who was following his millions). Deutsche has started to hand issued to Don McGahn, a former White boss’s orders, including himself. over financial documents related to Mr House counsel, and has ordered an official That leaves civil contempt as a possible Trump’s business dealings to Letitia James, who oversaw White House security clear- legal avenue. Congress can ask a federal New York’s attorney-general, who is inves- ances not to comply with another. More court to compel obedience to a subpoena. tigating the president. Since January the subpoenas may soon follow. The House This can take a while. In October 2011 Eric bank’s lawyers have been co-operating Ways and Means Committee wants Mr Holder, Barack Obama’s attorney-general, with investigators from the Democratic- Trump’s tax returns, which he has declined received a congressional subpoena. Mr controlled House Intelligence and Finan- to turn over to them. The House Judiciary Obama tried to block it by declaring execu- cial Services committees, who are probing Committee may find William Barr, Mr tive privilege, in June 2012. A court rejected the president’s financial affairs. After the Trump’s attorney-general, to be in con- Mr Obama’s blanket claim of privilege, but committees served a subpoena on April tempt of Congress for ignoring a subpoena not until January 2016. 15th, the bank signalled it would share de- demanding the unredacted Mueller report. The current standoff may finish faster, cades of financial records with them by As that example suggests, congressio- for two reasons. First, many of the justicia- May 6th unless a court intervened. On April nal subpoenas are not all-powerful. Va- bility concerns that took courts time to 29th Mr Trump sued Deutsche (and Capital rious presidents have fought them for dif- work through during the Obama and Bush One, an American bank) in a federal court ferent reasons. The usual levers brought to administrations have been resolved. And in New York to stop the banks from com- bear against private citizens who ignore second, as Stephen Vladeck, a law profes- plying with the subpoenas. subpoenas—fines and imprisonment—are sor at the University of Texas, explains, Mr The lawsuit asks the court to declare the harder to use against executive-branch of- Trump’s statement of blanket refusal “sug- committees’ subpoenas invalid. It claims ficials. And congressional oversight, says gests that case-specific objections are post- they were issued to “harass” Mr Trump. “No Andrew Wright, an associate counsel to Ba- hoc rationalisations”, which courts may be grounds exist to establish any purpose oth- rack Obama who is now a partner with k&l inclined to swiftly reject. er than a political one,” says the suit. Why is Gates, a law firm, “is a quasi-political, But legal battles still take some time to Mr Trump so keen to prevent records held quasi-legal process” that usually resists adjudicate. That may annoy Democrats but by his primary lender from coming to light? quick resolution. This does not mean that suit Mr Trump perfectly. His supporters Because Deutsche’s documents include in- Mr Trump—who has said that “we’re fight- prize his pugnacity, and he prefers table- ternal company memos, estimates of the ing all the subpoenas” because the House pounding defiance to the intricacies of le- value of Mr Trump’s assets and parts of his Democrats issuing them “aren’t, like, im- gal compromise. Also, political salience personal and business-tax returns, which partial people”—can simply ignore them, fades over time. He may reckon that if he the Treasury Department (which oversees merely that this fight may have a political loses in court, the public will have moved the irs) has been reluctant to divulge. rather than a legal resolution. on to the next outrage. And congressional Deutsche Bank says the president’s law- Congress can charge people who ignore subpoenas expire when the current Con- suit reflects a dispute between Mr Trump subpoenas with contempt, which requires gress does, making a successful play for and congressional committees and that a majority vote in a single chamber. Enforc- time a victory, of sorts. 7 the bank is not accused of any wrongdoing. 1 https://t.me/finera

The Economist May 4th 2019 United States 39

2 “We remain committed to providing ap- In Mr Arroyo’s case, Eric Gonzalez, The National Rifle Association propriate information to all authorised in- Brooklyn’s current da, published a 43-page vestigations,” says the bank. Adam Schiff, report detailing all the missteps and pro- Wayne’s world chair of the House Intelligence Committee, blems. The report also spells out lessons praised Deutsche for its assiduous co-oper- learnt. Overturning wrongful convictions ation with congressional investigators. has changed the da’s office procedures and The ailing lender is trying to salvage its rep- training. An exoneration “makes everyone utation. It hopes that, by providing more stop and pay attention and learn lessons”, transparency, it will help to end unfounded says Mr Gonzalez. Most of the overturned CHICAGO Gunslingers as mudslingers speculation that it helped to channel Rus- convictions have been for murders, but sian money to Mr Trump. Deutsche also burglaries and rape convictions have also ow serious is the mess at the National vows to “abide by a court order” regarding been rubbed out. Mr Gonzalez says that his HRifle Association? Wayne LaPierre, the congressional investigation. lawyers’ “obligation as prosecutors doesn’t who has led the outfit since 1991, said earli- The president’s suit seems unlikely to end when we get a guilty plea or when we er this year that it might be forced to shut succeed. Courts tend to stay away from get a guilty verdict.” Miriam Krinsky, a for- “forever” because of gun-shy banks and questioning lawmakers’ motives for inves- mer prosecutor and head of Fair and Just business owners. That might sound hyper- tigations. And the executive-privilege de- Prosecution, a network for reform-minded bolic. After all, nra propagandists routine- fence that may fend off other subpoenas district attorneys, says all this helps makes ly claim some bogeyman—communists, does not apply to things the president did Brooklyn’s cru the gold standard. zombies, “violent anti-second-amend- in his private life before he was elected. More than 30 jurisdictions across the ment extremists” or New York’s governor— This suggests that the two committees country have set up similar units. In fact threaten nra members and their constitu- should get some fresh reading material be- they are becoming the norm in large urban tional rights. Scaremongering drums up fore too long. 7 district-attorney offices. According to the the dues that pay its boss lavishly. National Registry of Exonerations there Yet this time the lobby seems most in- were 58 exonerations in 2018 that can be at- tent on self-harm. A clash of personalities Conviction-review units tributed to crus. John Hollway, of the Uni- is partly to blame. Its ceremonial president versity of Pennsylvania’s Quattrone Centre, Oliver North (of Iran-Contra fame), said Case dismissed says the culture has shifted from “why last week that a “clear crisis” besets the would you have one” to “why don’t you group. He then bungled an effort to topple have one?” In the past month two more Mr LaPierre. As recently as last week the states, Michigan and New Jersey, launched nra had gushed over Mr North as “a rock- units. Gurbir Grewal, New Jersey’s attor- solid purveyor of truth and defender of jus- BROOKLYN ney-general, says the prosecutors are on tice, relentless in the face of wrongful criti- The job of a new breed of prosecutors board: “no one wants an innocent person cism.” But that was before he reportedly is to get people out of jail behind bars.” Mr Grewal has also created a told Mr LaPierre to quit or suffer a public ladimil arroyo was sentenced to 20 statewide cold-case unit. letter about the organisation’s leaders and Byears-to-life in a New York prison for “We should have a criminal-justice sys- financial practices. Mr LaPierre says he murder, attempted robbery and assault. In tem that promotes human dignity,” says stared down the lieutenant-colonel, who February this year he was let out thanks to Brooklyn’s Mr Gonzalez. It seems to be has now been replaced as president. the efforts of the local government that had working: one exonerated man was so grate- That showdown took place in Indianap- put him away 18 years ago. His conviction ful to Brooklyn’s cru that he invited the olis, where nra members had flocked for was overturned after the Brooklyn district team and Mr Gonzalez to his wedding. 7 their annual convention. Among the wor- attorney’s conviction review unit (cru) ried supporters was President Donald found that he had been deprived of a fair Trump, who tweeted that the lobby risks trial, in part because not all of the detec- being destroyed if squabbling leaders fail tives’ notes had been shared with the de- to circle their wagons against a serious ex- fence. Mr Arroyo was the 25th person to ternal threat. He meant a legal push by New have his conviction quashed by Brooklyn’s York state (where the lobby has been regis- district attorney (da) since 2014. tered since 1871), whose attorney-general, That year Ken Thompson, a previous Letitia James, is dishing out subpoenas da, expanded the unit, which until then while asking if there was financial mal- had only investigated troublesome convic- practice at the nra. No friend of the lobby, tions on an ad-hoc basis. Its first task was to she once called it a “terrorist” group. investigate 100 potentially wrongful con- At stake is whether the legal case, if it victions in cases mostly related to a partic- goes against the nra, eventually leads the ular disgraced detective. The unit, the larg- gun group to lose its designation as a chari- est in the country, has since become a ty and thus its tax-free status. Without model for other jurisdictions. With a bud- those advantages the nra, which is secre- get of $1m, the team retraces steps, tracks tive about its finances but seems to be in down witnesses, including those in other ever more serious debt, could go broke. No states or behind bars, and sorts through one is sure whether it really has the 5m mounds of evidence. Seasoned lawyers are members it claims. Survey data suggest assigned to the unit. The findings are then that the share of Americans who own guns considered by an independent review pan- is declining, although people who do pos- el made of volunteer lawyers not affiliated sess them own more than they used to. But with the da. Blame is not necessarily as- one measure of the nra’s straitened condi- signed, but the details of how the authori- tion is that, in the mid-terms, gun-control ties failed the defendant are made public. Eric Gonzalez, devil’s advocate groups outspent it in an election for the 1 Financial Era Advisory Group 40 United States The Economist May 4th 2019

2 first time. That was quite a turnaround: the sue its agency seems to have triggered Mr to shoot people before, adds, “I’ve been gun lobby dished up $30m to help get Mr North’s putsch against Mr LaPierre. controlling myself lately”. The two are Trump elected in 2016. No wonder that opponents of the nra among 700 participants in an 18-month, The greatest problem for the lobby may sound gleeful over its mishaps. Andrew $25m experimental programme, called thus prove to be financial. An investigation Cuomo, New York’s governor, crowed that readi, which tries to change individuals’ by the Trace, which studies the firearms in- “the gig is up for the nra because people behaviour in the most violent districts of dustry, and the New Yorker recently provid- now know the truth.” As more members Chicago. It is one response—funded by ed evidence of questionable practices in- learn that the boss reportedly takes home Heartland Alliance, a big non-profit group, volving nra bosses and Ackerman $5m each year, their enthusiasm might and philanthropists—to a surge in violence McQueen, an advertising agency in Okla- wane. But don’t write him off yet. In the in 2016, when Chicago saw 762 murders. homa. The firm takes a hefty $40m a year 1990s Mr LaPierre made an enemy of a sit- Since big, hierarchical gangs fragmented from the nra for marketing and more, and ting Republican president, George H.W. into hundreds of tiny “cliques” of hot- is behind some big and costly efforts to ex- Bush, and the nra was said to be insolvent. headed and heavily armed youngsters, the pand its media presence, for example with He and the gun lobby bounced back from city’s murder rate has been stubbornly a tv channel. The nra’s recent decision to that. They could do so again. 7 high. The police force is unable to solve 80% of murders and 95% of all shootings. readi might make a difference. It mixes Urban violence job training with months of intense efforts to teach habits of restraint. The men are Monrovia on Lake Michigan supposed to become more employable and better able to control tempers. It is also led by a figure, Eddie Bocanegra, who has cred- ibility among participants, having himself served 14 years in prison for a gang killing. Unusually, the scheme applies lessons CHICAGO from a study in Liberia, in west Africa, after An anti-violence programme in Chicago applies lessons from war-torn Africa years of civil war left young, homeless men see a van, suspicious as hell. I keep involved in crime, especially in Monrovia, “Iwalking. They just pull up, get to shoot- the capital. Researchers there recruited 999 ing. I was just trying to get to my man’s crib, “hard-core street youth”, picking individ- four houses away. My mother say I died. I uals deeply involved in crime. Some got still got a bullet lodged in my liver right grants to start a business, others a few now. That shit was painful; worst feeling weeks of therapy to change impulsive be- ever. I died and they brought me back.” haviour and teach basic skills for legal ways Damien, a slender man in sports clothes to make a living. and red running shoes, knows dangers lurk Those who got both grants and therapy in some neighbourhoods. In the basement turned out to be much less likely to be in- of a ymca on Chicago’s South Side, he tells volved in crime a year later, says Chris of being thrown out of home when he was Blattman, a researcher at the University of 14. He has since been shot, pistol-whipped Chicago who worked in Liberia. He now and imprisoned. Several friends have been helps to advise the readi programme, killed, including two in a span of just eight which began in 2017 and ends its first phase days. “I know it’s time to do something dif- this year. As in Liberia, the programme tar- ferent, I just want to see my daughter grow gets the hardest cases. An algorithm devel- up”,he says. oped by the city’s Crime Lab trawled police Another man, Devon, nods and agrees. data for individuals’ arrest history, age, ad- He describes living amid, and participating dress, social networks, and for those who in, frequent gun violence. “I been shaking. already know victims of violence—all indi- I’m shaking now,”he says, a few days after a cators of who is likeliest to pull a trigger friend was killed, in December. He also re- next. Mr Bocanegra says 91% of partici- calls being present when a stray round pants have been arrested before, on average killed a young girl. Released from prison We’ve got a 1 in 5 chance, fellas 17 times each. The focus makes sense: one not long before, after serving a juvenile study found 70% of non-fatal shootings “life” term for murder, he sheds tears and Devon mentions behaviour today un- and 46% of fatal ones occur inside a net- talks of his anguish over whether to seek thinkable for him a few years ago. He says work of just 6% of city residents. violent revenge. he showed restraint shortly before another readi will be judged on whether it cuts, He also describes exhausting efforts to interview, in February, when unknown not ends, such violence. So far the anec- evade the rivals who hunt him. He rises at men robbed him as he cashed a cheque— dotes are encouraging, but at least five of 3am, walks long and circuitous routes, “everything went too fast; there’s a gun its participants have been killed, including avoids public transport (many targeted over here, gun over here.” Rather than react one man on April 28th. Mr Blattman says killings occur at bus stops), or remains violently, he says he use a method called the first measure of success will be whether locked indoors. Devon, a physically impos- “control, alt, delete” (cad) to control his more participants survive than members ing man with close-cropped hair and a blue rage. “It saved my life. It probably saved who are monitored in a control group in hoodie, says he is changing. “I came too far, theirs too.” He is proud of walking away. the same neighbourhoods. He and Mr Bo- I did too much. You want to wake up in “I’m just saving lives”. canegra are cautious but hopeful. Devon is peace, but you going to sleep with it [a gun] Both men talk of growing into different already convinced, because of the robbery on you. What the fuck, two guns. You went people. Damien, having said, “It ain’t noth- that did not end in murder. “cad worked. It to bed. Now you going to wake up.” ing to do it”, after describing his readiness worked. I was happy as hell.” 7 https://t.me/finera

The Economist May 4th 2019 United States 41 Lexington No sex please, we’re millennials

Economic change and technological progress have provided an unexpected boon to social conservatism it, many of them still live with their parents. And the low esteem that poor prospects engender, as the experience of many Japanese tragically attests, can also cause mass celibacy. The recent vigour of America’s economy might make this seem less relevant—especially among high-achievers like the North- western students. Yet it was striking how many mentioned the 2008 recession, including their memories of the distress it caused their parents, as a reason to prioritise their careers, even to the extent of forgoing romance entirely. “We’re not looking to get married any more, so what are we doing?” asked one woman. But that still does not seem to explain the persistence of Ameri- ca’s sex recession, or its most extreme feature: how concentrated it is among men. Since 2008 there has been almost a threefold rise in the share of men under the age of 30 who claim to be having no sex. At the same time, the portion of sexless women increased by only 8%. A range of possible explanations for the disparity has been suggested, and the students seemed to corroborate several of them. Many felt men’s social skills had been especially eroded by over-reliance on technology. Overindulgence in porn meanwhile offered them an escape route from reality. Yet the most compelling answer, because it contains elements of all that and more, may be signalled by young people’s increasing reluctance to date. o underline his theory that sexuality is a construct of hu- This is often blamed on the “hook-up culture” of college cam- Tman discourse, the philosopher Michel Foucault noted that puses. Yet casual sex and dating coexisted in the 1990s. It is also people talk about sex a lot. “We convince ourselves that we have easy to exaggerate—now as then—how many people are hooking never said enough on the subject,” he wrote in his (four-volume) up. Half the Northwestern students said they rarely or never did. “The History of Sexuality”. “It is possible that where sex is con- Yet they also rattled off reasons not to date which, among the men, cerned, the most long-winded, the most impatient of societies who would traditionally take the lead in such encounters, includ- is our own.” After a three-hour discussion of sex and dating with ed uncertainty about how they were even managed. Many consid- 30 students at Northwestern University, on the rainy shore of Lake ered the prospect of chatting someone up in a bar not merely Michigan, your columnist felt he knew why. Few fields of human daunting but possibly offensive. “Revealing that your intention in behaviour—and none more important—are so hard to explain. talking to someone is sexual? That’s hairy,” shuddered one man. Lexington’s visit was spurred by the latest evidence that young people in America—as in Japan and some other rich countries— A wrangle for the ring are having much less sex. The portion of Americans aged 18 to 29 The problem seems to be a profound anxiety about what the other who claim to have had no sex for 12 months has more than doubled party to a potential coupling might want and expect. The heavy in a decade—to 23% last year. That is, counter-intuitively, despite stress that all the students laid on the importance of mutually the removal of many impediments to sex. Young Americans are agreeing the basis of any relationship, at every stage of its develop- less religious and more relaxed about sexual orientation than they ment, is probably both a cause and effect of this. Dating apps, have ever been. They are also readier to experiment, in part owing which around half the students had used, can mitigate it at best. It to the deluge of free porn they receive on smartphones. “You have is likely a response to increased female empowerment, the major access to the entire body of porn in your rucksacks!” marvelled Al- change in sexual politics, and therefore further exacerbated by exandra Solomon, a clinical psychologist who runs Northwest- men’s dread of a #MeToo-style harassment charge. In short, young ern’s renowned “Marriage 101” course, in a subsequent lecture. American men with rather poor interpersonal skills currently face Her comment elicited hardly any amusement. Indeed, the a historically confusing mating-game, even as they worry a lot most striking thing about the students to Lexington—in effect, a about their careers. No wonder many are opting to stick to their visitor from the 1990s—was how frank and unembarrassable they video games. seemed. They were, despite their shared interest in studying sex at This is painful. But it does at least suggest that sexual relations an elite university, a diverse crowd: straight and gay, black and are not so much hitting the skids in America as in flux. The forces white, outgoing and reserved. About half were from religious fam- that govern sexual behaviour are dynamic. Who could have pred- ilies; a couple from migrant ones. Yet all seemed willing to discuss icted a little over a decade ago, when George W. Bush was splurging their sexual likes, dislikes and anxieties, including use of porn, on abstinence schemes, that America would soon see a spike in body shyness, and the possible role of both in fuelling a millennial celibacy fuelled by economics, technology, female empowerment obsession with pubic grooming. To the extent that they represent- and perhaps even casual sex? And that cocktail of circumstances ed their generation, diffidence about sex is not the problem. will not last. The economy is strong. The currents in popular cul- The biggest reasons for the “sex recession” are probably ture will shift. And once young Americans become more used to straightforward. Married couples have more sex than singletons their more equal gender relations, they might re-embrace the de- and Americans are marrying later. Economic duress is another gree of ambiguity and risk that romance entails. That is the hope, dampener: it is no coincidence that the slowdown in young Ameri- at least. Meanwhile, they might try putting down their phones, cans’ sex lives began during the great recession. Partly as a result of talking face to face a bit more, and even flirting. 7 Financial Era Advisory Group 42 The Americas The Economist May 4th 2019

Also in this section 43 Chile’s grammar schools 44 Feminist funk music — Bello is away

Venezuela two dozen rebel national guardsmen were reported to be in the Brazilian embassy. A failed uprising Mr Maduro, who started a second term in January after winning a sham election, has plunged the country into economic misery. But despite discontent, and occa- sional defections of small groups of sol- CARACAS AND WASHINGTON, DC diers, the regime has managed to keep the It leaves many unanswered questions about the Trump administration’s plan for loyalty of the armed forces. American offi- regime change cials stress the role of Cuban intelligence n may 1st, the day after the opposition well as his strength. surveillance in quashing military dissent. Oannounced a final push to oust Nicolás At dawn on April 30th Mr Guaidó had That is certainly important in preventing Maduro, Venezuela’s strongman was deter- appeared outside La Carlota with a small moves by individual commanders. mined to show he was back in control. He group of national guardsmen to announce But there is little doubt that the army used the method his regime knows best: “Operation Liberty”. By his side stood Leo- could act as a body to dump Mr Maduro if swift, forceful repression of protests. Juan poldo López, the country’s most famous the high command wanted. That was the Guaidó, recognised by most Western and political prisoner, who had been freed from supposition on which the opposition plan Latin American democracies as the coun- house arrest by his guards from sebin, the was based. Whether the commanders have try’s interim president, had promised the feared intelligence service. For several sufficient incentives to do so is another “biggest march in Venezuelan history” to hours, rumours flew that the army had at matter. Mr Guaidó has offered them an am- prise open the cracks in the regime. It last abandoned a hated regime and backed nesty. But some are too deeply implicated didn’t happen. When protesters ap- a transition to democracy. Then, one by in criminal activities to qualify. To act, the proached La Carlota, an air base in eastern one, General Vladimir Padrino, the defence armed forces need to be sure that their cor- Caracas, they were dispersed by a rain of minister, and other senior military figures porate interests will be protected. That tear-gas canisters the moment they began posted on social media statements of loyal- probably means giving them a role in a aiming stones at the conscripts inside. Two ty to Mr Maduro and denunciations of what transitional government of national unity, people died in demonstrations and dozens one called “a small coup”. which is anathema to many hardliners in were injured. In the evening of April 30th Mr Maduro the opposition whose voices are heard in Just a day earlier the opposition had at last appeared on television, flanked by the White House. hoped that its long struggle against Mr Ma- the high command. He vowed to pursue all American officials claimed that the at- duro’s dictatorship was on the brink of suc- of those behind the uprising. “Sooner, rath- tempted uprising followed two months of cess. But the collapse of what briefly looked er than later, they will go to prison to pay conversations between Mr Guaidó’s people like a co-ordinated uprising with military for their treason and crimes,” he said later. and senior figures in the regime. John Bol- backing represents a big setback for the op- The general in charge of sebin, Christo- ton, the national security adviser, said that position and its backers in the Trump ad- pher Figuera, was apparently sacked. Mr the plan was that Maikel Moreno, the head ministration. At the same time, these López and his family took refuge in the of Venezuela’s supreme court, which has events displayed Mr Maduro’s weakness as Spanish ambassador’s residence, while up till now acted as a regime puppet, was to 1 https://t.me/finera

The Economist May 4th 2019 The Americas 43

2 declare Mr Maduro’s national constituent stand-off is resolved soon, there is a risk The administration may soon face a assembly illegitimate. This would have giv- that any transitional government will in- choice: make good on Mr Trump’s threats en legal cover to General Padrino and the herit a country with the living conditions of military action, or hold its nose while high command to declare their obedience of Haiti. Europeans and Latin Americans negotiate to the opposition-controlled national as- What is not in doubt is the determina- with the regime. On May 1st America’s sec- sembly, of which Mr Guaidó is the speaker. tion of the Trump administration to get rid retary of state, Mike Pompeo, repeated that “For reasons that are still not clear, that of Mr Maduro’s regime. Having joined this military action is possible. Some White didn’t go forward,” Mr Bolton said. He battle, it is one they can ill afford to lose. House officials are reported to be impa- blamed Russian interference for dissuad- American diplomacy was initially deft in tient for this, though the president himself ing Mr Maduro from fleeing to Cuba. marshalling a broad coalition behind Mr may not be so enthusiastic. But military ac- Another explanation comes from Vene- Guaidó. Optimists think this week showed tion in a large country with many guns in zuelan military sources cited in El Confi- that it is only a matter of time before the re- civilian hands would be highly risky. It has dencial, a Spanish digital newspaper. It gime fragments. “If Guaidó is not failing, no support among the Latin American gov- holds that this plan was due to be put into he is winning,” says William Brownfield, a ernments that back Mr Guaidó. effect on May 2nd. Perhaps because they former American ambassador to Venezue- For the many who want change in Vene- thought Mr Maduro and his Cuban spies la. Mr Guaidó has now called for strikes. zuela, this week was intensely frustrating. had discovered the plot, Mr Guaidó and Mr But the counter-argument is also strong: The strategy of trying to win over the mili- López jumped the gun. That prompted the Mr Maduro showed his staying power and tary high command was the correct one. high command to back off. According to a will now crack down. Sadly, its execution was tragicomic. 7 former American official, that may have been in part because of the presence of Mr López, whom they especially mistrust. Education in Chile It is not the first time that the opposi- tion has seemingly overplayed its hand. Picking pupils Some sections of it have long believed that pressure from the streets is sufficient to overthrow Mr Maduro. It has not been. “When the opposition feels it has an advan- tage it always goes for the kill shot and fails,” says the former American official. SANTIAGO The government wants to bring back selective grammar schools General Figuera, the former intelli- gence chief, seemed to confirm Mr Bolton’s he buildingis grimy, with the odd bro- brought in by the country’s previous presi- accounts of military disloyalty. A letter Tken window pane. Despite its scruffy dent, the left-leaning Michelle Bachelet, do written to Mr Maduro and attributed to him appearance the Instituto Nacional, an in- not allow such schools to select more than said: “I discovered that many people you ner-city secondary school for boys, is 30% of their pupils on academic merit. The trust are negotiating behind your back.” Chile’s most prestigious high school. rule takes effect in Santiago this year. Fer- Whether the dictator can still trust General Founded in 1813, it has educated 17 presi- nando Soto, the Instituto Nacional’s rector, Padrino, Mr Moreno and the others must dents and dozens of prominent artists and says its “academic excellence” will be put now be open to doubt—a doubt the Ameri- scientists. It helps bright children from in doubt “if children are admitted with no cans are doing their best to inculcate. As- poor families enter the best universities. interest in studying”. Sylvia Eyzaguirre, an suming, that is, that the plot itself was not a Many commute long distances to get to the education specialist at the liberal Centre Cuban-run intelligence operation to force school in central Santiago. for Public Studies, says that the law “is de- the opposition’s hand, as some speculate. Its future, and that of a score of other stroying selective state schools”. For now, the biggest blow is indeed to “emblematic” schools (especially choosy Sebastián Piñera, Chile’s current centre- the momentum of the opposition. More grammar schools) is under threat. Policies right president, wants to avoid that. He has 1 than three months after Mr Guaidó pro- claimed himself interim president, with the backing of the United States and over 50 other countries, the regime has not col- lapsed. In February Mr Guaidó’s attempt to bring in humanitarian aid from Colombia, watched by the world’s media, failed. It is widely asserted in Washington that the White House officials who have led the Venezuela effort believed that the army would switch sides in a matter of days. The longer the stand-off continues, the more problematic the strategy of President Do- nald Trump’s administration becomes. Mr Maduro’s government and that of Hugo Chávez before him have brought about Venezuela’s economic collapse. But from now on, American sanctions against Venezuelan oil and finance will play a role in aggravating the country’s humanitarian crisis and the exodus of migrants to neigh- bouring countries, a point officials in Washington are sensitive about. Unless the Another experiment, another explosive reaction Financial Era Advisory Group 44 The Americas The Economist May 4th 2019

2 introduced two bills that would partially practices underlying segregation,” says Mi- dances where the music is played at ear- undo Ms Bachelet’s reforms. The first guel Crispi, a deputy for the left-leaning splitting volume—a public-health viola- would allow some 300 high-achieving Frente Amplio alliance, who advised Ms tion. (The legislature refused.) A particular schools, including the emblematics, to se- Bachelet on her education reforms. Legis- target is funk proibidão (taboo funk), in lect pupils on academic merit. Of those, lators like him will probably doom Mr Piñ- which explicit lyrics both glorify and la- half would have to come from hard-up era’s plan to reintroduce an element of se- ment violence. Funk ostentação (ostenta- families. The measure would apply to 10% lection for all schools. Some have a soft tion funk), which celebrates money and of high schools. A second bill would allow spot for emblematic schools. This gives the fame, is especially popular in São Paulo. all other non-private schools to choose bill aimed at the 300 high-performing mc Carol’s mission, and that of other 30% of pupils to suit their educational pro- schools a fighting chance. If it works, Insti- feminist funkeiras, is not to make the style grammes, which may include goals other tuto Nacional’s glory days could return. 7 less rude but to bring to it women’s view- than academic achievement. This “fair ad- points. mc (a hip-hop title derived from mission” policy will reward merit and hard “master of ceremonies”) Carol started out work, the government claims. singing putaria, a subgenre of proibidão Academic elitism is a fraught subject in that’s about sex. Some songs by women are Chile. The school system is stratified. Grad- frankly feminist. In the music video for uates of the poshest schools, like The “Não Sou Obrigada” (“I Don’t Have To”), Grange, are as visible at the top of society as which appears on Spotify’s Global Viral 50 are Old Etonians in Britain. Two-thirds of list, mc Pocahontas chides her dopey boy- private-school students who sit the univer- friend for bossing her around. In “Cai de sity entrance exam get into one of the main Boca” (“Drop Your Mouth”), a putaria hit universities. But just a third of those from from 2018, mc Rebecca sings about men state-supported independent schools, for performing oral sex on women. A hair styl- which parents usually pay top-up fees, ist and samba dancer from the favela Morro make the grade. For state-school students São João, she says the song is a call for sex- the success rate is just a fifth. In 2016, 18% of ual liberation in a world where “women are students admitted to the two best universi- still seen as submissive”. ties—Chile and Católica—came from state Female funk performers and their mes- schools, which have 37% of enrolment. Of sages bring new life to the subgenre “con- these, over half came from 19 emblematic scientious funk”, says Andressa Oliveira of schools. Run by local governments, they Liga do Funk, a group in São Paulo that have been the main non-fee-paying route trains artists. It draws some of its energy to good universities from opposition to Brazil’s president, Jair Chileans on the left have long demand- Bolsonaro, who has aggressively conserva- ed more equality in education. Among the Brazilian funk tive views on social issues. mc Rebecca, loudest agitators were pupils at emblemat- who came out as bisexual on Twitter, ic schools, which hurt the schools them- 100% feminista wrapped herself in a rainbow flag in a mu- selves. Months-long occupations of school sic video. Women are listening. onerpm, a buildings since 2011caused enrolment and company that represents artists in negotia- performance to fall. Instituto Nacional lost tions with digital platforms, looked at da- its place among the 20 best schools, as ta from YouTube for around 130 funk chan- measured by the performance of their stu- nels. It found that women are now 49.5% of dents in university entrance exams. In 2018 RIO DE JANEIRO the audience, up from 32% in 2014. Female mcs are changing the genre it ranked 78th. Female stars are giving Brazilian funk The pupils won, but at a further cost to arolina de oliveira lourenço first global appeal. Larissa Machado, who calls their schools. Ms Bachelet imposed the cap Cheard the word “feminism” in 2015 herself Anitta, started out in a church on emblematic schools’ ability to select from friends who were taking Brazil’s col- choir, made her name in Rio’s funk scene based on merit as part of her quest to make lege entrance exam, on which a question and now has 37m Instagram followers, the education system more equal. (She also about it appeared. She was 22, and a rising many of them abroad. The video for “Vai vowed to raise standards.) Other reforms star in the world of carioca funk, throbbing Malandra” (roughly, “Go Hustler”), which included eliminating selection for most syncopated dance music born in the fave- was filmed in a Rio favela, has been viewed other schools, phasing out top-up fees at las of Rio de Janeiro. A year later, mc Carol, 352m times on YouTube. Anitta refused to independent ones and providing more as she is known, released a song called airbrush out the cellulite on her thighs, de- money for poor pupils and teacher train- “100% Feminista”. The lyrics describe her lighting women. “Vai Malandra” is the first ing. The early signs are that the new system tough childhood: “I was five but I already Portuguese-language song to reach Spot- is increasing socio-economic diversity understood/that a woman gets hit if she ify’s Global Top 50 list. That brought a sing- within schools, says Ms Eyzaguirre. doesn’t make food,” she rapped. It was a hit. ing gig with Madonna. But it has taken effect slowly. And par- That did not stop nasty comments on so- Kamilla Fialho, whose marketing com- ents are keener on selection than the re- cial media about her appearance. “It’s not pany, k2l, helped shape Anitta’s early ca- formers are. According to a recent poll by just hard to be a woman singing funk,” says reer, compares her success to that of Cadem, 63% of Chileans are in favour of mc Carol, who calls herself black and fat. Beyoncé and Rihanna, who are politically merit-based selection; 79% prefer it to “It’s hard to be a woman, period.” active and flaunt their sexual empower- “random” selection. Most Chileans are Funk, which has roots in American hip ment. Her company is now coaching mc proud of emblematic schools. hop, is performed mostly by men. Its critics Rebecca by providing English lessons, This ought to help Mr Piñera bring back say its lyrics promote misogyny, promiscu- among other things. Ms Fialho is not en- some selection, but he faces a fight. His co- ity and crime. In 2017 20,000 Brazilians couraging the young funkeira to stay away alition lacks a majority in congress. “It’s signed a petition calling on congress to de- from the subject of sex. “If you want polite difficult to create inclusion if you keep the clare it—along with bailes funk, massive music, listen to classical,” she says. 7 https://t.me/finera Special report Banking The Economist May 4th 2019 3

A bank in your pocket

Young people and their phones are shaking up banking, says Helen Joyce. That will transform the industry started the business because I love milk tea myself,” says transfers, and then purchases in bricks-and-mortar outlets. Alipay “IPeng Yuxia. Meet the Cow, her shop in Hangzhou, 200km was spun off in 2011. Renamed Ant Financial in 2014, it is now one south-west of Shanghai, sells the cassava-based hot drink, also of the world’s biggest financial firms. Its most recent funding known as bubble tea, to passers-by—and, increasingly, to custom- round, last year, valued it at $150bn. Alibaba holds a 33% stake. ers who pre-order on their phones. Recently she signed up to a Together with its main rival, WeChat Pay, which sits within We- small-business programme run by Ant Financial, China’s biggest Chat, the country’s dominant messaging app, Alipay has trans- fintech firm, which has its headquarters nearby. Now customers formed Chinese commerce—and everyday life. They have enabled can order in advance from within Alipay, Ant’s payment app, and China to leapfrog straight to mobile payments using qr codes, by- she has seen total numbers rise from about 50 a day to nearer 70. passing credit and debit cards. All manner of things can be done Payment is by scanning a qr (quick-response) code—so easy, she from within their apps, including buying tickets for flights, train says, that a mother getting a pedicure next door can send a child in journeys and films, calling a taxi, paying an electricity bill, order- to order with her phone. ing food and much more. In another part of Hangzhou, Zeng Ping’en looks around his In the past five years Ant has expanded beyond payments and electric-moped shop with pride. A loan from mybank, Ant’s digital into other financial services. In 2013 it set up Yu’e Bao (“spare trea- bank, helped with the cost of redecoration. Applying took just a sure”), a single-click, instant-access way to earn interest on excess few minutes, he says: “A click on the phone and I got my money.” Alipay balances by parking them in a money-market fund. By He can draw down and repay funds at his convenience; interest March 2018 the fund had 1.7trn yuan ($250bn) in assets, making it amounts to a few yuan a day—“easily affordable”. Since China’s the world’s biggest money-market offering by a wide margin. long-established banks lend mostly to companies, without the In 2015 Ant started providing revolving consumer credit. The mybank loan he would have had to wheedle loans from his friends. following year it launched mybank, using Alipay data to set inter- “Electric-moped shops are getting fancier,” he says. “I’d lose out to est rates and credit limits for small-business loans. Ant Fortune, the competition if I didn’t renovate.” launched the same year, gives access to Yu’e Bao, now with a choice Ant’s origins lie in Alipay,set up in 2004 by Alibaba, then a new- of money-market funds, and a range of wealth-management pro- ish e-commerce website, to make online payments easier. As Ali- ducts from nearly 30 asset-management firms. baba grew, its payment arm started to allow person-to-person Startled by Ant’s hectic growth, in the past couple of years Chi-1 Financial Era Advisory Group 4 Special report Banking The Economist May 4th 2019

2 nese regulators have sought to slow its masse to a mobile-only “neobank” that of- pace, setting daily limits on transfers with- Shop and go fers its own current account but also acts as in Alipay and caps on those into and out of China, value of mobile payments, yuan trn a broker for products offered by other fi- Yu’e Bao. Regulators abroad, too, have 50 nancial institutions, such as Monzo in Brit- crimped Ant’s ambitions. Last year Ameri- ain or n26, now in 24 countries in Europe ca’s investment-screening committee Other 40 and planning to go farther afield. blocked Ant’s purchase of MoneyGram, a In such scenarios incumbents risk end- money-transfer firm, which would have 30 ing up as “dumb pipes”, holding bloated given it access to 350,000 retail outlets Tencent balance-sheets and originating products mobile globally—and a foothold in America, the 20 such as mortgages and loans that someone biggest market for financial services. else sells to consumers. If they were to lose The setbacks forced a rethink. At home, the ability to build a brand and the transac- 10 Ant’s top brass now talk about supporting tion data needed to understand their cus- Alipay mobile incumbents to find new customers and be- tomers and cross-sell, their wares would come technically more nimble. Its foreign 0 become interchangeable. Margins would plans have been slimmed down, too. It is 2015 16 17 18 be driven down, even as they continued focusing on enabling Chinese people to Source: Analysys having to abide by onerous banking regula- use Alipay abroad (now possible in 54 tions and hold balance-sheet risk. countries and hundreds of thousands of The mobile phone allows financial pro- shops) and expanding into developing countries. Ant now has ducts to be linked with other services in novel ways. Take Ant Fi- stakes in, or partnerships with, digital-payment firms in countries nancial’s main rival, Tencent, the social-media and gaming giant including Bangladesh, India, Malaysia, Mexico, the Philippines that owns WeChat. It moved into payments in 2013. Uptake was and Thailand. “We see our role as serving the unbanked and under- slow until the company spied an opportunity in the tradition of banked,” says Leiming Chen, its general counsel. giving cash gifts in red envelopes to friends and relatives during Chinese new year. In 2014 it added a digital “red envelope” feature Bestriding the world to WeChat; 40m were sent over the holiday period. In 2015 an as- Ant’s giddy growth is both a cause and a consequence of big tonishing 500m were sent on the single busiest day. changes in Chinese life: development, urbanisation and the emer- Though Alipay hurriedly added its own red-envelope feature, gence of a vast middle class ready to spend. But it also exemplifies a the damage had been done: WeChat Pay had become a fixture on broader shift in the provision of financial services. That shift goes Chinese people’s phones. It continues to benefit from being em- well beyond China’s borders. In hindsight, the pivotal year was bedded in an app that is used by most Chinese people many times 2007, when the credit crunch started and the iPhone was daily, and which connects them to everyone they know. Its share of launched. The consequences of the crunch have preoccupied mobile transactions has risen steadily and now accounts for 39% bankers everywhere for more than a decade. The smartphone, it is by value (though somewhat more by number, since it tends to be becoming clear, will matter at least as much for their future. used for smaller transactions), against 54% for Alipay (see chart). Start with the threat from Ant itself. Many bankers in developed Tencent also offers personal loans and runs an online bank, We- countries fear that its plans for aggressive expansion beyond Chi- Bank. A move deeper into financial services would further threat- na have merely been postponed. That worries rich-world incum- en Ant’s position. bents, since a hungry new arrival would mean slimmer pickings for those already at the table. And Ant’s “platform” approach—of- Innovation generation fering a pick-and-mix of financial and non-financial products This special report will argue that banking incumbents will need from other companies on its app—poses a challenge to the current to reinvent themselves to survive the restructuring of their indus- (or checking) account that is the central relationship with banks of try. It will also offer a way to understand the coming fight: as a co- most people in rich countries. If that core were to break up, how evolution of incumbents, fintechs, neobanks and consumers, would banks cross-sell loans, mortgages or insurance, profit from with developments in each country shaped by, among other interest-rate spreads and commissions, or charge fat fees for occa- things, the strength of existing banks, quirks of the local market sional services such as foreign exchange or overdrafts? and the attitude of regulators. “I understand why [banks] would be a little scared: the sheer It will focus on Asia, where the population is young, the market size of our user base and the variety of services we offer,” says Mr for low-cost financial products is growing fast and incumbents are Chen. But incumbents everywhere have nothing to fear, he insists: weak; and on places where financial regulators are seeking to Ant sees its role not as displacing them, but as helping them serve boost competition by encouraging new banks, notably Britain. It customers they would otherwise not be able to reach. Its expertise will have little to say about America, where digital banking has not is in creating value from technology, not from deploying capital to yet had much effect on the industry. Incumbents are sheltered by a support loans, he says. “The notion of us being a disrupter, or some thicket of state and federal regulations, and running a free-stand- creature that traditional financial institutions should be scared of, ing digital-only bank is nigh-impossible. is misguided.” Since the evolutionary pressure comes from the mobile phone, Many of those institutions are quaking nonetheless. And being the best way to view the fight is through the disrupted by Ant is just one of their digitally induced nightmares. eyes of its most devoted users: the un- In another version a Western tech giant—Amazon is mentioned der-30s. Though people of every age are most often—decides to move into banking. Or a messaging or ride- The pivotal year turning to mobile banking, the future of hailing firm expands into financial services—like Kakao in South was 2007, when the industry is clearest to see in the hands Korea, which owns the country’s favourite chat app and now offers of digital natives. A good place to start is payments and banking; or Grab and Gojek in South-East Asia, ride- the credit crunch South Korea, which is the world’s most hailing services that have moved into payments, insurance and started and the connected country—and perhaps also its loans. Some incumbents fret that customers might decamp en iPhone arrived most overbanked. 7 https://t.me/finera

The Economist May 4th 2019 Special report Banking 5

acquisition mean that banking in South Korea has long been a mis- How to make banking fun erable experience. Mobile-banking apps are poor or non-existent. Making a payment online typically requires 40 clicks and four passwords. But the past couple of years have seen a flurry of digital My branch manager is entrants. Some seek to help South Koreans cope with the existing muddle; others aim to replace it with something better. a radish In 2015 the Financial Services Commission (fsc), South Korea’s national regulator, decided that encouraging fintechs would shake up the incumbents and improve customer service, says Suh New ways to tame South Korea’s chaotic banking system Jeong-ho of the Institute of Finance, a think-tank associated with u, a 25-year-old student in Seoul, racks his brain to answer a the fsc. One of the most ambitious newcomers is Viva Republica. Ysimple question: where do you bank? At three different institu- In December the startup became South Korea’s first fintech uni- tions, it turns out, with six active accounts. One bank was nomi- corn, raising $80m in a funding round that valued it at $1.2bn. nated by a grant-giving body for the payment of a scholarship, an- Founded in 2013 by Lee Seung-gun, a former dentist, Viva Re- other offered perks while he was doing military service and a third publica tried several other ventures before going into digital pay- was where a previous employer insisted his salary be paid. He has ments with Toss (the name is supposed to suggest an easy shot in a several other dormant accounts, and “too many cards to remem- ballgame), which has since grown into a comprehensive money- ber”. One of them he applied for merely to get a bonus. “A sales- management app. Users can aggregate accounts, cards and loans woman came into my office and said that if I spent 300,000 won into a single view, with outgoings classified by category. They can [$300] on it, I’d get 100,000 won back.” He used it just once. sign up for financial products, with Toss earning a commission. “If In South Korea, this profusion is perfectly normal. The average you’re looking for convenience, you have to use Toss,” says Yu, the adult has 5.2 bank accounts and 3.6 credit cards. Financial pro- overbanked student. “I can see how much I’ve spent and even in- ducts are chosen not because they are a good fit, or because an in- vest in foreign stocks and peer-to-peer funding.” stitution offers fine service, but almost entirely because of perso- The upstart’s speedy growth testifies to the awfulness of the tra- nal connections. Credit cards are peddled to acquaintances by ditional banking experience. Toss has 11m registered users, a quar- freelance agents who split their commission. Flaws in customer ter of the South Korean population. But its ambitions go much fur-1

Kids these days

What bankers need to know about the mobile generation f you turn18 this year, you are young- pany, another consultancy, asked people that have been set by Uber and Amazon Ier than Amazon and Google. You in 17 countries which they would miss Prime. You are generally willing to grant turned three with Facebook’s arrival, four more for a day: their phone or their wallet. companies access to your data, but want with YouTube, five with Spotify, six with Everywhere except Japan and Malaysia, the something in return. You let Google Maps the iPhone and eight with WhatsApp. If share of under-25s who would miss their track your location to help you get where you are at the upper end of the 18-30 age phone more was above 70% (see chart). you are going; you like Netflix using your range considered in this special report, You are a demanding customer, with viewing habits for recommendations. you will remember a time before mobile expectations of speedy, convenient service In many developed countries, tuition internet, but not a time before mobile fees mean you have much more debt than phones. If you are anywhere in that previous generations did. Soaring property range, you use your mobile to read, chat Back pocket prices have made it harder for you to be- and play, stream music and videos, hail Retail-banking customers who would rather go come a homeowner. Growing up in the taxis, order food, and search for dates without their wallet than their phone, 2017, % of total aftermath of the financial crisis has left and jobs. Under 25 55 and above Average you cautious about loans. According to You use mobile phones to manage bankrate.com, a comparison service, just 0 20406080100 your money, too. Research last year by one in three American millennials has a Raddon, a consultancy, found that 85% South Korea credit or debit card, a much lower share of American millennials (those born China than for previous generations at the same between 1981and 1996) used mobile India age. All this means banks find it hard to banking, and predicted that the share Singapore make money from you. would be higher still for Gen z (born after You also demand more from financial Malaysia 1996). The main reason people choose a institutions than older people do, and care bank is convenience, the consultancy United States more about values-based investing and says. For older people that means a near- Britain corporate social responsibility. The young by branch; for younger ones it means an Australia expect an answer to the question: “Why are excellent app. Germany you in banking?”, says Rick Spitler of No- You have cooled on cash. Half of Japan vantas, a financial consultancy. “They American millennials use peer-to-peer think bankers should care about helping payment services such as Venmo or Zelle Canada people to become wealthier, not just about at least once a week. In 2017 Bain & Com- Source: Bain & Company their own bottom line.” Financial Era Advisory Group 6 Special report Banking The Economist May 4th 2019

2 ther. It is applying for a licence to set up a digital bank. The aim, declares Mr Lee, is to be the dominant South Korean “super-app” for all things financial. Banks do not see Toss as a threat, he says, but as a partner that cuts the cost of acquiring customers. In the long term, though, banks may lose out, he thinks. “We will get the [customer] engagement and they will become suppliers.” Bank Salad (banking, but healthy), from Rainist, a fintech founded in 2012, is taking a narrower approach. It has 4m users and also offers account aggregation and money management, though not payments or transfers. Its chief executive, Kim Tae- Hoon, says it aspires to be a financial-adviser version of Jarvis, the ai assistant in the superhero film “Iron Man”. Rainist’s strength is its data-driven referral system, which sug- gests products based on users’ spending patterns. According to its research, credit-card customers whom its partner institutions have acquired by other routes, such as agents who offer signing bo- nuses, spend an average of 600,000 won a month and stay for four months. The customers who sign up through Bank Salad spend three times as much each month and last nearly three times as long, so the card-issuers get a bargain for the commission they pay.

Salad, tossed Both apps are shaking up South Korean banking by rationalising customer acquisition, setting new expectations for quality of ser- vice and, if Toss succeeds in becoming a bank, competing head-on. But there is another formidable challenger. Fully 94% of South Ko- reans use Kakao Talk, the chat app of Kakao, a social-media and mobile-gaming giant. Like WeChat, it includes a payment func- tion, Kakao Pay, which has 28m registered users. It was used for more than 20trn won ($17.5bn) of payments in 2018. A dominant social-media player’s success in payments is of ob- vious interest to other fintechs. In February 2017 Ant bought nearly 40% of the fledgling Kakao Pay for $200m. For Kakao Pay, says Shin Won-keun, its chief strategy officer, the appeal of Ant as a partner was that its portfolio is similar to what Kakao Pay would like to do. For Ant, it is a chance to learn from Kakao Talk: “They wanted to see what would happen with a messenger app.” Kakao is now making a full-frontal assault on South Korea’s in- cumbent banks. In 2017 a consortium including Kakao Corpora- tion, the brand’s parent company, won one of the country’s first two licences to run a digital bank. Kakao Bank has been a runaway success: within 13 days 2m people had signed up for current ac- counts and it now has 8.9m clients (k-Bank, the other newcomer, lags far behind with 1m). The fsc is considering allowing non-fi- nancial firms to hold larger stakes in banks (Kakao Corporation owns just 10% of Kakao Bank, the maximum permissible) and granting two more digital licences. Toss hopes to win one of them. Rather than present itself as solid and respectable, as banks usually do, Kakao Bank comes over as playful and fun. Its debit cards, and those of Kakao Pay, feature the Kakao Friends, eight kooky characters created as emoji for Kakao Talk. Muzi, for exam- ple, is an optimistic piece of danmuji (pickled yellow radish) who dresses as a rabbit; the most popular character, Ryan, is a gentle lion who refused the throne of Doong Doong island and is self- conscious about lacking a mane. Whether South Koreans will shift to running their financial lives through their Kakao accounts is an- other question. After all, when you already have five accounts, adding a sixth may not Kakao is now be that big a deal. But the hordes who have making a full- signed up demonstrate that customer ex- pectations are changing. Instead of picking frontal assault on a stolid, sober bank manager to keep watch South Korea’s over their money, they are choosing a incumbent banks brand fronted by a gentle, maneless lion. 7 https://t.me/finera

The Economist May 4th 2019 Special report Banking 7

Apps in South-East Asia Grab and Gojek

In Malaysia and Indonesia, ride-hailing services are bringing banking to the masses oth were founded by Harvard Business School graduates, Bfrom the same year. Both have apps that have been downloaded more than 100m times. Both started with ride-hailing and expand- ed into other logistics businesses, such as deliveries and food- ordering. The story of two South-East Asian “deca-unicorns”—fin- techs valued above $10bn—is usually told in terms of their rivalry. This report is more concerned with how ride-hailing services can bring banking to the masses in a largely unbanked region. The older is Gojek (the name comes from ojek, the Indonesian word for a motorcycle taxi). Founded in 2010, it expanded beyond Indonesia only in 2018. It is now also active in Vietnam and Thai- land, and in January entered Singapore, its rival’s current base. Grab, founded in Malaysia in 2012, went multinational earlier. Last year it pulled ahead of Gojek when Uber called time on a price war with Grab, took a 27.5% stake in its erstwhile rival and left the he says, is convincing banks that Go-Pay is a potential partner, not region. It is now active in the same four countries as Gojek, plus a threat. “I don’t want to have to work the way that they do. I don’t Cambodia, Malaysia, Myanmar and the Philippines. Gojek’s main want to have their balance-sheet. They’re only in 30% of the mar- edge in what is now a two-way fight is that it is native to Indonesia, ket; there’s another 70%. There’s enough for all of us.” which, at 265m, accounts for two-fifths of the region’s population. If South-East Asia’s ride-hailing giants succeed in their ambi- At first, the pair’s apps simply put customers and drivers in tions, the region’s incumbents may never develop into anything touch, with payment in cash. Since 75-80% of South-East Asians that looks like the full-coverage retail banking available in the de- are unbanked, enabling customers to go cashless required lateral veloped world. They may hold on to better-off individuals and big thinking. Inspiration came from the way kiosks and convenience businesses, while everyone else buys the products they originate stores sell mobile-phone credit. Now drivers (who get help with on mobile platforms that combine financial and other services. opening bank accounts for themselves) act like mobile top-up sta- Rather than unbundling the constituent parts of banking, the mo- tions for in-app credit. Passengers can hand over extra cash on top bile phone may stop them being bundled in the first place. 7 of their fare and ask the driver to add it to their balance in the app. More recently, Grab and Gojek have enabled digital wallets to be topped up in cash with third parties, such as kiosks and conve- Reforming the incumbents nience stores. And they are signing up retailers to accept qr-code- enabled payments using their apps. Each aims to be used for all sorts of purchases, not just for services offered through their apps. The biggest obstacle for each (apart from its rival) is slow adop- Banker, disrupt thyself tion by retailers. Speeding things up means persuading retailers that new ordering and payment options will increase profits. Grab says its average cashless user makes twice as many transactions as one who pays in cash, and is 30% more likely to use several of its How Singapore keeps its banks up to speed services rather than just one. “Our pitch to a food merchant is that with Grab Food you typically see a 20-30% uplift in transactions, n 2014, as alibaba was preparing to list in New York, Piyush and with Grab Pay you see lower costs,” says Reuben Lai, senior IGupta, the chief executive of dbs, Singapore’s biggest bank, was managing director of Grab Financial, the group’s payment arm. watching with growing alarm. Together with his bank’s chairman, Both firms are moving into other financial services, such as Peter Seah, he arranged a meeting with Jack Ma, Alibaba’s founder, small-business loans and microinsurance. They can use transac- and Joseph Tsai, then its chief financial officer. “I walked away tion data to credit-score, and take payments from in-app wallets, scared out of my wits that they will change our industry forever,” which cuts the risk of default. Grab, with its region-wide footprint, says Mr Gupta. Many bankers, particularly in America, seemed is also looking at cross-border remittances. “Our ambition is to convinced that onerous regulations would protect them from build the asean [Association of South-East Asian Nations] wallet challenge, or that regulators would dampen competition for fear to enable any consumer to buy anything, online or offline, and ac- of destabilising the sector. To Mr Gupta that seemed complacent. cess any financial service, anytime, anywhere,” says Mr Lai. “Ant shows that there’s more than one way to skin the cat,” he says. Neither wants to make loans or underwrite insurance itself. “They are getting the customer relationship and the data to create Like Ant Financial, they insist they want to work in partnership value, and then passing the regulated part of the activity to banks.” with incumbent banks. The right way to think of Gojek’s payment The meeting left him determined to disrupt his own bank be- arm, Go-Pay, says Aldi Haryopratomo, its chief executive, is as a fore Ant, or another challenger, had a chance to do so. He consid- “bridge between people who don’t have access to financial services ered spinning off a separate unit to lead the transformation, or and people who want to provide them”. The hardest part of his job, outsourcing some of it to fintech firms, but decided that dbs was 1 Financial Era Advisory Group 8 Special report Banking The Economist May 4th 2019

2 capable of rebuilding itself. “The received wisdom is that it’s im- Neobanks possible to change culture,” he says. “But I had gone back home to Delhi to visit my dad, who’s in his 80s. He banked online, paid his taxes online, shopped on Amazon—so what makes us think we can’t change people in their 40s and 50s sitting in a bank?” For digital natives Since then dbs has reworked much of its back-office technol- ogy, moving more than 80% of its computing power off clunky mainframes onto the cloud. It has teamed up with businesses of- fering a wide variety of services to its app—including, most recent- British banking goes branchless ly, Gojek. dbs’s market dominance was essential to forging these relationships, says Mr Gupta. Elsewhere in the region it has decid- nne boden started her career in banking in 1981. After rising ed that acquiring new customers requires a new approach. Two Athrough the ranks, in 2012 she became chief operating officer years ago it launched digibank, a mobile-only bank aimed primar- at Allied Irish Banks. As she helped pick up the pieces after Ire- ily at young people, in India. Last year digibank launched in Indo- land’s banks had blown up its economy, she started thinking that nesia. It now has 2.9m customers in those two countries. banking needed root-and-branch reform. And even as bankers Acquiring a digibank customer via online promotions and ads were distracted by the aftermath of the financial crisis, the wider costs around $8-10 a go, far less than the $60-70 it takes to acquire a world was changing. “People were running their lives on mobile customer offline. And without branches, running accounts is very phones,” she says. “They were living on social media and buying cheap. Even so, it will take time for digibank to become profitable. music on Spotify, and financial services hadn’t caught up.” “Because the cost is not huge you think you’ll acquire the custom- At the end of 2013 she resigned to travel and visit the most inno- ers and figure out what to do with them,” says Mr Gupta. For a pos- vative banks she could find. But they seemed to be merely patching sible model he points to dbs’s digital marketplaces for cars, hous- up their computer systems and closing branches, rather than re- ing and energy contracts, which earn it commissions. thinking their business models. Starting again, she concluded, was the only way to do something better. So she decided to launch Creeps in this petty pace a digital-only “neobank”, Starling, in Britain. Since getting a bank- United Overseas Bank (uob), Singapore’s third-biggest bank by de- ing licence in 2016 it has opened 520,000 personal accounts. posits, is also creating a digital bank to support its regional expan- Starling is one in a flock of neobanks in Europe aiming to let sion. tmrw (pronounced tomorrow), a mobile-only bank aimed at digital natives bank on their mobile phones. Britain has the largest millennials, was launched in Thailand in March. A digital bank number; some 15 licences have been granted since 2005. These can be a trove of customer data. uob has set up an “engagement new banks are capturing a third of new revenue growth in Britain, lab” to use behavioural insights and artificial intelligence to study says Alan McIntyre of Accenture, a consultancy. All are raising customers’ banking habits and needs. large amounts of capital and seeing customer numbers grow at a The focus on young people simplifies things, explains Dennis speedy clip. According to a survey by finder.com, a comparison- Khoo, who is leading the expansion, since they are already digital- shopping website, 9% of British adults—and 15% of 18- to 23-year- ly minded and their financial needs are usually straightforward: olds—now have a neobank account. payments, credit cards and savings. He draws a distinction be- Monzo has opened 1.6m new accounts in Britain, with 30,000 tween “digital banking”—offering services through internet and more each week. Revolut, which started by offering foreign ex- mobile, alongside other channels, such as branches and phone— change and then added an e-money licence, now has a banking li- and a “digital bank”, like tmrw, which is available only through cence in Lithuania and will soon have deposit protection and be mobile phones. The latter is the way, he says, that banks can able to offer credit across the euro zone. n26 (named for the num-1 squeeze out costs while still offering excellent customer service. Singapore’s banks have certainly been forward-looking. But they have also been supported by a regulator that wants incum- bents to be well-placed to survive the coming competition. In typi- cally technocratic Singaporean style, the Monetary Authority of Singapore (mas) has chivvied banks to upgrade their software, move onto the cloud and build fintech-style services in order to see off challengers before they can gain a foothold. In 2016 mas summoned the island’s big banks and told them to create a peer-to-peer system for moving money between accounts. Any account-holder in Singapore should be able to transfer money free to anyone else with no more than a few clicks on a phone. More information fields were added to Singpass, the national digi- tal-identity system, and a system was set up to enable people to give financial institutions direct access to their profiles. “We de- cided to upgrade the ability of the existing players and equip them so they can better compete in the market,” says Sopnendu Mo- hanty, mas’s chief fintech officer. “As a public policymaker, we are working with banks to rationalise their costs, and create a level playing field for them to compete with non-regulated entities.” This approach has had the desired consequence: fintechs in Singapore have largely shifted from offering services to consum- ers to offering digital services to banks. Some other regulators, no- tably Britain’s, are taking a different tack: encouraging new en- trants and leaving it to the market to pick the winners. 7 https://t.me/finera

The Economist May 4th 2019 Special report Banking 9

2 ber of cubes that make up a Rubik’s cube), which launched in Aus- tria and Germany in 2015, is now in 24 European countries. Starling Bye bye, bank manager is moving into “banking as a service”: enabling businesses to carry out activities such as payments by handling the regulated parts. Bank branches per million people Willingness to purchase a digital Branches are closing and customers are becoming keener on product, Q4 2018, % of customers digital financial products in many developed markets (see chart). 1,000 0 20406080100 But neobanks have flourished particularly in Britain. One reason is Spain 800 that high-street banks’ reputations were even more thoroughly Netherlands wrecked in Britain than elsewhere, not just by the financial crisis Sweden Denmark Italy 600 but also by the mis-selling of insurance policies in the 1990s, for Germany Britain which compensation of more than £34bn ($44bn) has been paid so 400 far. Another is that the regulator, the Financial Conduct Authority Germany US (fca), is keen on new entrants. It has a mandate not just to protect 200 Spain the integrity of the financial system but to promote competition. Sweden Britain United States When the fca sets policy, says Chris Woolard, its director of strat- Netherlands 0 egy and competition, it considers “not just the risk that bad things 2000 05 10 16 Italy will happen, but the risk that good things will not”. Source: McKinsey Britain’s approach to financial innovation also helps fintechs move towards bank status step by step. Its “open banking” rules were shaped partly by an investigation in 2016 into the retail-bank- Neobanks have two big cost advantages: the absence of ing market that concluded more competition was needed. They in- branches and their up-to-date cloud-based software. Branches and clude a particularly fintech-friendly interpretation of the “revised the associated staff are responsible for as much as half of a high- payments services directive”, an eu-wide rule requiring banks to street bank’s costs. And if it is still running on a legacy mainframe, give third parties direct access to account information (with the three-quarters of its it budget is likely to go on “keeping the lights account-holder’s permission). The aim is to encourage startups on”, says Dharmesh Mistry of Temenos, which sells cloud-native that offer payment services, account aggregation and the like. banking software. Industry insiders say that a conventional bank Since 2016 the fca has run a “sandbox” for financial innovation. has to make in the region of $200-400 a year per customer to break Twice a year around 25 firms are allowed to sign up customers for a even, and each new account adds significant marginal cost. For a new product or operational approach, with full disclosure and an neobank, even including product development, customer acquisi- fca guarantee that they will not lose out if things go wrong. Firms tion and so on, the equivalent figure is around $50-60, and the must comply with all the usual prudential measures and checks marginal cost of maintaining each extra account is close to zero. for money-laundering, fraud and so on, but are granted permis- Economies of scale are encouraging a sprint for global growth. sion to innovate within the spirit of the rules. Starling is moving into the euro zone, with a base in Dublin; Mr Woolard draws an analogy with pharmaceutical trials, Monzo’s post-Brexit backup plan is an Irish licence, too. n26 and where a new medicine is tested against the standard treatment for Revolut are both entering several countries in Asia. In Singapore, a disease. Firms seem to value the opportunity to prove to inves- says Rishi Stocker, who is leading Revolut’s expansion, the regula- tors that their approach works in a regulated setting, he says: ap- tor seems more interested in supporting incumbents than in en- plications for the sandbox exceed the number of places by a factor couraging competitors. But the island’s large foreign-born popula- of three. The approach has spread: more than a dozen regulators tion makes it an attractive proposition for a bank with a reputation elsewhere have set up sandboxes in the past couple of years. for cheap foreign exchange. Australians, with their penchant for travel, are also an appealing target. And Japan is just asking to be disrupted, says Mr Stocker. “The existing banks are ultra-expen- sive, and most don’t have apps or even desktop applications.” n26 and Revolut are open about their plans to break into Ameri- ca; Starling and Monzo are less forthcoming. The country’s hand- ful of home-grown challengers, such as Simple and Moven, have been hampered by the patchwork of federal and state regulations, and rules that make it hard to operate without branches. Like the natives, the newcomers will take responsibility for customer ser- vice while partnering with local “white-label” banks—any of sev- eral dozen fully licensed banks that specialise in carrying out regu- lated activities such as holding deposits, handling payments and originating loans for institutions that lack a banking licence. The main criticism of challenger banks is that customers will use them merely to ring-fence discretionary spending, with their salaries still going into a high-street bank. But that is changing. Nearly two-thirds of Monzo’s active accounts have at least £500 a month coming in and a third have £1,000 a month. More important, they are realising that even secondary ac- counts can be monetised in novel ways. All want to act as market- places, not just for financial products but for other services, too. If a payment for an adventure holiday or mobile-phone bill goes out from your n26 account, muses Valentin Stalf, one of its co-foun- ders, you could be shown options for travel insurance or phone contracts. Monzo allows customers to put money into interest-1 Financial Era Advisory Group 10 Special report Banking The Economist May 4th 2019

2 bearing pots held by Investec, a separate institution (Monzo’s own “Flanker” banks current accounts do not pay interest). It is working on offering the best deals on utility bills, and mortgages from across the market to customers whose fixed rate is ending, says Tom Blomfield, its chief executive, rather than leaving them to default to a worse product. Young at heart “Monzo wants to liberate its clients from the ‘loyalty tax’,” he says. “There are a lot of industries in the uk where you get one year at a good rate and then you’re transferred to a rubbish one.” A balance-sheet-light business model that depends more on Some incumbents are seeking to combine the old and new selling third-party products than on recycling deposits into new loans requires top-notch data analysis and frictionless service. All t the entrance of the glass-and-chrome headquarters of the neobanks spend heavily on data scientists and app developers; ABank Leumi in Tel Aviv, look left and you will see Mani House, they roll out frequent updates and constantly tweak their recom- one of the city’s oldest buildings. From a balcony peers a statue of mendation algorithms. Since they have access to account data and Theodor Herzl, the Zionist leader known as the Father of Israel. have already checked their customers’ identities, referrals to third- The marriage of historical and modern is fitting for Israel’s oldest party suppliers could potentially be done with fingerprint or facial bank, established before Israel itself, in London in 1902. For Leumi recognition—as simple as one-click shopping on Amazon. also owns Israel’s youngest bank, launched in 2017. For any of this to work, customers must trust their bank. This Pepper is Israel’s first bank aimed at “millennials and millenni- means no more sneaky charges, such as allowing a scheduled pay- als at heart”, says Rakefet Russak-Aminoach, Leumi’s chief execu- ment to put them in the red and charging a fee, rather than alerting tive. It is also Israel’s first mobile-only bank, the first to charge no them in advance. “The most successful thing about these new fees or commissions and the first to allow current accounts to be banks is that they are on the customers’ side of the table,” says Mr opened without visiting a branch. It consists of two apps: one that McIntyre of Accenture. “The possibility is fading of building your resembles a Facebook feed, showing transactions, money-man- business model on the fact that customers make mistakes.” 7 agement tips and articles related to the account-holder’s spend-1

Coin of the virtual realm

Teaching children to value money they can neither touch nor see n 2009 a group of parents in Lyming- savings pots, view their spending and their financial management and motivat- Iton, an English coastal town, started balances, and set savings targets. “They ing them to spend better and save. It is just sharing worries about their children’s could decide to save ten dollars for a sib- one of several money-management apps money-management skills. Pocket mon- ling’s birthday in four weeks’ time, or set a for parents and children; others include ey was now stashed in a building society goal at 12 to have $2,000 to buy a car at age Osper, Nimbl and Pennybox. All charge rather than a piggy bank; household 18,” says Dean Brauer, one of GoHenry’s subscription fees, since they lack banking shopping was done online; the children founders. “The app tells them how much licences and cannot make money by lend- rarely saw their parents handling cash. to save each week to meet their goal.” ing out deposits. They fill a gap left by They were spending online, too. Money Mr Brauer compares GoHenry to a banks, which do not serve such young had become intangible. How, then, were fitness app, giving children feedback on customers or offer accounts that give children to learn its value? parents oversight of children’s spending. The answer they came up with was A big benefit of such apps is that they GoHenry, an app now available in Ameri- inspire family conversations about mon- ca as well as Britain. It is designed to help ey. According to research done in 2013 by young people learn good financial habits academics at Cambridge University, more through real-world money management. than half of British parents find the subject Parents sign up with their own bank hard to discuss with their children. And accounts and pay a monthly fee of £2.99 yet most agree that children’s attitudes to or $3.99 for each child aged six or over. money are formed in their early years. Adults and children download separate Some GoHenry customers are well-off versions. At the end of last year 379,000 parents who worry that their children will children had active accounts. grow up financially careless and entitled, Parents can schedule pocket money says Mr Brauer. Others have slender means and set chores. When those are marked but regard the subscription as an invest- as done, the child is paid the agreed ment in their child’s future. Some say that amount. Parents can see what the child they have been in debt and want their has bought and where. And they can children to avoid that mistake when they choose where the card can be used: in grow up; others that the app is cost-effec- shops, online or at atms. tive because their children learn to budget. Children get debit cards customised Even though young people no longer with their name (Henry was the first touch and hold money, they can still be child to use one). They can put money in taught to handle it well. https://t.me/finera

The Economist May 4th 2019 Special report Banking 11

2 ing; and a second, Pepper Pay, for money transfers. A third in development, Pepper Invest, will offer a cheap, simple interface for researching, buying and selling stocks. Pepper has not published customer numbers, but there are “tens of thousands”, says Ms Russak-Aminoach, and new ones are being added faster than at any other Is- raeli bank. That is despite the national reg- ulator requiring Pepper customers also to have a bricks-and-mortar account, a condi- tion it agreed to drop last month. For Barak Herscowitz, one of Pepper’s earliest customers, the draw was the clear terms and conditions. Traditional banks “always surprise you with things”, he says, “and it’s usually a bad surprise—a new charge, a new regulation, paperwork that has to be sent by fax.” His salary is paid into what the regulator considers his primary account, but he transfers it to Pepper each month and uses the app for everything. Though Pepper’s developers have de- signed the customer interface, behind it is software bought from Temenos. That puts Pepper on a par with fintechs and free- standing neobanks, and way ahead of mobile banking from high- banking system you’d have to write a very large cheque to one of street names, including Leumi, which run on mainframes. These the major mainframe companies.” Now a mobile-only bank can be update account records only once every 24 hours, so they cannot set up in 18 months for a few tens of millions. show balances or alerts in real time, or offer instant credit. Mr Bailie doubts rbs’s core computer system can be moved The plan is to move Leumi over to Pepper’s core software bit by over to Bó’s, but thinks that rbs customers might move volunta- bit. That will be a delicate business. According to Cognizant, a rily. “Look at social media,” he says. “The young and the better-off technology consultancy, a quarter of major upgrades of core bank- are first, but over the next ten years everybody else catches up.” 7 ing systems fail, and a further half go well over time or budget. But since Pepper is already up and running, the risks may be lower. “There’s always this question: are you cannibalising yourself?” The future says Ms Russak-Aminoach. But Pepper is taking customers away from all Israel’s incumbents, she points out. At 30%, the share of Pepper’s customers who hold Leumi accounts is fairly close to Leumi’s 25% share of the retail market. Moreover, she says, “if it’s Crowning King Customer possible to do something better than what we are doing, cannibal- isation is irrelevant, because if we don’t do it, others will.” Leumi is an early example of a new trend: high-street banks set- ting up digital “flankers”—new brands that compete in the same The latest banking revolution is great news for users category and territory as the original, generally in the hope of at- tracting a different clientele. Most have a narrow focus, such as o a mathematician, a transformation is what happens when a Esme by NatWest and New10 by abn amro, which offer small- Tgeometric object is shifted in space, resized, reflected or ro- business loans. But incumbent banks are increasingly thinking of tated. Bankers, too, are in the business of transformation, but it is following Leumi’s lead and going head-to-head with themselves. money they move, and not just through space but through time. Two years ago the board of rbs, Britain’s third-largest banking They take short-term deposits from savers and give them out to group, concluded that wholesale disruption in the banking indus- borrowers for longer terms; pool assets to reduce risk and sell try was coming, though the timing was unclear. If it proved immi- them on to investors; and—most mysteriously to outsiders—turn nent, there would be no time for the total overhaul the bank’s core the credit they extend into assets that can be lent out again. systems would need to compete. As an insurance policy the bank All this keeps the economy ticking. But ordinary people are set up Bó, a mobile-only bank that will go live later this year. If sometimes neglected. The high-street banks’ networks of change proves slower, the new bank will help the whole group branches and atms, and the government guarantees that back the manage a smoother transition. money in their accounts, have kept customers coming anyway. In Even if neobanks take time to make pro- many countries, including Britain, banks concentrate a lot of their fits, they have no trouble raising capital effort on their big corporate borrowers, says Kevin Travis of No- from investors, says Mark Bailie, Bó’s chief Incumbent banks vantas. “It’s revealing that leading high-street banks are generally executive. Customers are being “trained by are increasingly described as the ‘big lenders’.” Amazon” to expect services to be delivered Switching banks is rare. According to Novantas, only 8% of smoothly and rapidly on their phones, he thinking of going American customers switch bank in a given year, even though says. And technology is developing fast: head-to-head moving state often means moving bank. In Britain, where bank li- “Fifteen years ago if you wanted a new with themselves cences are national, only 4% do. Low churn is often cited as evi-1 Financial Era Advisory Group 12 Special report Banking The Economist May 4th 2019

merce leads them in that direction. McKinsey’s analysis suggests that once an online marketplace selling direct to consumers offers products in several categories and has a market share of at least 15-20% in its main category, it tends to move into payments. This, says Philip Bruno, who co-leads the consultancy’s global payment practice, is not necessarily because it is seeking to increase rev- enues from payments or to reduce costs (though having its own payment system does allow it to avoid the “interchange” fees charged by card issuers). Rather, it allows a retailer to control the shopping experience from start to finish. Chinese platforms show how it can be worth providing fre- quently used financial functions such as payments without mak- ing much from them—even, potentially, at a loss—if they act as a hook for consumer lending and advertising for related non-finan- cial services, says Brian Ledbetter of McKinsey. This is the logic be- hind speculation that a Western tech giant like Amazon might team up with a bank to offer current accounts. The benefit to the retailer would be increased customer loyalty. Or accounts might be offered for a monthly fee, suggests Brett King, the author of “Bank 4.0: Banking Everywhere, Never at a Bank” and founder of Moven, one of America’s handful of neobanks. Perks could include a roll- ing line of credit, discounts on purchases, or a rewards pro- gramme—all of which would boost the retailer’s sales. Financial services will increasingly become links in value chains that also contain non-financial services, predicts Mr King. 2 dence that customers are satisfied, but it would be more accurate Mortgages, for example, could sit in the “home-buying chain”, of- to say that they cannot envisage anything better, says Jason Bates fered on a platform that also displayed property listings and ar- of 11:fs, a British banking-technology consultancy. “People would ranged viewings, surveys, conveyancing and home removals. have said they were satisfied with taxis until Uber came along. The biggest benefit for customers will come from a rethink of Then all of a sudden they didn’t want to stand on a street corner what banks are supposed to do. As traditionally conceived, says holding their hand out in the rain.” Ted Moynihan of Oliver Wyman, a financial consultancy, what a Outside Asia, few have yet woken up to the arrival of new bank- bank offers its retail customers is a way to store, spend and borrow ing options, but there are signs that more are starting to. Britain’s money. It has not been a core part of its job to help them decide neobanks have managed to sign up millions of customers largely whether a purchase or loan will make them happier or wealthier. through word of mouth. McKinsey’s annual digital-payments sur- Often it will not. Research by the consultancy into credit for the veys used to find that banks were more trusted than tech firms. American mass market shows that 30% of those who had taken out Now, Amazon is running neck-and-neck with banks. And Rad- revolving credit regretted doing so; just 10% were glad they had. don’s research into Gen z Americans finds that two-thirds expect tech firms will change the way financial services are provided. The pursuit of happiness The rise of fintechs and neobanks that act as marketplaces for Those loans may have been at market-beating rates. And they may other institutions’ products presents incumbents in developed have been “good”, as defined by the industry—that is, repaid on markets with a choice: are they willing to leave customer acquisi- time. But that is not how they look to customers who wish they had tion and service to the newcomers, or do they want to compete not borrowed. And it is not how a neobank or fintech firm seeking head-on? White-label banks, which carry out regulated financial to act as a platform for third-party financial products can afford to services for other companies, show that focusing on products can view them, either. To convince customers that it is acting in their work. But the margins are low. In retail banking 70% of share- best interests, it must do more than sell products that are afford- holder value is typically captured by the customer-relationship able, or even at the keenest rates: it must sell them what they actu- and distribution channel, and just 30% by product manufacture, ally need. The most formidable challenge the newcomers pose to says Jan Bellens of ey, a consultancy. the rich world’s banking incumbents is not their lower costs or If the incumbents want to fight, the customer relationship is greater technological prowess. It is that their business model re- theirs to lose. Most people still open a high-street account in their quires them to put customers’ needs first. 7 teens at a bank chosen by their parents, and caution may make them stay put. Regulators are often pro-incumbent, whether be- cause they have been captured by lobby groups or because they acknowledgments A list of acknowledgments and sources is included in the online version fear big changes could cause financial instability. But banks would of this special report be unwise to depend on customer inertia and regulatory caution. If offer to readers Reprints of this special report are available, with a minimum order the alternatives are attractive enough, both may evaporate. of five copies. For academic institutions the minimum order is 50 and for companies 100. Adapting will be hard on incumbents, but customers have a lot We also offer a customisation service. To order, contact Foster Printing Service: to look forward to. The newcomers have lower costs and can there- Tel: +1 866 879 9144; email: [email protected] fore offer better value. As China shows, they can offer loans to peo- For information on reusing the articles featured in this special report, or for copyright queries, ple and small businesses that could not previously have been prof- contact The Economist Rights and Syndication Department: Tel: +44 (0)20 7576 8000; itably served. And their arrival will push down account charges email: [email protected]; Online: Economist.com/rights/reprints+and+permissions.html and fees for extras such as overdrafts and foreign exchange. more special reports Previous special reports, and a list of forthcoming ones, As Alibaba demonstrates, online retailers may not start out in- can be found at: Economist.com/specialreports tending to offer financial services, but the logic of online com- https://t.me/finera Middle East & Africa The Economist May 4th 2019 45

The Sahel congratulate them for their joining the convoy of the caliphate,” he said, according The new war on jihadism to the site Intelligence Group, which mon- itors jihadist communications. Major General Mark Hicks, who com- mands America’s special forces in Africa (and was in Burkina Faso for the war BOBO-DIOULASSO AND TIMBUKTU games) fears that is is not the only terrorist Despite Western help, governments in the Sahel are struggling to beat back group extending its franchise into his violent extremists patch. “Al-Qaeda has taken a very serious igerian troops huddle around their hem in Somalia. America, Britain, France long-term view of expanding here in the Ncaptain for a briefing. Several rest their and other Western powers are trying to Sahel, and they’re seeing real success,” he rifle muzzles in the sandy ground, which help local forces in at least 16 countries beat says. His intelligence officers reckon that could block and damage them. During the them back. It is not going well. the groups they track contain about 10,500 assault on a terrorist training camp, many Since the collapse of the “caliphate” in jihadist fighters. forget their training, firing wildly and run- Syria and Iraq, Islamic State (is) has been Most jihadists in Africa are fighting ning off their line of advance. After captur- looking for other places to raise its black their own governments. But some attack ing it, they mill about and ignore the flag. Africa, and especially the Sahel, is vul- Western targets. “If we don’t fight them booms of incoming artillery. Finally they nerable. Governments are weak, unpopu- here we will have to fight them on the are brought up short by an angry Scotsman, lar and often have only a tenuous grip over streets of Madrid or Paris,” says a European who shouts: “Ibrahim, you’re dead!” remote parts of their territory. Abu Bakr al- intelligence officer. This less-than-successful mock attack Baghdadi, the leader of is, sees an opportu- One cannot generalise easily about Afri- took place near the town of Bobo-Diou- nity. In a video released on April 29th, to can jihadist groups. Some are strictly local, lasso, in the west of Burkina Faso. It was prove that he is not dead (his first such ap- having taken up arms to fight over farm- part of an American-led training exercise pearance in five years), the bearded zealot land or against corrupt local government. earlier this year involving some 2,000 elite waxed enthusiastic about Africa. “Your Some adopt the “jihadist” label only be- troops from more than 30 countries. These brothers in Burkina Faso and Mali...we cause they happen to be Muslim. Many two-week war games are the most visible young men who join such groups do so be- part of a big Western push to turn the tide Also in this section cause they have been robbed by officials or in a bloody, forgotten war. Jihadists are beaten up by police, or seen their friends 46 Ethnic militias in the Sahel sweeping across the Sahel, an arid swathe humiliated in this way. of scrubland on the southern edge of the 47 Clerics against clerical rule Other groups, such as al-Shabab in So- Sahara that stretches most of the way malia, are steeped in the teachings of al- 48 Cheesy music in Israel across Africa. They are also causing may- Qaeda, the group behind the attacks on 1 Financial Era Advisory Group 46 Middle East & Africa The Economist May 4th 2019

ALGERIA 500 km shooting at them with a small force to goad MAURITANIA the defenders into using up their ammuni- MALI SAHEL NIGER tion firing back, leaving them helpless Timbuktu when the main attack begins. Ogossagou Samani S AHE massacre Efforts to contain the spread of jihadism L SENEGAL (174 deaths) CHAD by training local armies or killing insur- gent leaders are not obviously working. Violent events Bamako Yirgou massacre Lake Take Mali, where in 2012 Tuareg separatists Jan 2018-Apr 2019 Ouagadougou Chad (210 deaths) and jihadists allied to al-Qaeda swept out Jihadist groups GUINEA Bobo-Dioulasso Militias* NIGERIA of the desert and conquered the north of Source: the country using weapons looted from the BURKINA FASO CAMEROON ACLED *Selected arsenals of Libya’s dead dictator, Muammar Qaddafi. The rebels seemed ready to march 2 America on September 11th 2001. They tend where drone-fired missiles have killed on the capital, Bamako, and the south, to focus on spectacular atrocities, such as a many of al-Shabab’s fighters. Most are which contains 90% of the population and truck bomb in 2017 in the Somali capital, training local forces. They often have to sustains most of the economy. Mogadishu, that killed almost 600 people. start with the basics. In Nigeria, for in- French troops pushed them back from The most worrying groups are adherents of stance, jihadists often sneak up and over- the main cities. But not even their expertise is that seek to hold territory. An offshoot of run army bases because the bush around and firepower could defeat the rebels, who Boko Haram, for example, is building a them has not been cleared. Or they start simply melted back into the desert. There 1 proto-caliphate in northern Nigeria. Jihadist groups of all varieties are ex- Gangs with guns panding their reach in the Sahel and around Lake Chad. Last year conflicts with jihadists in Africa claimed more than 9,300 Malicious militias lives, mostly civilian. This is almost as many as were killed in conflict with jiha- BAMAKO States in the Sahel have let murderous self-defence groups flourish dists in Syria and Iraq combined. About two-fifths of those deaths were in Somalia, he first sound of danger was the with ease. Emboldened by the govern- where al-Shabab frequently detonates car Troar of motorbikes. Then came the ment’s inaction, militiamen hacked and bombs in crowded streets. Many of the rest gunfire as about 20 men attacked Sa- burned to death more than 170 people in were in Nigeria, where the schoolgirl-kid- mani, a village in central Mali, killing Ogossagou, central Mali, in March. This nappers of Boko Haram and its odious off- three people and cutting off body parts as favouritism plays into the hands of the shoot, Islamic State West Africa Province, trophies. They took the chief’s 30-year- jihadists, who find it easiest to recruit shoot villagers and behead nurses. old son, “cut him in half, and took his among oppressed minorities such as the However, the area that aid workers and heart out”, says Amadou Barry, an elder Fulani, which are also forming their own Western spooks worry about most is the Sa- who managed to escape to Bamako, militias. Some jihadists have urged all hel. In Niger, Mali and Burkina Faso the Mali’s capital. Fulanis to join their fight. number of people killed in jihad-related vi- The gunmen were from an ethnic The situation is hardly better in Bur- olence has doubled for each of the past two militia, one of hundreds that have kina Faso, where thousands of men have years, to more than 1,100 in 2018. And the vi- sprouted in Mali and Burkina Faso, and joined groups called Koglweogo (guard- olence is spreading, spilling across borders that have killed at least 800 people since ians of the bush). They started out as and threatening to tear apart poor, fragile the beginning of 2018. The militias are vigilante groups that beat or killed al- states with bad rulers and swelling popula- most active in Mali, which has battled a leged criminals. But many now demand tions. Such places are already beset by jihadist insurgency since 2012. Many money from villagers and torture those droughts, possibly caused by global warm- emerged from groups of hunters, who who do not pay. ing. Over the longer term “the Sahel is our used to stalk game with flintlock guns. Some estimate there are about 4,500 biggest worry,” says Mark Lowcock, who is Now they are armed with assault rifles Koglweogo groups, most with at least 20 in charge of emergency relief at the un. Pe- and speed about on motorbikes. They say men, mainly from the majority Mossi ter Maurer, the president of the Interna- they hunt jihadists. In reality they are ethnic group. They are being sucked into tional Committee of the Red Cross, frets targeting Fulanis, a mainly Muslim conflict with the Fulani. In January that conflict and climate change are minority group. Photos on social media Koglweogo fighters massacred some 210 prompting huge flows of migrants out of show Fulani villages in which families mostly Fulani people in Yirgou in north- the Sahel. have been shot, their bodies thrown ern Burkina Faso. Instead of arresting the Fear of refugees is one of the main rea- down wells or cut to pieces. “We should attackers, the government told the vic- sons why European military powers are call it what it is: ethnic cleansing,” says tims to forgive them. trying to stabilise the region. France has Héni Nsaibia, from the Armed Conflict The government’s shameful reaction 4,500 troops fighting jihadists there. Ger- Location & Event Data Project, an ngo. partly reflects its weakness. But there many and Italy each have about 1,000 sol- The army has made no serious at- may be a darker motive. Many members diers in Africa. Britain has set up two spe- tempt to disarm these militias, said of the government are Mossi, and may cialised infantry units dedicated to Human Rights Watch, a watchdog, in think it useful to have an ethnic militia training African soldiers in Nigeria and So- December. Instead, the government has on hand before elections next year. malia. America, which is more concerned helped them. Some army units patrol Yet by allowing militias to arm and about terrorism than refugee flows in this with them. They have been exempted multiply, governments “have created a part of the world, has more than 7,000 mil- from a ban on motorbikes (supposedly monster”, says a un official in the Sahel. itary personnel in Africa. the jihadists’ favourite ride) in central Having let this demon out of the box, The majority of Western troops do not Mali. This allows the militias to attack they will struggle to put it back. fight jihadists directly—except in Somalia, https://t.me/finera

The Economist May 4th 2019 Middle East & Africa 47

2 they have survived a seven-year-long Iran counterinsurgency campaign. Pundits in Paris are calling call Mali “France’s Afghan- Battle of the ayatollahs istan”. And with good reason. The un now has more than 16,000 peacekeepers in Mali, of whom 195 have been killed, making it the blue helmets’ most dangerous mis- sion since its start in 2013. Nonetheless, the jihadists have continued to spread south Why Shia clerics are turning on Iran’s theocracy into Niger and Burkina Faso. The government of Mali has shown lit- he murder of an imam ought to pro- tle interest in trying to restore security in Tvoke horror. But after a bodybuilder the northern half of the country, content- gunned down Mostafa Qassemi, a cleric in ing itself with holding the gold-rich south. the western Iranian city of Hamedan, on “They have basically ceded the territory April 27th over 100,000 people followed and aren’t willing to fight for it,” complains the killer on Instagram. Posts by his follow- a Western army officer. Worse still, the gov- ers railed against Iran’s supreme leader, ernment has allowed—if not actively sup- Ayatollah Ali Khamenei. “One less cleric,” ported—the formation of pro-government women mutter on Tehran’s underground. ethnic militias that are responsible for a Such is the anger at Iran’s ruling clerics, rapidly increasing number of attacks on ci- who preside over a shrinking economy. vilians from minority groups (see article American sanctions on oil exports have on previous page). A flood of weapons from sent the currency crashing. Inflation is the Gulf of Guinea feeds the mayhem. near 40%; wages are falling in real terms. There are so many assault rifles in Mali that Basics such as chicken and clothes are be- the price has fallen from $600 two years coming luxuries. The imf forecasts that ago to $260 today, says an official. gdp will contract by 6% this year. The theo- Western governments and armies have crats offer no way out of the crisis. “We’re started to focus less on Mali and Nigeria approaching a turning point,” says Sadegh and more on Niger and Burkina Faso, hop- Haghighat of Mofid University in the Shia ing that these countries can act as bulwarks holy city of Qom. Clerics there increasingly to halt the spread of jihadism. “We have a question the system of velayat-e faqih, or window of opportunity to help this coun- clerical rule. try draw a line that they can hold,” says An- Some clerics are distancing themselves drew Young, America’s ambassador to Bur- from the regime, which corners much of kina Faso. Iran’s wealth through its vast business em- Unfortunately, many of the mistakes pire. Esmail Azarinejad, a poor cleric, that were made in Mali are also being made drives around neglected villages distribut- The poster boy of Najaf in Burkina Faso. Militias are proliferating; ing children’s books from the back of his a cycle of ethnic violence has begun. old Peugeot. Others openly challenge the Sunni, and the return of relative calm to Too little is being done to fix the under- mullahs in charge. The following of Seyed Iraq, Najaf’s prestige among Shias has lying problems that fuel conflict, such as Aghamiri, who says temporal power cor- soared. Its shrine of Imam Ali, founder of failing agriculture, poor governance and rupts, grew after a clerical court defrocked the Shia sect, attracts millions of pilgrims a poverty. Local elites seldom want to end him. Older sages have met with reformers. year. Its colleges are free of state interfer- the corruption that enriches them, or allow A growing number look to Iraq’s holy city of ence, unlike those in Qom. And it is the seat the kind of democratic accountability that Najaf, 675km away, for a different model of of the most popular Shia cleric, Grand Aya- might limit their power. mosque-state relations. tollah Ali al-Sistani (pictured). Furthermore, the threat of jihadism has For decades Najaf was Qom’s poor rela- Mr Sistani champions the separation of prompted some Western governments qui- tion. Under Saddam Hussein, Iraq’s old dic- mosque and state. Clerics should advise, he etly to stop promoting democracy in Afri- tator, yearly enrolment at its Shia seminar- says, not rule. Revered as Shiism’s pre-emi- ca, just as during the cold war, when they ies dropped to just a few hundred, while nent marja, or religious reference, Mr Sis- propped up awful regimes if they were Iran funded training for 110,000 clerics. But tani has influence in Qom too. Last month anti-communist. A similar approach since the overthrow of Saddam, who was Ayatollah Abdollah Javadi-Amoli, a conser- seems evident now: almost any ruler who vative stalwart in Qom, said the quality of is anti-jihadist can seem a suitable ally. teaching is better in Najaf. Senior Iranian Earlier this year, for example, French war- ARMENIA AZERBAIJAN clerics are moving there, including Ali planes bombed rebels in Chad to protect TURKEY TURKMENISTAN Khomeini, the respected grandson of the Idriss Déby, who has ruled since 1990. In Caspian Islamic Republic’s founder. “If you’re un- Sea Cameroon special forces trained by the der the heavy hand of Iran’s religious estab- Tehran West have been implicated in brutal abuses SYRIA IRAQ lishment, which tells you what to think against opponents of Paul Biya, who has Hamedan Qom and what to wear, it makes you look to the been president since 1982. Baghdad intellectual freedom of Najaf,” says Abbas The Sahel is so unstable that foreign Najaf IRAN Kadhim, Mr Sistani’s biographer. troops will probably be there for years. But In March Hassan Rouhani travelled to unless local governance improves, they SAUDI KUWAIT Najaf, becoming the first Iranian president will not eliminate the jihadist threat. As ARABIA to meet Mr Sistani. By law Mr Rouhani’s al- one Western officer muses: “Are we just The legiance should be to Mr Khamenei, but he 500 km Gulf building sandcastles at low tide?” 7 hoped Mr Sistani’s blessing would boost 1 Financial Era Advisory Group 48 Middle East & Africa The Economist May 4th 2019

2 his standing in the face of pressure from Eurovision hardliners. An observer said it looked as if the president was meeting the pope. “Rou- hani is sending a signal that there’s room in BDS meets BDSM the Islamic republic for those who don’t be- lieve the rule of the [Islamic] jurist is an ar- What happens when a kitschy song contest is held in Israel ticle of faith,” says Robert Gleave of Exeter University in Britain. atred will prevail!” screams the Barzilai, won last year, so it gets to host If so, some in Iraq want to help him out. “Hman on stage, as two leather-clad this year. Hawks wanted the event to be “Velayat-e faqih is a dictatorial regime,” women gyrate in cages behind him. On a held in the contested city of Jerusalem, says Saleh al-Hakeem, a globe-trotting pedestal above, a man in a black leotard which Israel calls its capital. But the state cleric from Najaf. “The clerics of Najaf slices the air with a staff shaped like a broadcasting authority and the ebu should support civil society in Iran, not toilet plunger. Meet Hatari (pictured), a chose Tel Aviv. theocracy.” Mr Sistani, himself an Iranian self-described “anti-capitalist, bdsm The singing doesn’t begin until May national, is more cautious. But after his [bondage-discipline-sadism-masoch- 14th, but the sniping started months ago. meeting with Mr Rouhani he called for ism] techno band”.They are Iceland’s Leaders of the campaign for boycotts, Iraqi sovereignty to be respected. Clerical entry for this year’s Eurovision song divestment and sanctions against Israel, casuists understood that as a criticism of contest, best known for featuring cheesy widely known as bds, have called on Mr Khamenei’s claim to be supreme leader ballads and launching the careers of artists and broadcasters to withdraw not just of Iran, but of all Shias. abba and Céline Dion. from the event. “Israel is using Eurovi- Mr Sistani is quietly projecting his in- But Hatari are not in the spotlight for sion to art-wash its egregious crimes fluence. His representative (and son-in- their bizarre appearance or perfor- against the Palestinian people,” says the law) in Qom, Jawad al-Shahristani, collects mances. The band’s members have movement. Dozens of British celebrities, tithes from Iranian followers and funds a caused a stir by threatening to use their such as Peter Gabriel and Roger Waters, countrywide charitable network that in- platform to criticise this year’s host, signed a letter in January calling on the cludes poor houses and hospitals. Mr Sis- Israel, for its treatment of the Palestin- bbc to press for Eurovision to be relo- tani also supports 49,000 religious stu- ians. They also challenged Binyamin cated. Other artists have since come out dents, about 45% of Iran’s total, with Netanyahu, Israel’s prime minister, to a against a boycott. stipends. Short of cash, Mr Rouhani, mean- “friendly match of traditional Icelandic The backdrop to all of this is an in- while, has cut seminary funding by a third. trouser grip wrestling”.(He appears to be creasingly complicated relationship “Mr Sistani’s office is very powerful in ducking this intriguing challenge.) between Europe and Israel. Many Euro- Qom,” says Mr Haghighat. It might seem odd for Israel to be pean leaders are outspoken supporters of Mr Khamenei is responding by tighten- hosting Eurovision, given that it is not in a Palestinian state and critical of Israeli ing his grip. In March he installed Ebrahim Europe. But its broadcasting authority is policies in the occupied territories. Raisi, a hardliner who lost to Mr Rouhani in a member of the European Broadcasting Despite having a trade agreement with the last election, as chief justice. He ap- Union (ebu), which runs the event. (For Israel, the eu requires that products pointed another hardliner to head the Ex- the same reason, Morocco has competed made in Israeli settlements be labelled as pediency Council, his government watch- in the past.) Israel’s representative, Netta such. Mr Netanyahu, for his part, talks of dog. Conservative ideologues get airtime a “plague” of anti-Semitism in Europe. on state television, where they chide cler- He has reached out to nationalist and ics for losing faith in velayat-e faqih. The far-right European politicians who are doubters have their funding cut or are de- often more sympathetic to Israeli posi- moted by the Society of Seminary Teachers tions (though some have also used anti- of Qom, a state regulator. Some have had Semitic rhetoric in the past). their offices ransacked. The worst offend- The politicisation of Eurovision is ers are hauled before a clerical court and nothing new. The victory of a bearded held under house arrest. drag queen from Austria upset social Most of Qom’s top clerics, each more conservatives in Belarus and Russia in learned than Mr Khamenei, have begun to 2014. Russia was also peeved about Uk- bite their tongues or speak in riddles. But raine’s win in 2016 with a song about the more coercive Mr Khamenei’s rule gets Josef Stalin’s deportation of Crimean the more attractive Mr Sistani’s teachings Tatars. (Russia invaded and annexed appear. Far from elevating clerics, say dis- Crimea in 2014.) In 2017 Ukraine banned sidents, Mr Khamenei’s bullies treat them Russia’s candidate, who had performed like state functionaries. “The Islamic Re- in Crimea; this year Ukraine’s act with- public’s crackdown on the clergy has drew to avoid a ban on singing in Russia. reached an extent unprecedented even un- No one has yet pulled out of this der the Shah,” says Mohsen Kadivar, a year’s event over the host country. But scholar from Qom now in America. some fear Israel will not allow in contes- Ayatollahs tend to live long lives, but Mr tants who have voiced pro-Palestinian Sistani is 88 and Mr Khamenei is 80 (and views. Hatari think they might be banned said to be fighting cancer). The question by Eurovision’s organisers. The rules their followers often ask is what comes state that “no lyrics, speeches, gestures next. For years it seemed as though clerics of a political, commercial or similar in Qom would determine the future of reli- nature shall be permitted during the gious leadership in Najaf. Now the talk is of Eurovision Song Contest.” Save them for the clerics in Najaf shaping the future of Bibi’s new sparring partner the wrestling match. Iran’s clerical rule. 7 https://t.me/finera Asia The Economist May 4th 2019 49

Also in this section 50 Banyan: Kim Jong Un’s options 51 Australia’s disillusioned voters 51 Relocating Indonesia’s capital 52 Riots in the Solomon Islands 53 Japan and Shinto

Elections in India only 500 rupees ($7) out of the 2,000 he had pocketed from the candidate for each vote. Missiles maketh the man High costs may also serve to raise the heat: in the past few weeks candidates have vari- ously accused each other of theft, treason, bigotry, support for terrorism and a host of other sins. Along with scale and intensity, this DELHI election packs suspense. India’s first-past- Nationalist fervour is likely to secure a second term for Narendra Modi the-post system allows a seat to be won he scale of an Indian general election The daunting cost of entry gives candi- with well under half of the vote, provided Tcan be hard to grasp. With close to dates with high profiles or deep pockets an other candidates do even less well. Five 900m registered voters and 1m polling sta- advantage. Small wonder that so many are years ago the ruling Bharatiya Janata Party tions, it is as if every country in the Euro- former film and sports stars, gangsters, fat (bjp) converted a 31% vote share into a tidy pean Union, plus America, Canada and cats or dynasts. The expense of contesting 52% of seats, while its big rival, Congress, Mexico, as well as Japan and South Korea, also inflates hopes among poor voters: in squeezed a paltry 8% of seats out of its 19% were all to vote together. Yet the process one southern state, villagers recently be- of votes (see chart). Wild swings are possi- generally runs smoothly. The voting this sieged a party office, furious that a middle- ble: at the last election, in the country’s time started on April 11th and is divided man who had “sold” their votes paid them most populous state, Uttar Pradesh, had into seven phases, to reduce the burden on the bjp’s two biggest rivals, the Bahujan Sa- election personnel and police. The use of maj Party (bsp) and the Samajwadi Party nearly 4m portable, battery-operated vot- Best guess (sp) joined forces, they would have cut the ing machines will make it possible to tally India, Lok Sabha election (272 seats for a majority) bjp’s seat tally there by nearly half, strip- all the votes on a single day, May 23rd. ping away its majority. Chastened, the pair, The counting may run with symphonic Vote share, % Seats which represent two different slices of the precision, but the rest of the proceedings Party 2014 2019* 2014 2019* lower castes, are now in alliance. are pure cacophony. With 8,000 candidates BJP 31.0 35 282 222-232 Excepting astrologers, Indians under- from more than 2,000 parties vying for BJP allies 7.4 6 54 41-51 standably tend to be wary of political pre- seats in the Lok Sabha, the lower house of Congress 19.3 23 44 74-84 dictions. In the past three general elec- parliament, this is less a national election tions, professional pollsters have fallen Congress allies 3.7 7 15 41-51 than 543 separate battles. Rules on election wide of the mark. Still, there is consensus spending are loose and often flouted. Esti- BSP, SP† 7.6 9 5 37-47 about the broader outcomes of the contest. - mates of the cost of this year’s contest are Left 4.8 3 12 5 15 No one expects the stars to align so per- as high as $10bn. Since mid-March the Others 26.2 17 131 88-98 fectly for Narendra Modi, the prime minis- Election Commission has seized some Sources: Election *Projection based on a survey of 10,010 ter, as they did in 2014, when the bjp won $500m of cash, gold, drugs and alcohol it Commission of India; people, March 24th-31st 2019 282 seats on its own. Everyone expects the Lokniti †In alliance in 2019, but not in 2014 suspects were intended for bribing voters. rival Congress—the only other truly na-1 Financial Era Advisory Group 50 Asia The Economist May 4th 2019

2 tional party—to rise from its dismal 44 anonymous political gifts was created by Meanwhile, a government programme to seats, but still to remain a distant second. the bjp in the name of “transparency” last compensate small farmers, introduced in Most expect regional parties, including the year, some 95% of all bonds have gone to February, miraculously placed cash in their bsp and sp, to take about a third of the seats. the ruling party. accounts in time for the vote. To be fair, Given the advantages he enjoys, Mr Being in power also helps. As elections some other parties have been just as crass: Modi is widely tipped to win. The prime approached, Mr Modi’s opponents have West Bengal, run by the fiercely anti-bjp minister himself is a talented and tireless found themselves targeted by tax raids or Trinamool Congress, has blocked leaders campaigner, delivering relentlessly on- police probes. Midway through voting the from the rival party from landing helicop- message blasts of boosterism mixed with home ministry has suddenly decided to re- ters on “its” turf. searing swipes at his enemies. Another spond to a public query, dating from 2015, Despite holding so many cards, Mr leg-up comes from having vastly more questioning the citizenship of Rahul Modi had begun to look vulnerable earlier money. Some of this is unaccountable, but Gandhi, whose family has led the Congress this year. Congress appeared to rise from one measure is the value of donations via party for five generations and India for the dead in December, toppling bjp govern- “electoral bonds”. Since this vehicle for much of the time since independence. ments in local elections in three states 1 Banyan Kim Jong Un’s options

The North Korean dictator does not look as clever as he did a year ago t is a year since a nuclear-armed Kim eased in exchange for an incomplete dis- about South Korean authorities “posing IJong Un set off on a diplomatic dance mantling of his nuclear programme. He as a meddlesome ‘mediator’” just after drawing in the leaders of China, South was taken aback to learn that the Ameri- the South Korean president had visited Korea, the United States and now Russia. cans knew of a secret nuclear facility that the White House to urge Mr Trump to The flamboyant approach has turned the had not been part of discussions. Mr keep up the diplomacy. family dictatorship’s decades of dour Trump walked away. It is a return to shrill North Korean reclusiveness on their head and done A blow for Mr Kim, and he may not be form. The South is being blamed for not much for the North Korean leader’s responding cannily. It is nice to be treated doing more to keep America dancing. standing at home and abroad. Korea- as an equal by Mr Putin, but it gives him Abusing Mr Moon is surely foolish, says watchers say it has increased Mr Kim’s little leverage with Mr Trump. Mr Putin Aidan Foster-Carter, a longtime Korea- room for manoeuvre and so, by exten- loves to needle and upstage America, but watcher. Mr Moon is keen to keep rap- sion, his odds of survival. What a bril- he is not about to bail out the failed North prochement going, but is struggling to liant young despot. Perhaps he really will Korean state. bring South Koreans along with him. die peacefully in his bed. Where Mr Kim has real agency is in his They backed the detente last year. But Last year, on April 27th, Mr Kim met dealings with Mr Moon, whose efforts many have since lost faith in North his South Korean counterpart, Moon brought Mr Kim and Mr Trump together. Korean promises, and interest in reunifi- Jae-in, at Panmunjom, the “truce village” Yet he is blowing it. In South Korea the cation. The approval ratings of hawkish where the armistice halting Korea’s civil anniversary of the Panmunjom summit conservatives have soared. In power they war had been signed 65 years earlier. was celebrated with international mu- would make life far harder for Mr Kim. Even a hardened press corps gasped at sicians and a video message from the Pope. Even Mr Kim’s approach towards the symbolism. The two held three sum- Conspicuously absent was any North America is questionable. He still appears mits in six months, where predecessors Korean representation. to assume that Mr Trump will deal. His had managed just two in decades. They Out of pique at stalled nuclear talks, leverage is less his nuclear threat than Mr promised all manner of joint co-oper- North Korea is taking things out on the Trump’s claim last year to have done ation. Mr Kim has also met four times South. All Panmunjom talk of co-oper- away with it (after Mr Kim suspended his with China’s leader, Xi Jinping, with ation has gone. In a speech last month Mr nuclear testing). A test last month of a whom he even celebrated his birthday. Kim attacked Mr Moon, complaining new short-range guided missile seems As a spectacular, nothing beat Mr calculated to remind the American presi- Kim’s summit with Donald Trump last dent that Mr Kim has the power to em- June in Singapore. It was followed by a barrass him. second meeting, in February in Hanoi. Is that, along with the regime’s at- Better late to the dance than never, Vladi- tacks on Mike Pompeo, Mr Trump’s chief mir Putin, Russia’s president, rolled out diplomat, wise? Even Mr Trump would the red carpet for Mr Kim last month. struggle to seal a bad deal in the face of But as full as Mr Kim’s dance card has sceptical advisers. Meanwhile, sanctions been, the only flirtation that matters is continue to bite, despite help from Chi- with Mr Trump. Only America presents a nese and Russian sanctions-busters. Mr serious military threat, and can unlock Kim seems minded to respond more by un sanctions imposed in response to snarling, perhaps with more tests, than North Korea’s drive to develop nuclear by charming. For America and its friends, bombs and long-range missiles. Yet the it hints at a return to a lousy set of op- summit in Hanoi ended in failure. It tions for dealing with North Korea. But it seems Mr Kim overplayed his hand, means lousy options for the young des- expecting Mr Trump to be eager for a deal pot too. So much for Mr Kim’s supposed that would see at least some sanctions brilliance. https://t.me/finera

The Economist May 4th 2019 Asia 51

2 across central India. Fatigue with Mr Modi pacity than most political parties”, says was growing, as well as anger among such A tough ten years John Hewson, a former Liberal leader who important groups as farmers, small trad- Australia, satisfaction with democracy, % advised it in its early days. ers, minorities and the better-educated. 100 Henny Smith, GetUp!’s elections direc- The lapdog media grew noticeably less tor, says it is “not interested in who gets fawning. There was talk of opposition par- 80 elected” as long as the result is “sensible ties banding together under Mr Gandhi in climate policy and a conscionable ap- an all-out bid to beat the bjp. 60 proach to refugees”. But those goals put it at But the winds then shifted again, this odds with right-wing politicians such as time in Mr Modi’s favour. On February 14th 40 Mr Abbott and Peter Dutton, the pugna- 20-year-old Adil Ahmad Dar ploughed his cious home-affairs minister who spear- bomb-laden car into a convoy of paramili- 20 headed the coup against Mr Turnbull. Get- tary police in the disputed state of Jammu Up! is “an extreme left-wing front”, asserts & Kashmir, killing 40 of them. The attack, 0 Eric Abetz, a conservative senator. Three claimed by a Pakistan-based terror group, 1996 2000 05 10 15 18 investigations by the electoral commission spawned a surge of national emotion that Sources: University of Canberra; Museum of Australian Democracy have cleared it of any partisan associations. crested two weeks later, when Mr Modi or- Guessing the extent of GetUp!’s influ- dered the retaliatory bombing of an alleged ence is tricky, but Mr Abbott may soon get terror base deep inside Pakistan. them. Compulsory voting forces even the an inkling. Warringah is doggedly conser- Mr Modi has mercilessly milked disengaged to turn out on election day. vative, and he has held the seat for a quarter nationalist sentiment, threatening to rain Those who might not otherwise vote tend of a century. But an upset would not be un- missiles on the enemy in a “night of kill- to back one of the two main parties, the Lib- precedented: when Mr Turnbull resigned ing” and scorning his opponents as wob- erals and Labor. The voting system, which last year, an independent, Kerryn Phelps, bly-kneed defeatists. Although many Indi- requires Australians to rank candidates in deprived the Liberals of his seat for the first ans, especially those far from the border order of preference, also ends up funnel- time in over a century. The party’s own with Pakistan, find local issues more press- ling votes to the big two. As a result, the pair polling suggests that another indepen- ing, the unrelenting bombast has flum- continue to dominate politics—they won dent, Zali Steggall, is on course to beat Mr moxed Mr Modi’s opponents. Instead of co- all but five of the 150 seats in the lower Abbott with a huge swing of 12%. Mr Dutton alescing, they have drifted apart. If the bjp house at the last election, in 2016—even holds his suburban seat in Brisbane by a far and its closest allies fail to win a majority, though the share of voters who pick them less comfortable margin, partly thanks to he will almost certainly be better placed as their first choice is falling. GetUp!’s work at the previous election. The than Mr Gandhi to court a clutch of region- A decade of political instability has left group may need to bake more cakes. 7 al parties to form a coalition. “If this elec- many voters feeling disillusioned. The tion were about the fundamentals, Modi prime minister has changed five times in and the bjp would be in a pickle,” says Mi- that time (but only once because of an elec- Relocating Indonesia’s capital lan Vaishnav of Carnegie, a think-tank. tion). Policymaking has naturally suffered. “But given Modi’s popularity, the security “We’re going backwards on too many im- An extraordinary dimension and the opposition’s foibles, portant issues,” says one of Mr Abbott’s my sense is the bjp has found a way to make constituents. Some of them lost patience move lemonade out of lemons.” 7 with him in August, when the brigade of staunch conservatives he leads toppled the Liberals’ popular leader, Malcolm Turn- JAKARTA The president looks to replace one bull. The prime minister’s crime had been Democracy in Australia unsuitable capital with another to attempt to set legally binding targets to Up and at ’em reduce greenhouse-gas emissions. o experience the true Jakarta, sit in a Political parties struggle to appeal both Ttaxi for an hour, listening to the motor- to rural constituencies, which clamour for bikes rev and the horns honk, only to real- mining jobs, and urban ones, which fret ise that you are no closer to your destina- about climate change. Voters also worry tion than when you set off. Indonesia’s SYDNEY about costly housing, insecure jobs and—a capital, home to 30m people, is in a con- A new group is harnessing public relatively new affliction for Australia— stant state of gridlock. Meetings are rou- disillusionment with politics stagnant wages. There are fears that big tinely missed; businessfolk often call in group of protesters gathered outside business and foreign governments have from the back seat of a stationary vehicle. ATony Abbott’s constituency office on undue sway over politicians. According to Some policemen have started a sideline Sydney’s north shore. They wore party hats one poll, faith in democracy has fallen by selling motorcade escorts. Fumes from the and cut a cake. It was, the activists ex- more than half over the past decade. Only sea of cars add to the smog. Public trans- plained, an early retirement gathering for 41% of voters say they are satisfied with the port offers little respite: a new under- Australia’s former prime minister. He is in system (see chart). ground service, decades in the building, al- danger of losing his supposedly safe seat, Yet many have channelled their disillu- ready feels jam-packed. partly because of the work of their advoca- sionment into activism. More than a mil- The traffic is the result of decades of rap- cy group, GetUp!, which is campaigning to lion people have joined GetUp!, giving it al- id urbanisation coupled with neglect of in- turf out several of the ruling Liberal Party’s most eight times as many members as the frastructure. It is not the city’s only failing. most right-wing members in the general two big parties combined. It deploys ar- There is no real centre, just a vast concrete election on May 18th. “Our parties aren’t mies of orange-clad volunteers to man sprawl where highways and flyovers corral representing us,” laments one of its volun- phones and knock on doors. Its donations skyscrapers. Parks are a rarity. So are pave- teers. “They’re representing themselves.” have soared by more than a quarter over the ments—and the few there are are crowded Such complaints are common in Aus- past year, furnishing it with a war-chest of with makeshift restaurants, forcing pedes- tralia, but its political system can shroud almost A$13m ($9m). It now has “more ca- trians onto the heaving roads. 1 Financial Era Advisory Group 52 Asia The Economist May 4th 2019

2 Another big problem is water. Torren- shrink regional inequalities. Indonesia is quickly afterwards. Mr Wale obtained a tial rain falls for half the year, but rivers and an archipelago of 13,000 or so islands, but court order to delay the prime ministerial drainage ditches are clogged with rubbish Java generates about 58% of gdp. vote, but the governor-general, who pre- and swimming with untreated sewage. The relocation could take ten years. It is sides over the selection of the prime minis- They overflow regularly, flooding much of likely to face stern resistance, not least ter, disregarded it. He cited instead the con- the city. Only a third of residents have ac- from Indonesia’s tycoons, who do not want stitution, which allows any mp, whether cess to municipal water, so the rest drill to see the value of their Jakarta penthouses affiliated with a political party or not, to be- wells to tap groundwater. As a result, Jakar- fall. Civil servants will probably object too, come prime minister. ta is sinking faster than any other city in because the most likely new site for the The underlying grievance is economic the world, even as sea levels rise. Some capital is something of a backwater. as well as political. ramsi restored law and neighbourhoods are dropping at a rate of Palangkaraya is a city of 260,000 in the order, but did little to encourage develop- 25cm a year. Researchers think that almost province of Central Kalimantan, part of the ment or to regulate the Asian logging com- all the city’s coastal districts could be sub- Indonesian portion of Borneo. Whereas Ja- panies that account for most of the coun- merged in 30 years. karta lacks greenery, Palangkaraya has it in try’s exports. A steady drift from the Small wonder, then, that the president, abundance: the city is in the middle of the countryside has swollen the population of Joko Widodo, who is known as Jokowi, jungle. There is a titchy airport; the nearest Honiara, where Chinese-owned business- wants to move the capital. On April 29th seaport is a four-hour drive away, past an es have come to dominate commerce. Bambang Brodjonegoro, the planning min- orangutan reserve. Much of the surround- Many locals blame this on corruption in ister, announced that the government will ing terrain is soft and swampy—not ideal the granting of business licences and in the leave the island of Java, where Jakarta sits, for building skyscrapers. And when nearby doling out of land. mps, meanwhile, divert although it is still considering where to go. peatlands burn, a toxic haze fills the air. a disproportionate share of government The intention, in addition to escaping (and Government officials may be sinking and spending to pork-barrel schemes in distant reducing) congestion in Jakarta, is to choking in their new digs, too. 7 constituencies, leaving many young peo- ple in the city unemployed and angry. As one social-media post supporting the riot- The Solomon Islands ers put it: “Everyone is stealing from every- one.” mps steal from the people, the argu- Solomons’ choice ment went, Chinese businesses steal from their customers and the rioters were re- sponding by stealing from government and businesses, creating a balance of sorts. To his credit, Mr Sogavare has tried to clamp down on corruption. Parliament ap- WELLINGTON proved an anti-corruption bill last year A disputed parliamentary vote to pick a prime minister sparks riots (after watering it down) and a police task- olitics in the Solomon Islands has a fourth term as prime minister with the force has arrested senior civil servants and Pnasty habit of repeating itself. On April support of 34 of the 50 mps. At that point 15 a minister for misappropriating public 24th riots broke out in the capital Honiara mps who supported Matthew Wale for the funds. Mr Varley says ten other mps are un- after mps met to pick a prime minister, as top job walked out of parliament in protest. der investigation. But even if corruption happened 13 years ago. Outside parliament, Mr Wale claims that Mr Sogavare is inel- can be reduced, it will take time for the un- angry youths again denounced the out- igible to stand as prime minister because employed youth of Burns Creek to feel the come. When their protests went unheeded, the law requires a candidate for prime min- benefit. Mr Sogavare is considering recog- they descended on Honiara’s Chinatown ister to be a member of a political party. Mr nising China instead of Taiwan, in search district and smashed up the Pacific Casino Sogavare contested the election as an inde- of funds for development. But the advent of Hotel, just as they had in 2006. pendent, but assembled the Ownership, crowds of Chinese to build infrastructure This time around, the Australian- Unity and Responsibility (our) party might also enrage Burns Creek. 7 trained police force was better prepared. Black-clad riot police equipped with hel- mets, shields and tear-gas barred access to Chinatown, and dispersed the crowds. Ri- oting continued on the nights of April 24th and 25th, but it was mainly confined to at- tacks on shops and businesses in and around the Burns Creek squatter settle- ment in eastern Honiara. The police chief, Matthew Varley, who is Australian, says ri- oters have been assembling petrol bombs and home-made guns in preparation for future battles. The troubles came in the wake of the Solomon Islands’ tenth general election since independence in 1978. It was the first election since the departure in 2017 of the Regional Assistance Mission to Solomon Islands (ramsi), a peacekeeping force led by Australia and New Zealand. The election was mostly trouble-free, at least until Ma- nasseh Sogavare was about to secure a Hammering at the gates of parliament https://t.me/finera

The Economist May 4th 2019 Asia 53

Japan and Shinto brought lawsuits claiming that the imperi- al rituals violate the separation of religion Through the looking glass and state (similar complaints during the last change of emperor were dismissed by the courts). Even the new emperor’s broth- er, who is also the next in line to the throne, has questioned whether state funds should be used for an elaborate ceremony later TOKYO this year at which the new emperor’s inves- This week’s imperial ceremonies highlight the religion’s muddled status titure will be celebrated. The emperor’s sis- n the morning of April 30th, then- ter, meanwhile, is the head priest of the Ise Oemperor Akihito, decked out in a puffy shrine—a job that always goes to a member brown robe, entered Kashikodokoro of the royal family. shrine, in the grounds of the imperial pal- Some would like to restore the central ace in Tokyo. He washed his hands, rinsed role of Shinto in public life. A few priests his mouth, bowed twice, clapped twice, talk fondly of reviving the idea of the em- bowed once more and then read a letter to peror as a god. “It is unclear whether the the gods informing them of his retirement. Japanese view the emperor as a kami, a nice On May 1st his son, Naruhito, was invested person or an ojisan [uncle],” gripes a priest as emperor by receiving a jewel and a sword who believes the first. said to have belonged to Amaterasu, the Mark Mullins of the University of Auck- sun goddess, from whom he is a direct de- land is sympathetic to those who argue scendant, according to Shinto mythology. against a pedantic separation of Shinto Shinto is a form of animism, which from state affairs. “Look at America and dates back to prehistoric times. Ancient you see the Bible and prayers coming out at Japanese saw divine forces all around every inauguration,” he notes. But the asso- them, and celebrated as kami, or gods, ciation of the religion with right-wing na- everything from the sun to the wind. The tionalism is a cause for concern, he argues. emperor was traditionally the high priest— That is largely thanks to Jinja Honcho, although after the second world war, he which lobbies for conservative causes, for was stripped of his status as a living god. Our great Mikado, virtuous man the sake “of our nation and nationhood”, as There are some 80,000 Shinto shrines, all Mr Tanaka puts it. That includes revising over Japan, where priests and devotees can be seen exploring the vast grounds of the school textbooks to whitewash Japan’s be seen clapping and bowing like Akihito. shrine, which is surrounded by trees and a conduct in the second world war, allowing Some 70% of Japanese are reported to river. Visitor numbers have steadily grown, the armed forces greater freedom of opera- adhere to Shinto—a percentage that is de- to more than 8.5m people last year. tion despite Japan’s official pacifism and clining only slowly. That may be because Environmentalism has helped Shinto, resisting moves to amend a law that re- many see it as a cultural belief rather than a says Susumu Shimazono of Sophia Univer- quires married couples to share a surname, religion. People who do not consider them- sity: “A few years ago Shinto was seen as in- a measure that in practice prevents mar- selves religious may still visit a shrine in ferior to the great world religions, like ried women from keeping their maiden search of luck or love, or to attend Shinto Christianity, Buddhism and Islam, where names. (Past successes include defending festivals that involve lots of food and drink. the sacred dimension is beyond nature,” he the use of gengo, dates based on imperial Indeed, many Buddhists and Christians says. “Now it is seen as something we reigns, in most official documents.) visit Shinto shrines. should recover.” Some politicians like these ideas. Jinja It helps that Shinto has no scriptures or But the picture is not all rosy. The num- Honcho has many supporters in the ruling doctrine. “It is a way of thinking, of living; ber of shrines is in slow but steady decline. Liberal Democratic Party. Their number has it is in Japanese people’s dna,” says Tsune- Many are nestled in small rural communi- grown under the current prime minister, kiyo Tanaka, the head priest at Iwashimizu ties that are populated mainly by old peo- Shinzo Abe, who is an avowed nationalist Hachimangu, a shrine near Kyoto, and ple, since the young tend to move to cities. and has prayed at the Yasukuni shrine, head of Jinja Honcho, an umbrella organi- The number of priests has dropped more where war criminals are enshrined as kami. sation for the religion. It is indeed a part of drastically, from 88,192 in 1997 to 71,142 in When he began his second stint in office in everyday life. Many people perform a Shin- 2017. As the shrinking and ageing of Japan’s 2012, Mr Mullins notes, 204 members of to ground-breaking ceremony to appease population accelerates, these problems the Diet were in Jinja Honcho’s parliament- the kami before beginning construction will get worse. ary arm; now 294 are. work. Sumo matches involve Shinto rituals Another tension is the still contentious The general public is not so keen. Mr Ta- that take up more time than the wrestling. question of Shinto’s official role. After the naka admits that many of the firms that Marie Kondo, a Japanese tidying guru, is second world war the American occupiers fund the association dislike its involve- said to be inspired by Shinto’s emphasis on insisted on the separation of shrine and ment in politics. Surveys suggest that most process and ritual. She worked as a shrine state, since Shinto had been a central part Japanese do not support its pet causes. “maiden” for five years. of Japan’s war effort, in which the cult of Many priests seem to be similarly scepti- Those of a new-age disposition see the divine emperor served to legitimise cal, even at the Ise shrine. Mr Otowa does shrines as “power-spots” brimming with militarism. The state stopped administer- not overtly criticise Jinja Honcho, but he healing, love and insight. Satoru Otowa of ing and funding shrines, leaving private or- does talk about how women used to have a Ise Grand shrine, Shinto’s holiest place, ganisations, most notably Jinja Honcho, to much bigger role in Shinto. At most where a mirror said to have belonged to assume that role. shrines, says Koji Suga of Kokugakuin Uni- Amaterasu is kept, says many young peo- But Shinto is still a big part of official versity in Tokyo, who is also a part-time ple come for “mental health and to feel at events such as this week’s abdication and priest, the staff are not ideological: “They peace”. On a spring day groups of them can coronation. Indignant citizens have sweep and wait for people to come.” 7 Financial Era Advisory Group 54 China The Economist May 4th 2019

Political demonstrations owing to the assiduous efforts of cen- sors)—the party is bent on ensuring that its Tiananmen 1919 version of history is the only one heard. Both the party and dissidents agree that in 1919 the country was at its nadir. The last imperial dynasty, the Qing, weakened by decades of internal strife and foreign en- croachment on Chinese territory, had col- BEIJING lapsed in 1911. A military strongman, Yuan The anniversary of a momentous protest tests the party’s nerves Shikai, had tried to reinstate the monarchy short walk from Tiananmen Square, China by its allies after the first world war. with himself as the new emperor. His death Ayoung carworkers wearing company The Treaty of Versailles had awarded a for- in 1916 had unleashed struggles between ri- tracksuits stand with their fists in the air. mer German colony in China to Japan. val warlords. The young protesters had They are renewing their vows to the Com- Today May 4th is officially celebrated as hoped that China’s support for the allies munist Youth League by chanting prom- Youth Day. Its significance is strongly con- against Germany—it had sent about ises to “resolutely support” the Commu- tested. The party recalls the May 4th Move- 140,000 men to work as labourers on the nist Party and “strictly follow” the league’s ment, which refers to the protest in Tian- front in Europe—would result in the return regulations. When they step aside for a anmen as well as similar ones elsewhere in to China of colonised territory. Not only group photo, 40 students from a technical China and intellectual soul-searching had their hopes been dashed, but, as they college take their place to make their own around that time, as the backdrop to the saw it, China’s own government had been pledges of loyalty. A growing queue of party’s birth two years later. Liberals re- complicit in the betrayal. youngsters waits nearby to do the same. member the movement as a cry for democ- But the party prefers not to delve deeply The oath-swearing spot is in the court- racy by patriots who believed that China into the political aspirations of the May 4th yard of an imposing edifice of russet brick, had no hope of standing tall without adopt- Movement, including the view of many known as the Red Building. A century ago it ing Western learning, including in politics. participants that China’s weakness was in belonged to Peking University, one of Chi- In a year packed with sensitive anniversa- part the result of flaws in its traditional cul- na’s most prestigious seats of learning ries—including the 30th on June 4th of the ture. China’s current leader, Xi Jinping, is (now in a north-western suburb). There is a army’s crushing of student protests in the trying to recast the party as a champion of striking contrast between these profes- same square in 1989 (an event barely ancient Chinese values. The reformers of sions of faith in a dictatorial party and an known to many young people in China, 1919 would be horrified. exhibition the same young people are tak- There is only one aspect of the move- en to see inside the building. It is about the ment that officials want to dwell on, name- Also in this section students who, 100 years ago on May 4th, set ly its links with the party’s founding, says off from the Red Building and other sites 55 Touring Mars Base 1 Rana Mitter of Oxford University. But pub- around the city to join a protest at Tianan- lic discussion even of the party’s early ide- 56 Chaguan: Taking on Hollywood men provoked by the shabby treatment of als is curtailed. The party does not want to 1 https://t.me/finera

The Economist May 4th 2019 China 55

2 be reminded that its supporters were once Space-themed tourism them back to Earth (the last country to do attracted by its promise of liberation from this was the Soviet Union in 1976). Next autocracy, not by the dictatorship it came Gobi a Martian year China wants to launch the main sec- to represent. In recent decades the party tion of a new Earth-orbiting space station has downplayed the iconoclasm of the May and send a rover to Mars. 4th Movement, preferring to portray it as There is clearly much public excite- something far blander. A student leader ment. The number of people searching on- tells one of the groups outside the Red JINCHANG line for space-related museums, attrac- China’s burgeoning space programme Building that “the spirit of May 4th” is to- tions and tours increased by 60% in 2018, is becoming a money-spinner on Earth day found in young doctors who battle epi- reckons Ctrip, a Chinese travel agent. In demics and young soldiers who rescue citi- ealworms wriggle on a shelf in the March another Mars-themed attraction—a zens from natural disasters. Mbotanical module of Mars Base 1, a tourist camp accommodating up to 160 If there is something galling about a simulated Martian habitat on the edge of people—opened on the Tibetan plateau. government that brooks no dissent making the Gobi desert in western China. Guo Publishers are producing five times as heroes of long-dead protesters, no one at Jiayu, a guide, tells a group of wide-eyed many science-fiction titles as they were in the Red Building is willing to admit it. Chi- schoolchildren that, mashed up, such lar- 2011, says Sixth Tone, a Chinese news site. na today is far more tightly controlled than vae could be part of the diet of astronauts In the southernmost province of Hai- it was during the early months of 1989 should they reach the red planet. Else- nan, officials are hoping to cash in on a when the party was almost brought down where in the complex (pictured), neon-lit space-launch site that became operational by students who claimed that they, not Chi- corridors lead to sleeping compartments there in 2016. Previously, such facilities na’s geriatric leaders, were the true heirs of and a control centre. Through an airlock were built in remote areas deep inland. The 1919. Those protests were fanned by excite- lined with spacesuits awaits a rover, ready new facility is much more accessible to ment about the 70th anniversary of the for exploring the rocky expanse outside. tourists. Its launches can be watched from May 4th Movement (hundreds of thou- The small installation is near Jinchang, a nearby sandy beach. For now, however, a sands took to the streets on that day 30 a nickel-mining city in the western prov- more popular attraction is the world’s larg- years ago—a high point of the unrest). The ince of Gansu. It was built last year at a cost est radio telescope, fast, in a remote basin party frets that the proximity this year of of around 50m yuan ($7.5m) by Bai Fan, a of another southern province, Guizhou. two big anniversaries—of the demonstra- garrulous British-educated entrepreneur The instrument, which has a diameter of tions in 1919 as well as in 1989—will encour- with the backing of private investors. For 500 metres, also opened in 2016. In the first age dissidents to air their grievances. now Mr Bai is mainly using the base to half of last year alone, more than 5m visi- Given the intensity of security in the teach students about travel to Mars. Even- tors travelled to see it. Few of them got in- capital, this is highly unlikely to happen on tually he hopes the facility will become the side the facility itself: only 2,000 people the streets. But the party’s anxiety has some centrepiece of a resort. His company has are admitted daily. But nearby towns are basis. Campus activism has been bubbling secured the right to develop 67 square kilo- littered with chintzy attractions. up in the form of #MeToo campaigning metres of the surrounding desert—an area Officials in Guizhou worry that the tou- against sexual harassment and an attempt bigger than Manhattan. The base has al- rism boom might interfere with the tele- by self-described Marxists to help factory ready hosted a reality television show, in scope’s function. They are scaling back de- workers in southern China establish a free which six celebrities pretended to be astro- velopment plans in the area. But the trade union. Police have arrested dozens of nauts facing life-threatening challenges. Communist Party sees benefits in all this these labour activists. (Six students con- Businesspeople across China see mon- attention to space. It is generating patriotic nected with the cause are reported to have ey-making possibilities in the country’s fervour as well as enthusiasm for space sci- been taken into custody on April 28th, pre- quest for space-faring achievement. In Jan- ence. An excited 13-year-old touring Mars sumably for fear that they might speak out uary China became the first country to land Base 1 says she hopes to visit the planet it- during the centenary.) Academics are a spacecraft on the far side of the moon. It self one day. Americans were the first peo- cowed, but not crushed. Lately the bravest aims to send another one to the lunar sur- ple to set foot on the moon, she says. Why have been speaking up for Xu Zhangrun, an face this year to collect samples and bring shouldn’t the first on Mars be Chinese? 7 academic in Beijing who was suspended earlier this year for attacking Mr Xi’s au- thoritarianism. The party can at least claim to have ful- filled one dream of the protesters of 1919: China is now a global power (Mr Xi will be careful to ensure that his trade agreement with America’s president, Donald Trump, expected soon, does not look like surren- der). But on April 30th, at a commemora- tion of the centenary in the Great Hall of the People next to Tiananmen, Mr Xi gave a veiled warning to dissidents. He described being unpatriotic as “disgraceful” and said that loving the country was closely en- twined with loving the party and socialism. The traditional May Day public holiday was recently extended from three days to four. The party may hope to nudge Beijingers to enjoy a break outside the city and leave its history behind. The “spirit” of the centena- ry looks a lot like mistrust and fear. 7 Take your mealworm pills and put your helmet on Financial Era Advisory Group 56 China The Economist May 4th 2019 Chaguan Weak tea doesn’t sell

A Chinese-American film star explains why blandly globalised fare flops in China It is a revealing hit. A patriotic action adventure set in war-torn Africa, “Wolf Warrior 2” depicts a lone Chinese commando rescu- ing Chinese and African hostages from wicked American merce- naries. The film plays on a story often pushed by Communist pro- paganda officials, namely that China is a growing yet peace-loving military power that—for now—is content to lend its strength to un peacekeeping missions and other benign tasks. A tense scene shows the hero battling tank-driving baddies on the ground, while awaiting help from a Chinese warship out at sea. Stern Chinese na- val officers launch their missiles only after the un Security Coun- cil in New York approves their use of force—a plot device that is hard to spot in Hollywood action flicks. In another scene Ms Jade’s character, a Chinese-American doctor, telephones the nearest American consulate for help. She hears an answering-machine, for the Yanks have run away. Chaguan met Ms Jade in Beijing after her return from a work trip to Los Angeles, as she prepared to visit Norway for a television travel show. Two years ago Hollywood producers sought projects that would work in both America and China, she says. That might involve adding a Chinese actress to an American blockbuster in a “decorative role”. Now her American meetings are “all about Chi- na”. By this she means co-productions using American know-how, ven if it did not boast a character called Captain America, the but squarely aimed at Chinese audiences. Esuperhero film “Avengers: Endgame” is a very obviously Ameri- The actress would not mourn if Hollywood were to drop pro- can spectacle. Beyond its swagger and expensive special effects, jects crafted to appeal to all cultures, and offend in none. She com- the Marvel comic book film series, of which this is the final instal- pares the approval process for such films to dipping the same tea ment, celebrates flawed, individualistic superheroes. That the bag in ten cups, then drinking from the last. On the Chinese side, film just broke Chinese box-office records for its opening weekend she sees studios growing less anxious about foreign success: “Why could lead outsiders to assume that the American and Chinese serve the global market when there’s so much demand here?” film markets—the world’s two largest—are converging. In fact Chi- She is unsurprised when crossover hits struggle. Whereas Ms na’s film world is becoming more distinctive and self-confident. Jade’s American side related to “Crazy Rich Asians”, she says her Hollywood producers have bet fair sums of money, over the Chinese side found it over the top, and even “fantastical”. Chinese years, on the idea that American and Chinese audiences are not so audiences like to see romantic heroes showing their love in subtle very different, and will laugh, weep and cheer at the same, careful- ways, she says; “It might be how he serves her food.” ly globalised movies. China has a habit of proving them wrong. The State planners are playing a role. China opened 9,303 cinema “Avengers” series has a large but distinctive set of fans in China, screens last year, says ihs Markit, a consultancy. Government tar- who often say they love the films precisely because they identify gets are for 80,000 screens nationwide by 2020, up from 60,000 with its misfit heroes, struggling with a harsh, judgmental world. today. Some will struggle amid an oversupply of screens and a Over 1.7bn cinema tickets were sold in China last year, a domes- shortage of good titles. But expansion has boosted the clout of tic record. Most sales were driven by locally made hits in which the smaller cities where audiences relish films with local themes. stories ranged from Chinese military heroics overseas (“Operation Red Sea”) to a bittersweet drama about cancer (“Dying to Survive”). The propaganda bureau is not amused Though Hollywood had a respectable 2018 worldwide, revenues in Modern China’s first big American import, “The Fugitive” starring China for imported films were down year on year. Harrison Ford, was allowed into just six cities in 1994. It prompted Before “Avengers: Endgame”, the world’s most successful film a spat between state film distributors that took on a nationalist this year had been a Chinese science-fiction epic, “Wandering edge. One distributor grumbled about “using socialist money to Earth”. But it owed this mainly to its popularity at home. By the end fatten the capitalist pig”. Officials still resist Hollywood’s charms. of its American cinema release less than 1% of its revenues came A rampant piracy problem is largely resolved. But quotas continue from the American box office. Western reviewers struggled to re- to limit the number of foreign films shown each year (President late to a film that involved saving the planet, and in which the only Donald Trump’s trade negotiators are trying to improve Holly- speaking role for a non-Chinese was given to a Russian. wood’s market access). Foreign studios pre-emptively pander to Americans flocked to “Crazy Rich Asians”, a frothy romantic China’s censors, avoiding taboo subjects like Tibet. The Chinese comedy about Chinese-Americans and Singapore’s high society. version of “Bohemian Rhapsody”, a biopic about Freddie Mercury, Despite its supposed crossover appeal, in China it flopped. a flamboyant musician, excised most references to his sexuality. Celina Horan, a Chinese-American actor, speaks with authority Ms Jade says she is proud to work in today’s assertive, self-con- about the two film markets. Educated in Hong Kong and at the Lon- fident China. Unbidden, she pays tribute to one-party rule. When don School of Economics, she is fluent in Cantonese, English and tackling environmental challenges, “democracy kind of slows Mandarin. Known professionally as Celina Jade and in China as Lu things down”, she says. Ms Jade questions the idea that censorship Jingshan, she played the female lead in “Wolf Warrior 2”, released makes for bad movies: “Sometimes having limitations forces peo- in 2017 and to date the highest-grossing Chinese film ever. ple to be more creative.” She is in the right place. 7 https://t.me/finera International The Economist May 4th 2019 57

Food global meat consumption rose by an aver- age of 1.9% a year and fresh dairy consump- A meaty planet tion by 2.1%—both about twice as fast as population growth. Almost four-fifths of all agricultural land is dedicated to feeding livestock, if you count not just pasture but also cropland used to grow animal feed. BEIJING, DAKAR AND MUMBAI Humans have bred so many animals for Consumption of meat and animal products is rising. That is bad for the food that Earth’s mammalian biomass is environment—but good for many people thought to have quadrupled since the stone hings were different 28 years ago, nese person went from eating 4kg of meat a age (see chart). Twhen Zhou Xueyu and her husband year to 62kg. Half of the world’s pork is eat- Barring a big leap forward in laboratory- moved from the coastal province of Shan- en in the country. More liberal agricultural grown meat, this is likely to continue. The dong to Beijing and began selling fresh policies have allowed farms to produce Food and Agriculture Organisation (fao), pork. The Xinfadi agricultural market more—in 1961 China was suffering under an agency of the un, estimates that the glo- where they opened their stall was then a the awful experiment in collectivisation bal number of ruminant livestock (that is, small outpost of the capital. Only at the known as the “great leap forward”. But the cattle, buffalo, sheep and goats) will rise busiest times of year, around holidays, main reason the Chinese are eating more from 4.1bn to 5.8bn between 2015 and 2050 might the couple sell more than 100kg of meat is simply that they are wealthier. under a business-as-usual scenario. The meat in a day. With China’s economic In rich countries people go vegan for population of chickens is expected to grow boom just beginning, pork was still a luxu- January and pour oat milk over their break- even faster. The chicken is already by far ry for most people. fast cereal. In the world as a whole, the the most common bird in the world, with Ms Zhou now sells about two tonnes of trend is the other way. In the decade to 2017 about 23bn alive at the moment compared meat a day. In between expert whacks of with 500m house sparrows. her heavy cleaver, she explains how her Meanwhile the geography of meat-eat- business has grown. She used to rely on a Heavy tread ing is changing. The countries that drove few suppliers in nearby provinces. Now the Estimated biomass, gigatonnes of carbon the global rise in the consumption of ani- meat travels along China’s excellent motor- mal products over the past few decades are way network from as far away as Heilong- 0 0.05 0.10 0.15 0.20 not the ones that will do so in future. Tastes jiang, in the far north-east, and Sichuan, in in meat are changing, too. In some coun- 100,000 Wild mammals the south-west. The Xinfadi market has years ago tries people are moving from pork or mut- changed, too. It is 100 times larger than Present Livestock Humans ton to beef, whereas in others beef is giving when it opened in 1988, and now lies within way to chicken. These shifts from meat to Beijing, which has sprawled around it. Source: “The biomass distribution on Earth”, by meat and from country to country are just Y. M. Bar-On, R. Phillips, R. Milo, PNAS, 2018 Between 1961 and 2013 the average Chi- as important as the overall pattern of 1 Financial Era Advisory Group 58 International The Economist May 4th 2019

2 growth. They are also more cheering. On a planetary scale, the rise of meat- and dairy- Plate tectonics eating is a giant environmental problem. Locally, however, it can be a boon. Daily food consumption per person, kilocalories From animal products Over the past few decades no animal has bulked up faster than the Chinese pig. An- Rich countries China Sub-Saharan Africa 4,000 4,000 4,000 nual pork production in that country has grown more than 30-fold since the early 3,000 3,000 3,000 1960s, to 55m tonnes. It is mostly to feed the 2,000 2,000 2,000 legions of porkers that China imports 100m 1,000 1,000 1,000 tonnes of soybeans every year—two-thirds of trade in that commodity. It is largely 0 0 0 through eating more pork and dairy that 1961 2015 2030 1961 2015 2030 1961 2015 2030 est.* forecast* est.* forecast* est.* forecast* Chinese diets have come to resemble West- ern ones, rich in protein and fat. And it is Population, bn mostly because their diets have altered that 1.5 1.5 1.5 Chinese people have changed shape. The 1.0 1.0 1.0 average 12-year-old urban boy was nine 0.5 0.5 0.5 centimetres taller in 2010 than in 1985, the 0 0 0 average girl seven centimetres taller. Boys 1961 2015 2030 1961 2015 2030 1961 2015 2030 in particular have also grown fatter. forecast forecast forecast China’s pork suppliers are swelling, too. Sources: FAO UN Global Perspectives Studies; UN Population Division *“Business as usual” scenario Three-fifths of pigs already come from farms that produce more than 500 a year, and Wan Hongjian, vice-president of wh Wan. Another fashion—hotpot restaurants that can be expected in rich countries over Group Ltd, China’s largest pork producer, where patrons cook meat in boiling pots of the next few years. Despite eager predic- thinks the proportion will rise. Disease is broth at the table—is boosting consump- tions of a “second nutrition transition” to one reason. African swine fever, a viral dis- tion of beef and lamb. Last year China over- diets lower in meat and higher in grains ease fatal to pigs though harmless to peo- took Brazil to become the world’s second- and vegetables, Western diets are so far ple, has swept China and has led to the cull- biggest beef market after America, accord- changing only in the details. Beef is a little ing of about 1m hogs. The virus is tough, ing to the United States Department of less popular in some countries, but chick- and can be eradicated only if farms main- Agriculture. Australia exports so much beef en is more so; people are drinking less milk tain excellent hygiene. Bigger producers to China that the Global Times, a pugna- but eating more cheese. The eu expects are likely to prove better at that. cious state-owned newspaper, has suggest- only a tiny decline in meat-eating, from ed crimping the trade to punish Australia 69.3kg per person to 68.7kg, between 2018 High on the hog for various provocations. and 2030. Collectively, Europeans and Yet China’s pork companies are grabbing The shift from pork to beef in the Americans seem to desire neither more an- larger shares of a market that appears al- world’s most populous country is bad news imal proteins nor fewer. most to have stopped growing. The oecd, a for the environment. Because pigs require If the West is sated, and China is getting club of mostly rich countries, estimates no pasture, and are efficient at converting there, where is the growth coming from? that pork consumption in China has been feed into flesh, pork is among the greenest One answer is India. Although Indians still more or less flat since 2014. It predicts of meats. Cattle are usually much less effi- eat astonishingly little meat—just 4kg a growth of just under 1% a year over the next cient, although they can be farmed in dif- year—they are drinking far more milk, eat- decade. If a country that eats so much of the ferent ways. And because cows are rumi- ing more cheese and cooking with more stuff is indeed approaching peak pork, it nants, they belch methane, a powerful ghee (clarified butter) than before. In the hints at a big shift in global animal popula- greenhouse gas. A study of American farm 1970s India embarked on a top-down tions. Pigs will become a smaller presence data in 2014 estimated that, calorie for calo- “white revolution” to match the green one. on the global farm. rie, beef production requires three times as Dairy farmers were organised into co-oper- In 2015 animal products supplied 22% much animal feed as pork production and atives and encouraged to bring their milk of the average Chinese person’s calorie in- produces almost five times as much green- to collection centres with refrigerated take, according to the fao. That is only a house gases. Other estimates suggest it tanks. Milk production shot up from 20m shade below the average in rich countries uses two and a half times as much water. tonnes in 1970 to 174m tonnes in 2018, mak- (24%). “Unlike decades ago, there are no Fortunately, even as the Chinese devel- ing India the world’s biggest milk producer. longer large chunks of the population out op the taste for beef, Americans are losing The oecd expects India will produce 244m there that are not yet eating meat,” says Joel it. Consumption per head peaked in 1976; tonnes of milk in 2027. Haggard of the us Meat Export Federation, around 1990 beef was overtaken by chicken All that dairy is both a source of national an industry group. And demography is be- as America’s favourite meat. Academics at pride and a problem in a country governed ginning to prove a drag on demand. China’s Kansas State University linked that to the by Hindu nationalists. Hindus hold cows population will start falling in about ten rise of women’s paid work. Between 1982 to be sacred. Through laws, hectoring and years’ time. The country is already ageing, and 2007 a 1% increase in the female em- “cow protection” squads, zealots have tried which suppresses food consumption be- ployment rate was associated with a 0.6% to prevent all Indians from eating beef or cause old people eat less than young people drop in demand for beef and a similar rise even exporting it to other countries. When do. un demographers project that, between in demand for chicken. Perhaps working cows grow too old to produce much milk, 2015 and 2050, the number of Chinese in women think beef is more trouble to cook. farmers are supposed to send them to bo- their 20s will crash from 231m to 139m. Beef-eating has risen a little recently, prob- vine retirement homes. In fact, Indian Besides, pork has strong competitors. ably because Americans are feeling wealth- dairy farmers seem to be ditching the holy “All over China there are people eating beef ier. But chicken remains king. cows for water buffalo. When these stop at McDonald’s and chicken at kfc,” says Mr Shifts like that are probably the most producing milk, they are killed and their 1 https://t.me/finera

The Economist May 4th 2019 International 59

2 rather stringy meat is eaten or exported. 1.1bn today. That would lead to a huge in- not to near Western or Chinese levels. Much of it goes to Vietnam, then to China crease in meat- and dairy-eating even if People will probably become healthier, (often illegally, because of fears of foot- people’s diets stayed the same. But they though. Many African children are stunted and-mouth disease). will not. The population of Kenya has (notably small for their age) partly because But neither an Indian milk co-operative grown by 58% since 2000, while the output they do not get enough micronutrients nor a large Chinese pig farm really repre- of beef has more than doubled. such as Vitamin A. Iron deficiency is start- sents the future of food. Look instead to a Africa already imports more meat each lingly common. In Senegal a health survey small, scruffy chicken farm just east of Da- year than does China, and the oecd’s fore- in 2017 found that 42% of young children kar, the capital of Senegal. Some 2,000 casters expect imports to keep growing by and 14% of women are moderately or se- birds squeeze into a simple concrete shed more than 3% a year. But most of the conti- verely anaemic. Poor nutrition stunts with large openings in the walls, which are nent’s meat will probably be home-grown. brains as well as bodies. covered with wire mesh. Though breezes The fao predicts that in 2050 almost two Animal products are excellent sources blow through the building, the chickens’ out of every five ruminant livestock ani- of essential vitamins and minerals. Studies droppings emit an ammoniac reek that mals in the world will be African. The num- in several developing countries have clings to the nostrils. A few steps outside, ber of chickens in Africa is projected to shown that giving milk to schoolchildren the ground is brown with blood. Chickens quadruple, to 7bn. makes them taller. Recent research in rural have been stuffed into a makeshift appara- This will strain the environment. Al- western Kenya found that children who tus of steel cones to protect their wings, though African broilers and battery hens regularly ate eggs grew 5% faster than chil- and their necks cut with a knife. are more or less as productive as chickens dren who did not; cow’s milk had a smaller Though it looks primitive, this repre- anywhere, African cattle are the world’s effect. But meat—or, rather, animals—can sents a great advance over traditional west feeblest. Not only are they poorly fed and be dangerous, too. In Africa chickens are African farming methods. The chickens in seldom visited by vets; in many areas they often allowed to run in and out of people’s the shed hardly resemble the variegated are treated more as stores of wealth than homes. Their eggs and flesh seem to im- brown birds that can be seen pecking at the producers of food. Africa has 23% of the prove human health; their droppings do ground in any number of villages. They are world’s cattle but produces 10% of the not. One study of Ghana finds that child- commercial broilers—white creatures world’s beef and just 5% of its milk. hood anaemia is more common in chick- with big appetites that grow to 2kg in Lorenzo Bellù of the fao points out that en-owning households, perhaps because weight after just 35 days. All have been vac- herders routinely encroach on national the nippers caught more diseases. cinated against two widespread chicken- parks and private lands in east Africa. He Africans’ changing diets also create op- killers—Newcastle disease and infectious finds it hard to imagine that the continent’s portunities for local businesses. As cities bursal disease. A vet, Mamadou Diouf, hunger for meat will be supplied entirely grow, and as people in those cities demand checks on them regularly (and chastises by making farming more efficient. Almost more animal protein, national supply the farmers for killing too close to the certainly, much forest will be cut down. chains become bigger and more sophisti- shed). Mr Diouf says that when he started Other consequences will be global. Sub-Sa- cated. Animal breeders, hatcheries, vets working in the district, in 2013, many farm- haran Africans currently have tiny carbon and trucking companies multiply. People ers refused to let him in. footprints because they use so little ener- stop feeding kitchen scraps to animals and Official statistics suggest that the num- gy—excluding South Africa, the entire con- start using commercial feed. In Nigeria the ber of chickens in Senegal has increased tinent produces about as much electricity amount of maize used for animal-feed shot from 24m to 60m since 2000. As people as France. The armies of cattle, goats and up from 300,000 tonnes to 1.8m tonnes be- move from villages to cities, they have less sheep will raise Africans’ collective contri- tween 2003 and 2015. time to make traditional stews—which bution to global climate change, though You can see this on the outskirts of Da- might involve fish, mutton or beef as well kar—indeed, the building is so big that you as vegetables and spices, and are delicious. can hardly miss it. nma Sanders, a feed- Instead they eat in cafés, or buy food that mill, turned out some 140,000 tonnes of they can cook quickly. By the roads into Da- chicken feed last year, up from 122,000 the kar posters advertise “le poulet prêt à year before, according to its director of cuire”, wrapped in plastic. Broiler farms are quality, Cheikh Alioune Konaté. The ware- so productive that supermarket chickens house floor is piled high with raw ingredi- are not just convenient but cheap. ents: maize from Morocco, Egypt and Bra- zil; soya cake from Mali; fishmeal from Economic vegetarians local suppliers. The mill has created many Many sub-Saharan Africans still eat almost jobs, from the labourers who fill bags with no meat, dairy or fish. The fao estimates pelleted feed to the technicians who run that just 7% of people’s dietary energy the computer system, and managers like comes from animal products, one-third of Mr Konaté. Lorries come and go. the proportion in China. This is seldom the It is often said that sub-Saharan Africa result of religious or cultural prohibitions. lacks an industrial base, and this is true. If animal foods were cheaper, or if people Just one car in every 85 is made in Africa, had more money, they would eat more of according to the International Organisa- them. Richard Waite of the World Re- tion of Motor Vehicle Manufacturers. But sources Institute, an American think-tank, to look only for high-tech, export-oriented points out that when Africans move to rich industries risks overlooking the conti- countries and open restaurants, they tend nent’s increasingly sophisticated food- to write meat-heavy menus. producers, who are responding to urban Yet this frugal continent is beginning to demand. Ideally, Africa would learn to fill sway the global food system. The un thinks shipping containers with clothes and gad- that the population of sub-Saharan Africa gets. For now, there are some jobs to be had will reach 2bn in the mid-2040s, up from The low-productivity horns of Africa filling bellies with meat. 7 Financial Era Advisory Group 60 Business The Economist May 4th 2019

Also in this section 61 Really big tech 61 Trouble in Deutschland AG 62 Bartleby: Struggling with style 63 Fast times at PSA Group 63 Ailing antibiotics-makers 64 A billion-yuan bet 65 Schumpeter: How to rev up Unilever

Facebook especially European ones, it is flat. The young prefer social media which are more Mark Zuckerberg’s WeChat moment “intimate” and “ephemeral”, like Snapchat, which pioneered “stories”, messages and pictures that disappear after 24 hours— and which Facebook aped. More than 500m users of Instagram, Messenger and WhatsApp now post stories every day. MENLO PARK AND SAN JOSE Mr Zuckerberg expects migration from The social network’s boss has a plan to overpower his opponents the online “town square” to a digital “living n his spare time Mark Zuckerberg likes berg’s speech at his firm’s annual developer room” to continue; stories may soon out- Ito run. In 2016 Facebook’s boss pledged to conference in San Jose on April 30th sug- number posts on Facebook’s newsfeed. The cover 365 miles (587km) that year and, ever gested as much. Far from retreating, he is plan is to build it around WhatsApp, which the overachiever, completed the challenge limbering up for a new contest—to rein- already offers secure texting. It would let by July. He does not practise martial arts, vent social networking, this time around users find each other, pay digital and off- but his almost discomfiting poise could messaging. “The future is private,” he de- line shopkeepers, or purchase a cornuco- lead you to mistake him for a master of clared grandiosely. Though he might not pia of online services—perhaps one day us- something like aikido. That would be ap- admit it in public, he seems keen to turn ing Facebook’s own currency. In time, the propriate, for in his professional life Mr Facebook into a Western version of We- thinking goes, it may become as indispens- Zuckerberg is trying to turn his opponents’ Chat, the Chinese messaging app whose able to Westerners as WeChat is in China. energy against them. array of mobile services, from payments to Some elements of the new platform al- When in early March he announced that filing court paperwork, has made it ubiqui- ready exist; WhatsApp is testing a payment Facebook would follow a “privacy-focused tous in China—even if his recent pledge to service in India. Others, such as new shop- vision for social networking”, complete store user information only in countries ping features on Instagram, were launched with encrypted messages that even the that respect the rule of law is an implicit in San Jose. All this falls short of a full- firm cannot peer into, observers interpret- admission that he has given up on the Chi- blown business plan. But the contours of ed this as a defensive move. Some dis- nese market, where Communist minders Mr Zuckerberg’s vision are taking shape. cerned a belated response to outrage over insist that Western firms must keep all The 34-year-old is proceeding more cau- privacy abuses on the world’s largest social data locally. tiously than in Facebook’s early years, network. Others saw the plan to knit when he was guided by the now infamous together its instant-messaging services, Older. And wiser? injunction to “move fast and break chiefly Messenger and WhatsApp, as a way Facebook’s core business is maturing, as its things”—but no less deliberately. to make the company harder to break up, as boss clearly sees. Its operating mar- That is just as well, for “platform shifts” some American politicians demand. Oth- gins—42%, excluding $3bn set aside to are tricky. Microsoft did not see smart- ers still spied a ruse to escape liability for cover an expected fine by America’s Federal phones coming and Facebook itself almost violent user content, now that Facebook Trade Commission for privacy violations— missed the rise of mobile apps. To succeed, would no longer be able to read any of it. remain the envy of the tech world (see it must clear a number of hurdles. The first All three rationales probably played a charts on next page). In the latest quarter is technical. Facebook wants an Instagram part. Yet the firm’s “privacy pivot” is per- revenue grew by 26% compared with the user to be able to send a note directly to a haps better seen as an aikido-like redirec- previous year, exceeding $15bn. But user friend on WhatsApp. Creating a common tion of detractors’ momentum. Mr Zucker- growth is slowing. In some rich countries, phone book for these services, with a com-1 https://t.me/finera

The Economist May 4th 2019 Business 61

2 bined total of 2.7bn users and different working into power over private messag- Deutschland AG source codes, presents a knotty problem ing. This reminds seasoned competition for programmers. Chris Cox, one of Mr regulators of Microsoft’s attempts to bun- Cracks in the DAX Zuckerberg’s top lieutenants, is rumoured dle its operating system with a web brows- to have left the company in March because er in the mid-1990s in a bid to control he did not think it could be done (this week cyberspace. With the internet’s rise, the Mr Cox attributed his departure to “artistic stakes today are bigger: no country wants differences” with his boss). one firm to become society’s de facto oper- BERLIN Why so many big German corporate The second challenge is economic. We- ating system. names are in trouble Chat could become the platform of choice Since its services cost nothing, Face- on smartphones because China had no book says, it is not gouging users. It could t has never happened to a chief execu- dominant app stores. Facebook must con- argue that a single dominant social net- Itive of a company in the dax index of Ger- tend with incumbents such as Apple and work is easier to police than lots of smaller many’s 30 largest listed firms. On April 26th Google. Since you can’t sell microtargeted ones and has greater financial and techni- 56% of shareholders in Bayer, a chemicals adverts against encrypted messages your cal capacity to keep users safe from harm- conglomerate, censured Werner Baumann algorithms cannot see, the new platform ful content. And it would be a bulwark and his management team. Most German will need a fresh way to make money. For against WeChat, which might otherwise bosses can count on nine in ten share- all its ubiquity, WeChat is no cash cow become a force outside China—bringing holders to back them in non-binding confi- (Tencent, its owner, makes most of its rev- the Chinese surveillance state with it. dence votes. In 2015 a rebellion by a minor- enue from online games). Maintaining Fa- Indeed, Mr Zuckerberg’s Washington ity, of 39%, of Deutsche Bank’s owners, who cebook’s fat margins would require new Post article looks like a bid to broker a 21st- censured Anshu Jain and Jürgen Fitschen, revenue sources, such as charging busi- century version of the Kingsbury Commit- led both co-chief executives to announce nesses to contact users or taking a cut of ment of 1913, when at&t, then America’s their resignation. any purchases, as credit-card issuers do. telephone monopoly, accepted govern- Bayer shareholders have reason to be Lastly, there are the entwined issues of ment oversight and agreed to spin off some mutinous. Its share price has plunged by privacy and competition. Mr Zuckerberg of its businesses in exchange for not being 40% since its takeover last June of Mon- accepts that a lot of people dismiss Face- nationalised or broken up. The difference santo. It is now worth less than the $63bn it book’s sincerity here—his recent article in is that, unlike at&t, Facebook’s reach ex- paid for the American seed-and-chemicals the Washington Post, imploring govern- tends beyond America and spans a growing giant. Critics accuse Mr Baumann of infect- ments to regulate social media, notwith- range of industries, from advertising to fi- ing a healthy firm with underestimated le- standing. It will continue to collect plenty nance. It must grapple with politicians, gal risks related to Roundup, Monsanto’s of data. Integrating these, and the underly- regulators and rivals. If enough opponents blockbuster weedkiller. ing apps, could in turn enable Facebook to gang up at once, even the most gifted aiki- In August an American court awarded convert its dominance in public social net- do master may struggle to fend them off. 7 $289m to Dewayne Johnson, a terminally ill cancer patient who had been exposed to Roundup over many years. In March it lost Really big tech a similar case when a court in California Apple Microsoft Alphabet* Facebook Amazon awarded $81m to a cancer victim. It is fend- ing off more than 13,000 lawsuits alleging Cumulative profits since Q1 2013, $bn Revenues†, $bn (despite earlier scientific evidence to the 700 300 contrary) that Roundup causes tumours. 250 The next verdict is expected later this 200 600 month. There are murmurs that activist in- 150 vestors, including Elliott, an American 100 500 hedge fund which owns a stake in the com- 50 pany, want to amputate Bayer’s agriculture 0 business from its healthier drugs one. 400 2013 14 15 16 17 18 19 Bayer is not the only German blue-chip company that has stumbled after an Amer- 300 ican misadventure. Volkswagen, Europe’s Net profit margin†, % 50 biggest carmaker, has so far paid $30bn in 200 40 fines and compensation in America after it 30 was caught fitting “defeat devices” in up to 20 11m cars worldwide to fool emissions tests. 100 10 It is now trying to reinvent itself as Eu- 0 rope’s leading maker of electric vehicles. 0 -10 Deutsche Bank’s existential troubles date 2013 14 15 16 17 18 19 2013 14 15 16 17 18 19 back to its acquisition in 1999 of Bankers Source: Bloomberg *Parent of Google †Four-quarter trailing Trust, an American investment bank, which served as the launching pad for its ill-fated foray into international invest- Never mind the buzz ment banking. Daimler, which makes Mer- The big American tech firms continue to flirt with market valuations of $1trn, but their cedes cars, has yet to recover after losing first-quarter earnings show that the outlook is mixed. Facebook shrugged off regulatory €40bn ($45bn) in its short-lived takeover crackdowns but its margins dipped. Sales of Apple’s iPhones fell again, highlighting the in 1998 of Chrysler. ThyssenKrupp, a steel- need for new revenue sources. Alphabet, Google’s parent, shed 7.5% of its value after it maker, burned through €8bn with two fac- reported slowing ad sales. Amazon’s (comparatively puny) profits doubled but sales tories in North and South America and is growth slowed. Microsoft showed it is no tech has-been; it briefly joined the $1trn club. now splitting its historic steelmaking unit, 1 Financial Era Advisory Group 62 Business The Economist May 4th 2019

2 to be merged with the European steelmak- strategy. Americans talk up sexy topics line with other stockmarkets, this year may ing business of Tata, an Indian conglomer- such as technology when they pitch their be no less tough for some of them. Carmak- ate, from its lucrative lifts business. company’s achievements. By contrast, Mr ers and energy firms plan to send many Optimists point to the rude health of Baur observes, Germans tend to pontificate workers into early retirement. dax stalwarts like sap (software), Allianz about regulation and taxes. Whether Bayer’s boss joins them will (insurance), Munich Re (reinsurance), Sie- Perhaps. But even dax companies that depend on how company’s legal troubles in mens (engineering) or basf (chemicals)— have avoided self-inflicted wounds from America unfold. The sum awarded to Mr solid companies with sound balance- unfamiliar American-style corporate ag- Johnson was subsequently reduced; Bayer sheets busily preparing for the digital age. gression face challenges. Most depend on is appealing. On April 30th credit-raters at Even Volkswagen appears largely to have exports. They are affected by the slowdown Moody’s said that Bayer could absorb litiga- put “Dieselgate” behind it. Cornelius Baur, of the Chinese economy, tariff wars and the tion costs of up to €5bn. But they warned the German boss of McKinsey, a consultan- uncertainty over Brexit. Last year the oper- that payouts of €20bn or more could push cy, puts some of German firms’ mishaps to ating income of dax firms fell by 6.5%. Al- the company’s rating uncomfortably close chief executives’ poor communication though the index is up since January, in to junk. 7 Bartleby Struggling with style

Modern dress codes are easier for men than for women ummer’s arrival in the northern Mark Zuckerberg, the founder of Face- gets snarky comments when she wears Shemisphere brings with it a dilemma book, was to meet a venture capitalist, he the same clothes twice. that plagues every office worker. What turned up wearing his pyjamas. Women’s workwear seems to have does a casual dress code mean in prac- The jacket, by contrast, is a much more become less formal over time. A survey tice? The happy medium between look- useful garment, replete with pockets to by Euromonitor found that sales of ing like Kim Kardashian or Hagrid the house wallets, spectacle cases and travel women’s suits fell by 77% in America giant is hard to pin down. passes (or, these days, mobile phones). So between 2007 and 2016. But many wom- Goldman Sachs has just implemented the default work garb for men, when meet- en worry that they will be judged as a “flexible dress code” although the ing clients, is jacket, open-necked shirt unprofessional (unlike their male col- executive memo noted gnomically that and dark trousers (denim excluded). leagues) if their clothes are deemed to be “casual dress is not appropriate every On days without meetings, men can too scruffy, or too revealing. It can also be day”. Besuited corporate clients might slob out in t-shirts (though not too garish) hard choosing clothes that are suitable not take kindly to investment-banking and jeans, and no one will think the worse for both indoors and out. Air-condition- advice offered by someone wearing a of them. Arriving in shorts or without ing systems in offices are often designed tank top and ripped jeans. socks is another matter entirely. But dress- to suit the male metabolic rate, which It makes sense that banking would be ing in the morning is quick and easy. Steve can cope with colder temperatures than one of the last bastions to fall to the Jobs was famous for wearing the same the female body. The result may be that advance of casual workwear. You want outfit—black polo neck, jeans and train- women have to bring an extra layer to the people who look after your money to ers—every day. wear in the building. appear sober and respectable. For similar But what works well for men does not As for formal meetings, while men reasons, bank headquarters have deliber- translate as easily to women. Karl Stefa- have abandoned the tie, many women ately been built in a grandiose style to novic, an Australian television presenter, feel obliged to wear high heels. These emphasise the institution’s financial wore the same blue suit every day for a give some women a sense of empow- solidity and historical roots. Depositors year and no one noticed. By contrast, his erment and femininity (not to mention might hesitate about handing over their female co-presenters received constant extra height). But in health terms, heels savings to people working under a rail- remarks on their appearance. Even the can seem like the Western equivalent of way arch. Duchess of Cambridge, Kate Middleton, the ancient Chinese practice of foot- For men, the move to casual dress binding: bad for women’s feet, ankles seems entirely positive. Few people will and backs and designed to limit their mourn the demise of the tie, a function- mobility. Britain’s Parliament held a ally useless garment that constricted debate after a woman was sent home male necks for a century. The tie’s origins from her job as a receptionist for refusing date back to the 17th century, when mer- to wear high heels (it was inconclusive). cenaries hired by Louis XIII of France Companies understandably want wore a form of cravat. The modern ver- workers who deal with the public to look sion of the tie emerged in the 1920s and respectable. Workers shouldn’t wear was popularised by Britain’s Edward VIII clothes that wouldn’t be appropriate if who, when not flirting with the Nazis, visiting a prudish grandmother or a developed the Windsor knot. It became child’s teacher. And yet no one should be standard office wear for the next six expected to turn up at the office as if decades. In the 1990s ties started to go dressed for a wedding. The most impor- out of fashion because technology titans tant item to bring to work is a dose of and hedge-fund managers refused to sartorial common sense. wear them—and were rich enough to ignore social convention. Once, when Economist.com/blogs/bartleby https://t.me/finera

The Economist May 4th 2019 Business 63

Carmaking where carmakers have done well in recent Drugmaking years. Making humdrum Opels (sold as Track mentality Vauxhalls in Britain) desirable will require A tough sell heavy spending. Placid unions, which re- cognised psa’s difficulties, may become less so as its health improves. A plan to return to America has also met POISSY with scepticism. psa’s brands are largely PSA Group’s boss has revived its Why producers of new antibiotics forgotten there—the last one, Peugeot, de- fortunes. He isn’t done are ailing parted 28 years ago. Rather than spending arlos tavares likes to move quickly. heavily on marketing, building a factory etting hold of penicillin in 1943 was a CThe boss of psa, maker of Peugeots and and losing money “like hell”, Mr Picat says, Glottery in America. The “miracle drug” Citroëns, has a passion for motor racing psa will start with car-sharing services to had been discovered 15 years earlier but and speed pervades his day-to-day activi- reintroduce the marques gradually as part production capacity was limited, and most ties, too. The intense Portuguese arrives of a ten-year project that will “make money went to the war effort. What remained was abruptly for meetings and departs so swift- at every step”. This seems to be one place rationed, and a single injection cost at least ly that it takes a few seconds to realise that where Mr Tavares is content to go slowly. $40 (about $600 in today’s prices). By 1949 he has gone. His reputation as the most tal- Further down the road, he worries better manufacturing methods allowed the ented boss now running a car company is about the added costs of electrification to price to fall to 20 cents. The use of penicil- also built on speed—his rapid and remark- meet eu emissions targets. The American lin exploded. able turnaround of two struggling firms, car-sharing venture will offer some experi- Antibiotics subsequently became a sta- first psa itself and then Opel, acquired ence in mobility services, but psa lags be- ple of modern medicine. Massive volumes from General Motors (gm) in 2017. Steering hind many rivals in autonomous vehicles. offset low margins. No longer. Finding new his mass-market firm towards the future of All this will require heavy spending. molecules is getting harder, which means carmaking will not be easy. Greater scale would help. Mr Tavares is higher development costs. At the same The permanent frown clouding Mr Ta- on the lookout for deals. A tie-up with gm time, growing awareness that overuse ac- vares’s brow is a testament to the tough or Fiat Chrysler Automobiles (whose chair- celerates development of bacterial resis- jobs he has pulled off. First, after taking the man, John Elkann, sits on the board of The tance to the drugs has led to “antibiotics wheel of psa in 2014 after years of heavy Economist’s parent company) has been ru- stewardship”, the practice of using the losses, he rescued it from bankruptcy. To moured. So has a takeover of struggling Jag- newest antibiotics only for infections un- near-universal surprise, he restored the uar Land Rover from its Indian owners. treatable with older ones. Volumes, in oth- firm to the black in a year. Revenues and Some industry-watchers think consolida- er words, are often disappointing. With profits have since grown handsomely; pro- tion is imminent—and virtually all believe returns from antibiotics down, big phar- fit margins now rival those of German pre- it is necessary to share the costs of develop- maceutical companies have abandoned mium carmakers. ing electric vehicles, self-driving cars and them for more lucrative drugs. Glaxo- As Maxime Picat, psa’s director of oper- mobility services. Since the death last year SmithKline, Pfizer and Merck are the only ation in Europe, drily observes, seeking of Sergio Marchionne, Fiat Chrysler’s leg- three doing clinical research in the field. profits first and volumes afterwards has endary boss, and the legal travails in Japan Small biotechnology firms tried to pick “not always been the case” in an industry of Carlos Ghosn, ejected from his leader- up the slack. In the past ten years, as the that has prioritised sales and market share. ship roles in the Renault-Nissan-Mitsub- world began to panic about the rise of resis- psa sought to sell fewer cars at a bigger ishi alliance, many observers see Mr Ta- tant superbugs, governments and charities mark-up. It axed niche models that made vares as the only car boss with the skill to provided early-stage financing. Like big little money and slashed costs by limiting cut big and difficult deals. 7 pharma, though, the biotech startups have the bewildering array of combinations of struggled to make money from antibiotics. engines, body styles and the like. An American one, Achaogen, filed for When psa was criticised for lacking the bankruptcy on April 15th; plazomicin, a heft to make big investments in electric ve- novel antibiotic it began selling in 2018, hicles and self-driving cars, Mr Tavares sold barely any doses in the first eight paid gm €1.3bn ($1.4bn) for its struggling months. Melinta, another antibiotics start- European arm. This added around 1m vehi- up, is restructuring. Share prices of similar cles a year to the 2.8m the rest of the group firms have plunged, in some cases below built in 2018, making it Europe’s second- their liquidation value. biggest carmaker behind Volkswagen. He The demise of Achaogen has been applied his tactics again, this time to a blamed on the peculiar features of the anti- company which had suffered two decades biotics market, rather than the poor busi- of losses totalling around $20bn under ness decisions of its managers. The low American ownership. In 2018 Opel report- number of cases that are suitable for poten- ed an operating profit of over €860m. tial treatment with novel antibiotics makes The resurrection of two struggling car it hard to recruit enough patients for clini- giants has propelled psa’s share price by cal trials. Take carbapenem-resistant Ente- 14% over the past year. Steering the com- robacteriaceae (or cre for short), which bined firm through the next series of bends Achaogen went after. These bacteria kill will take a different set of skills, however. half of those whose bloodstream they in- Car sales in Europe, where psa generates fect. But cres cause only a tiny fraction of 80% of revenues, are less brisk than in the bacterial infections in American hospitals. past. Markets such as India and Russia, Firms get around this by having their which Mr Tavares is eyeing, are trickier to new antibiotics approved for more com- negotiate. psa has struggled in China, Cornering the market mon ailments treatable with existing 1 Financial Era Advisory Group 64 Business The Economist May 4th 2019

Chinese business The billion-yuan bet

SHANGHAI A wager offers a vignette of changing corporate China n 2013 business folk gathered in Beij- just as private ones like Xiaomi do. In Iing to honour Chinese “Economic April Gree’s largest shareholder, a regu- Figures of the Year” were treated to an lator overseeing state-owned enter- unexpected twist. One of the winners, Lei prises, said it would sell most of its 18% Jun, ventured that in five years the sales stake. To build an ecosystem of devices of Xiaomi, the smartphone-maker he controlled by his mobile phones, Mr Lei founded in 2010, would surpass those of relies on closeness to China’s manufac- Gree, a manufacturer of air-conditioners turing heartland, Gree’s home. with government roots. To make things They face similar challenges, too. The interesting Dong Mingzhu, an entrepre- competition in their core markets is stiff. neur and Gree’s chairwoman with whom Xiaomi’s margins from low-cost phones Mr Lei had shared an award, bet him 1bn are wafer-thin. Gree has lost share of yuan ($148m today) that her company’s Chinese air-con sales to rivals such as turnover would stay ahead. Mr Lei ac- Haier and Midea, which are introducing cepted. Since March 19th, when Xiaomi more high-tech models. Xiaomi and Gree posted revenues of175bn yuan in 2018, have both taken a punt on changing their corporate China has awaited the figure original business models. Gree is selling 2 drugs, such as urinary-tract infections. At from Gree. On April 28th the verdict was more online. Xiaomi is opening more the same time, they publish results from in: it made 200bn yuan. Mr Lei was out of physical stores. To keep up with rapidly small observational trials of the new drugs the money. changing consumer tastes, Gree has showing good recovery rates for hospital The bet looked bold for Mr Lei in 2013. moved into smart home appliances, as patients with cre infections—counting on Xiaomi was then making a quarter of well as low-emission vehicles and chip doctors to prescribe the medicines off-la- Gree’s120bn yuan in annual sales. The design—areas in which Xiaomi now does bel for cre. In the case of Achaogen, a small “Appleof the East”,as it was dubbed, business, too. Ms Dong now makes study showed that plazomicin was indeed represented a new sort of Chinese com- smartphones, and Mr Lei has a line of safer and more effective for cre than colis- pany: market-driven and spunky, not air-conditioners. Whether or not he tin, a highly toxic antibiotic of last resort state-led and stodgy; online instead of makes good on it—gambling is outlawed from the 1950s. Yet plazomicin did not bricks and mortar; relying on digital on the mainland—the bet highlights the make a dent in colistin use. A cre antibiot- technology rather than mechanical changing face of China Inc. ic by Melinta that has been on the market engineering. By mid-2018 Xiaomi’s rev- for over a year is not selling well, either. enue neared 90% of Gree’s (see chart). That could be because few doctors When the firm floated on the Hong Kong Chinese poker know about the new treatments. The firms stock exchange last July it was valued at Revenues, yuan bn which sell them lack the marketing dollars $54bn. It has become the fourth-most- 200 that big pharma firms shower on new valuable Chinese brand, according to Lei Jun and drugs, says Alan Carr, an analyst at Need- Brandz, a consultancy; Gree is 29th. Ms Dong Mingzhu ham, an asset manager in New York. It Dong herself suggested that the wager make bet 150 takes time for new antibiotics to make it was meaningless given how different Gree Electric into clinical guidelines, such as those of Gree and Xiaomi were. 100 the Infectious Diseases Society of America, In reality, the companies are not that Xiaomi which are updated infrequently. dissimilar—and growing less so as Chi- 50 American hospitals, meanwhile, avoid na’s economy modernises. Both have new antibiotics because they end up foot- boomed thanks to swelling Chinese ing the bill, which can run to several thou- disposable incomes. The fiercely in- 0 sand dollars per patient. Federal pro- dependent Ms Dong has repeated public- 2012 13 14 15 16 17 18 grammes like Medicare, which provides ly that her firm must fight for customers Sources: Company reports; press reports health care for the elderly, often pay hospi- tals for antibiotics as part of bundled pay- ments for hospitalisation, not as reim- mon antibiotics that usually work for the er the cost of drugs, not raise it. Even if new bursement for a particular treatment, as in microbial culprit they suspect. For exam- antibiotics were paid for separately, many the case of cancer. Aleks Engel of Novo ple, when a first-line antibiotic stops work- investors think that patients for drugs like Holdings, another asset manager, cites this ing for most cases of pneumonia caused by plazomicin are too few to make these drugs model as a perennial gripe among fellow bacteria that grow in hospital pa- commercially viable in the near term. investors in antibiotics. tients’ breathing tubes, the third-line anti- Making them profitable for firms will Antibiotics which fall flat in the first biotic starts selling briskly. take ingenuity. This week a un commis- few years can eventually become profit- Many investors are too impatient to sion mused about granting large cash able, notes Bibhash Mukhopadhyay of New wait that long. Lacking other products on prizes for companies that create such Enterprise Associates, an American ven- the market to turn a profit, firms like drugs, or paying them a subscription that ture-capital firm. Until tests pinpoint the Achaogen struggle to raise capital to cover guarantees fixed revenues regardless of specific bug causing an infection (which their costs. Higher prices might help, but use. Given the x Prize and Netflix, these are may take days), doctors try several com- the debate in America is about how to low- at least familiar to venture capitalists. 7 https://t.me/finera

The Economist May 4th 2019 Business 65 Schumpeter How to rev up Unilever

A new boss confronts an old question their understanding of consumer tastes. In the developed world, the toughest business is food and beverages, especially easily rep- licable items like dressings, spreads and builders’ tea. Hence the pressure on Unilever to ditch the food business entirely. Unilever is already on a diet. Food and refreshments have shrunk from more than half of sales when Mr Polman took over in 2009 to 36% (it shed its 90-year-old spreads business last year). Home and personal care, including soaps, deodorants and laundry liquids, are up. This was not just a case of breathing new life into old brands like Dove. Unilever has made 29 acquisitions since 2015, mostly in the personal-care division formerly headed by Mr Jope, including upmarket beauty products like Dermalogica and sub- scription services like Dollar Shave Club. Known inside Unilever as “speedboats”, they are meant to bring more oomph to the mother- ship yet remain separate from it. Analysts and some investors tout the merits of potentially seis- mic deals to enhance the focus. Martin Deboo of Jefferies, a broker- age, has long argued that Unilever should sell the rest of its food business and buy Colgate-Palmolive, a potentially $62bn mouth- ful of toothpaste and other home and personal-care businesses. Andrew Wood of Bernstein, a research firm, says Mr Jope should attempt to buy Reckitt Benckiser’s smaller, $20bn hygiene-and- n a compound in Shanghai two rising stars in the marketing home business, shedding more food brands in the process. Iworld used to share a beer together. One was Alan Jope, who in But there are three reasons why Mr Jope ought to avoid game- January became the boss of Unilever, a 130-year-old Anglo-Dutch changing transactions. The first is Unilever’s lack of experience in consumer-goods firm famous for its Knorr stock cubes and Dove handling big acquisitions. Most of the recent ones cost less than soaps. The other was Miguel Patricio, the incoming chief executive €1bn ($1.1bn). Unilever’s biggest splurge was the disastrous $24bn of Kraft Heinz, the macaroni-to-ketchup deal machine that in 2017 acquisition of Bestfoods in 2000, after which it wasted 15 years choked in an attempt to swallow Unilever. selling off unloved brands. Tastes are changing so fast that any big He may run a firm that is worth $175bn, but Mr Jope seems the purchase could end up a dud. sort of bloke with whom it would be easy to have a pint. The 55- The second reason is that Unilever’s emerging-market ambi- year-old Scot is refreshingly down-to-earth. He wears jeans and tions are well served by having a food arm. Some 58% of sales come trainers, but no tie. He has good tales to tell. His first job was driv- from developing countries. Fast-growing markets such as Bangla- ing a butcher’s van. His hobby is joining friends on an intermittent desh could provide as much growth in dollar terms as a region like mission to circumnavigate the globe on a bmw 750 motorcycle— Europe. Short of formal shops, such places rely on sprawling dis- and he has bones, broken in the Gobi desert, to prove it. He is also tribution networks that work best combining food, beauty and loyal to former drinking buddies, such as Mr Patricio. There is, he home products. People there have a growing appetite for nutri- has said, “no Schadenfreude” about the troubles at Kraft Heinz fol- tional items. That helps explain Unilever’s recent €3.3bn purchase lowing its calamitous results in February. of Horlicks, a malt drink popular in India, from GlaxoSmithKline. In temperament, Mr Jope could not be more different from his Third, food can be made more valuable. Mr Wood notes that predecessor, Paul Polman, a self-confessed “Calvinist Dutch” Nespresso allows Nestlé to charge ten times more per cup of coffee whose messianic belief in long-term sustainability gave him a than Nescafé Gold Blend. Other competitors are pushing teas and haughty air. Unlike Mr Polman, who was famously dismissive of ice creams up market. Unilever has acquired a few trendy food shareholders, Mr Jope has been listening to them. Among the most companies such as the Vegetarian Butcher. Moreover, the line be- radical ideas out there is a perennial one: that he should take Un- tween food, beauty and health is blurring; brace for more nutra- ilever on the business equivalent of an off-road trip, abandoning ceuticals, such as dietary supplements, cosmeceuticals, such as the slow-growing food business and focusing exclusively on more acne deep cleanse, and nutricosmetics, to make hair thicker. exciting areas such as beauty and home products. Mr Jope should resist the urge. There are other ways to rev up Off the soap box Unilever’s engine. Ugly neologisms aside, such a bundle of salubrious brands would Most consumer-goods behemoths are in the midst of soul- dovetail with Unilever’s trademark pursuit of environmental and searching. For much of the post-war era, the mass marketing of social responsibility that Mr Jope is keen to preserve. He would be strong brands to ever-wealthier Westerners was the epitome of a wise to do so. Though shareholders in Britain turned against Mr stable business. According to McKinsey, a consultancy, for 45 years Polman when he tried to end Unilever’s dual listing in London and to 2010 few industries could top the returns to shareholders of the Amsterdam, few want the firm to jettison the sense of purpose that slow-moving business of selling fast-moving consumer products. he brought, if only because it helps win customers and keep staff In the past decade, though, firms like Procter & Gamble, Nestlé committed. Mr Jope may be less preachy than his predecessor, and Kraft Heinz have increasingly resembled overweight cyclists more pragmatic and, possibly, more profit-oriented. He should re- in a bike lane. They have looked sluggish next to smaller, more ag- sist Evel Knievel-ish leaps into the unknown. Otherwise he may ile competitors. Social-media-obsessed millennials have shaken have more than broken bones to reminisce about over a lager. 7 Financial Era Advisory Group 66 Finance & economics The Economist May 4th 2019

Also in this section 68 Buttonwood: Berkshire Hathaway 69 Turkey’s central bank 69 No sign of recession in America 70 Cryptocurrencies 70 Foreign-exchange trading 71 America’s best young economist 72 Free exchange: Neonatal economics

Big Compliance al-scale operation just to digest all the reg- ulatory changes,” says Colin Bell, hsbc’s Rise of the No Men chief compliance officer (cco). Keen to show that compliance is a prior- ity, banks highlight it much more in filings than they used to (see chart 1on next page). Though disclosure is patchy and banks de- fine compliance and related functions in Those in charge of minimising banks’ regulatory woes have never been more varying ways, they seem to have backed up in demand talk with action. Disclosures, such as they ompliance officers are the killjoys of to remain well above pre-crisis levels. are, suggest that it accounts for 10% or Cfinance. To bankers and traders keen to Combating financial crime is central to more of the workforce at large banks, up let rip, they are the po-faced types who compliance. Enforcement has tightened from perhaps half that in the mid-2000s. frown at any transaction that might breach since America passed the Patriot Act, At the end of 2018, some 30,000 (or 15%) this rule or contravene that regulation. A which targeted money flowing to terrorists of the 204,000 employees of Citigroup, an recent episode of “Billions”, a television and other bad actors, after the September American bank, worked in compliance, drama about Wall Street, captured the rain- 11th attacks. Regulators have fined financial risk and other control functions—enough makers’ frustration: so fed up is “Dollar” firms at least $28.4bn for money-launder- to fill more than two-thirds of the seats at Bill Stern with having his wings clipped by ing and sanctions violations since 2008; Citi Field, the New York Mets’ baseball sta- Ari Spyros that the veteran trader rams the bnp Paribas alone paid up $8.9bn for sanc- dium. At the end of 2008 it was just over 4% side of the compliance chief’s Porsche tions shenanigans. Aiding tax evaders has of employees. JPMorgan Chase could just when he pulls out of the car park of their cost banks at least another $9.5bn. There is about fill it with the 43,000 it claims to em- hedge fund, Axe Capital. more to come: Scandinavian banks em- ploy in “fortress controls” (a category that But pity not finance’s in-house police- broiled in scandals involving laundered is probably broader). men, for they have had a golden decade Russian money, including Danske Bank hsbc, which was fined $1.9bn in 2012 for since the crisis. While swathes of banking and Swedbank, are bracing for penalties. banking Mexican drug money and other have laboured under cutbacks and stiff Compliance is also about keeping on lapses, has around 5,000 employees in capital requirements, their headcount and top of a plethora of regulations, covering anti-money-laundering (aml) compliance.1 clout have grown. Banks fined for aiding everything from capital and corporate go- corruption, money-laundering and sanc- vernance to disclosure and diversity. Com- Business and finance correspondent: The tions-busting have beefed up their compli- pliance teams even have to fret about Economist is looking for a writer to work at its headquarters in London. The ideal candidate will ance, risk, legal and internal-audit teams. seemingly innocent diversions like “office combine the ability to write informatively, Compliance officers will never be the rock pools”—sweepstakes on sports events—in succinctly and wittily with a knowledge of finance. stars of finance, but they have moved from case they fall foul of gambling laws. Thom- Applicants should send a CV and an unpublished drums to rhythm guitar. And though some son Reuters, which tracks regulatory alerts, article they think would be suitable for publication in either the Business section or the Finance and banks hint at having reached “Peak Com- reckons that 56,321 were issued by 900 bo- Economics section to fi[email protected]. pliance”, staffing and investment are likely dies in 2017. “You have to build an industri- The closing date for applications is May 31st 2019. https://t.me/finera

The Economist May 4th 2019 Finance & economics 67

2 Standard Chartered, which has coughed up more, another recruiter, says that though 1 $1.8bn for breaches of sanctions, has 3,500. Say it, mean it the market remains strong, “we’re no lon- Both banks spend $500m a year on aml Selected banks’ annual reports ger seeing amazing bidding wars for well- alone—for Standard Chartered, the equiva- Number of times “compliance” is mentioned qualified compliance officers where there lent of a fifth of its pre-tax profit for 2018. 2006 2018 would be two other offers on the table and British banks’ annual aml spend is £5bn 0 50 100 150 200 250 you couldn’t be sure the guy would start ($6.5bn), according to the Financial Con- BNP Paribas until he actually walked through the door.” duct Authority. Since bnp Paribas was hit Now, the biggest question for bank con- with its mega-fine in 2014, it has nearly Credit Suisse trollers is how many humans they can re- doubled staffing in compliance and other HSBC place with bots without compromising hsbc control functions, to almost 13,000. Grow- RBS compliance. is looking at the pos- ing demand for aml sleuths has been a sibility of using big data to assign a finan- boon for those who certify them, too. The Barclays cial-crime-risk score to each customer. Association of Certified Anti-Money-Laun- Deutsche Bank Banks are going into partnership with dering Specialists, based in Miami, has Goldman Sachs some of the hundreds of “regtechs” that seen worldwide membership grow from have sprouted in recent years: startups 5,600 to 70,000 since 2007. UBS with names like RegBot and Arachnys that Banks caught up in dirty-money scan- Bank of America promote cutting-edge compliance. Accord- htf dals are not only rushing to hire, but adver- JPMorgan Chase ing to , a market-research firm, global tising the fact to soothe markets. Danske regtech market revenue was $1.4bn in 2018 Source: Company reports Bank has said it will hire 600 new compli- and is forecast to reach $6.4bn by 2025. ance staff this year; it has already quadru- The most mature part is aml screening, pled the number since 2015, to 1,200. abn world over. Recruiters say talented lawyers which is dominated by bigger firms such as amro, under scrutiny because an opera- who would previously have shunned com- Refinitiv and Dow Jones that help banks tion that it used to own may have been con- pliance roles are now more interested. and companies vet clients and potential nected with the Troika Laundromat, a Rus- So too are banks’ profit generators. In trading partners for money-laundering, sian money-washing scheme, has revealed recent years bnp Paribas has encouraged sanctions and terrorist-finance risks. It details of its investment in aml (including employees to move between the business continues to grow at quite a clip. Sales in- a tripling of staff engaged in “client due di- side and compliance to “disseminate the creased 18% in 2018, reckons Burton-Taylor, ligence”). Banks are also throwing money compliance and conduct culture”, says another research firm. Some big hitters are at staff training—and policing it. Gone are Nathalie Hartmann, its compliance chief— backing the robot revolution. “Over time, the days when traders could get interns to and previously head of portfolio manage- ai will…dramatically improve [aml pro- take their computer-based compliance ment. Under bnp’s post-fine compliance cesses] as well as other complex compli- tests for them while they popped out for a framework, “conduct and control officers” ance requirements,” wrote Jamie Dimon, pint. Such ruses are now a sacking offence. wander trading floors and sales desks, the chief executive of JPMorgan Chase, in spotting wayward behaviour earlier than his latest letter to shareholders. The bankers who like to say No would previously have been possible. For now, though, many banks struggle Compliance is gaining not just investment, Banks such as bnp and hsbc, which are to choose between the myriad products but clout. In the past it was often buried in now several years into compliance-boost- hustling for attention, says Stacey English the legal or risk department, and ccos re- ing efforts, have entered a “stabilisation” of Thomson Reuters. “ai carries risks we ported to chief risk officers or general phase, says a consultant. Having started by don’t understand,” says a large bank’s com- counsels. Now they are more likely to have throwing people at the problem, they are pliance chief. Regulators will need con- a direct line to the top: for instance, hsbc’s now seeking to increase efficiency and vincing, too. In December a group of Amer- Mr Bell reports directly to the chief execu- lower costs. Some, including ubs, have ican regulators urged banks to use tive. The role now involves much more even suggested it may be time to pare back “innovative approaches”, including ai, to than ensuring the firm is within the law: li- after the boom. Spending on compliance at enhance money-laundering compliance. aising with the board, ensuring investors hsbc peaked in 2017, says Mr Bell. “As in But banks remain nervous that they will be and regulators have the information they any cycle of transformation, there is a set- penalised if techno-experiments fail. need, and helping shape the bank’s risk tling-in phase, when you can, for instance, The idea of compliance algorithms re- culture. “It has become a much more influ- do without some of those who did the ini- placing warm-blooded sleuths is fanciful, 1 ential position,” says Mark Jackson of Hei- tial training or initiated technology pro- drick & Struggles, a recruitment firm. jects that are now up and running.” 2 After the financial crisis, the compli- Some financial firms are outsourcing The untouchables ance jobs market became one of the hottest compliance functions or specific projects. United States, Office of Foreign Assets Control in finance. ccos earn far less than banks’ Compliance Risk Concepts, an American Additions to the sanctioned persons’ list rainmakers, but the best-paid can expect firm that does such work, has seen demand 1,500 basic annual salaries of over $1m. (Compli- grow by over 30% a year, says Mitch Avnet, ance also weighs heavily in pay for top its managing partner. And in America, 1,250 hsbc dogs: at , “risk and compliance” is the which strengthened controls earlier than 1,000 biggest element the board considers when Europe did, the market for jobs in compli- assessing the ceo, weighted at 25%. Profit ance has eased a bit. Jack Kelly of Compli- 750 counts for 20% and revenue growth 10%.) ance Search Group, a recruiter, attributes 500 Consequently, compliance is attracting this partly to regulatory forbearance: not so more big names than it used to. Jennifer much actual deregulation (the Trump ad- 250 hsbc Calvery, ’s head of financial-crime ministration has cut less red tape than 0 threat mitigation, was previously head of promised) as “winks and nods” from regu- 2001 03 05 07 09 11 13 15 18 Fincen, America’s aml regulator, a role lators to signal they will enforce rules less Source: Gibson, Dunn & Crutcher that strikes fear into bankers’ hearts the stringently. John Gilmore of Barker-Gil- Financial Era Advisory Group 68 Finance & economics The Economist May 4th 2019

2 say experts. Sujata Dasgupta, the head of fi- tion and privacy rules, such as the eu’s in the next 12 months, with only 5% expect- nancial-crimes compliance at Tata Consul- gdpr. Tougher enforcement is increasing ing a reduction. If the Russian laundromat tancy Services, sees compliance staff mov- compliance risks, too. Britain, for instance, scandal claims more victims, another hir- ing into “higher-quality investigations”, has increased personal liability for senior ing spree may be round the corner. with bots used for “more rule-based, repet- executives at financial firms. A picture of Eliot Spitzer hangs on the itive screening tasks”. Also rewarding more vigorous compli- wall of Mr Kelly’s compliance-recruitment Moreover, bankers expect no let-up in ance is the growing tendency of regulators, firm. As New York’s attorney-general from either financial-crime enforcement or new including America’s Department of Justice, 1999 to 2006, Mr Spitzer (later brought regulation. America’s increased use of to offer big cuts to penalties for firms that down by another type of scandal himself) sanctions as a foreign-policy tool under self-report violations in financial-crime was a scourge of Wall Street, tilting at banks Donald Trump means banks must be more and corruption cases. Hardly surprising, for various alleged transgressions and vigilant than ever (see chart 2 on previous then, that a global study of risk and compli- sparking an earlier compliance hiring page). Demand is growing for people who ance officers at 800 financial firms in 2018 spree. “He’s one of my heroes,” chuckles Mr can help banks negotiate new data-protec- found that 43% expected their team to grow Kelly, “and scandals are my friend.” 7 Buttonwood Trench fever

The eternal quest to find companies that have a lasting competitive edge n 1965 warren buffett acquired It is super-wonderful if the castle is run by See’s Candies, a maker of fancy choco- IBerkshire Hathaway, a textile company a knight who spends his riches on wid- lates; Gillette (now part of p&g); Wells based in New England, for his invest- ening the moat, rather than blowing it all Fargo; and latterly Apple. The apex of this ment partnership. When he began buy- on banquets or natty coats of arms. But the strategy was the frenzied acquisition of ing the stock, in 1962, Berkshire had moat is the main thing. shares in Coca Cola in the late 1980s. Mr working capital worth $16 a share; the Looking back, Mr Buffett has invested Buffett saw that its profits were about to shares sold for $8. So Mr Buffett was in firms with two sorts of moat. The first accelerate as it conquered new markets. getting the rest of the firm’s assets for type operates in a market that has room for With hindsight, Coke, Gillette and the less than nothing. This was the sort of just one profitable firm. In the 1970s Mr rest look like sure-fire winners. That “value investing” that had made Mr Buffett’s monopoly of choice was citywide Berkshire made losing bets on firms with Buffett and his partners a tidy pile over newspapers, which had a lock on ad- apparently unbreachable moats shows the preceding decade. vertising. bnsf, America’s largest freight the difficulty of foresight. An example Berkshire would become a wildly railway, which Berkshire has owned out- was Tesco, a British grocery chain. It was successful investment vehicle. On May right since 2009, is a more recent example. the leading firm in an oligopoly—a clas- 4th, 40,000 of its shareholders gather for The moat’s contours are not as clear for the sic Buffett play. But after it issued several its annual general meeting in Omaha, second type. The firm has competitors. But profit warnings, Berkshire sold at a hefty Nebraska, for a dose of Mr Buffett’s folksy it has a bond with its customers based on a loss in 2014. Other moats are springing wisdom. It continues to make a wide reputation for products of a consistently leaks. The marriage of Heinz and Kraft, range of financial investments: witness high quality. So strong is the firm’s brand two food-manufacturing giants, bro- this week’s offer to buy $10bn of debt-like that consumers are slow to switch alle- kered by Berkshire and 3g, a private- securities and warrants in Occidental, an giance, even when prices are raised. equity firm, is in trouble. New brands oil firm that is negotiating a merger. Mr Buffett’s first big bet on a consumer built on social media and online sales are Yet he came to regret buying Berk- franchise of this kind was American Ex- challenging the established order. shire stock. The return on investment press, on which Berkshire staked a quarter “Moats are lame,” teased Elon Musk, a was paltry, because the firm had no of its capital in 1964. Amex had an enviable tech entrepreneur, last year. What gives unique edge or products. Textiles are position in charge cards. Over the years, firms a competitive edge, he said, is the commodities. No one ever asked his other franchise stocks were snapped up: pace of innovation. In fact, investors’ tailor for a Hathaway suit lining. enthusiasm for tech firms such as Ama- In its way, Berkshire provided a valu- zon, Facebook and Google has been able lesson. Mr Buffett’s strategy shifted. because they appear to have deep moats. Instead of “buying fair companies at (Mr Buffett has admitted he has no in- wonderful prices”, he would buy “won- sights on tech.) In any event, it is wrong derful companies at fair prices”. To make to think that innovation is a guarantee of the grade, a firm must have a lucrative profits. Firms that come up with ideas position in the marketplace. But it needs often see rivals reap the benefit. more. To be a truly great investment, the It is hard enough to find a firm with a company should also have a “moat”. moat; it is much harder not to overpay This is Mr Buffett’s shorthand for a for its stock. Many of the signature pur- company with a lasting competitive chases of Mr Buffett’s career, such as edge—the philosopher’s stone of busi- Amex and Wells Fargo, were at knock- ness strategists and stockpickers. Its down prices. The strategy (buy stocks profits are secure because other compa- with moats) sounds simple; but it is not nies cannot easily replicate what it does. easy. Carrying it out takes skill, nerve and A niche of this kind acts like a moat discipline. If it were easy, everybody around a castle, keeping rival firms out. could do it. https://t.me/finera

The Economist May 4th 2019 Finance & economics 69

Turkey’s central bank America’s economy Jumping the track The cost of Turkey, net international reserves, $bn False alarm 35 concision 30 25 ISTANBUL 20 WASHINGTON, DC How a few missing words hurt Recent fears of a downturn suddenly Adjusted for currency swaps* 15 Turkey’s turnaround look overblown 10 central bank’s nvestors started words have power. 5 the year brooding Three of them (“whatever it takes”) about the risk of an American recession. A 0 I calmed the euro area’s debt panic in 2012. Torsten Slok of Deutsche Bank, Germany’s Another few (the Federal Reserve mulling a JFMAMJ JASONDJFMA biggest lender, says clients around the “step down in our pace of purchases”) start- 2018 2019 globe were worried. Financial indicators Sources: Central Bank of the ed the taper tantrum that upset emerging Republic of Turkey; *Reported monthly were flashing red, the stockmarket was markets in 2013. The Economist weak and yields on low-grade corporate What is left unsaid can also be power- debt had jumped. The Federal Reserve’s de- ful. After its interest-rate meeting on April Turhan, a former chair of the Istanbul stock cision to raise interest rates in December 25th, Turkey’s central bank failed to repeat exchange. “No one would like to see Turkey had been unsurprising, but unwelcome. eight words that had been included in each in the second group.” At the end of the year a model from of its seven previous statements: “if need- In the month before the elections, Mr economists at JPMorgan Chase had put the ed, further monetary tightening will be de- Erdogan encouraged state banks to in- chances of a recession within 12 months, livered”. The omission cast doubt on its crease the amount they lent at cheap rates. based on the s&p 500 index and corporate- commitment to fight inflation, which was Banks also came under pressure to lower credit spreads, at 65%. But the mood has almost 20% in the year to March. In re- lira deposit rates, making other currencies now improved. By April 29th JPMorgan’s sponse, the lira fell by more than 1% against more attractive by comparison. Turkish model was putting the chances of a reces- the dollar. It has fallen by 11% this year. residents now hold over half of their de- sion at just 15%. The mishap was an uncomfortable re- posits in dollars and other hard currencies. “It’s eye-popping how quickly the nar- minder of last summer’s currency turmoil, None of this has helped the lira. On rative has changed,” says Mr Slok. One rea- when the central bank (browbeaten by Re- March 21st the central bank revealed it had son for the improvement in sentiment is cep Tayyip Erdogan, Turkey’s president) burned through $6.3bn (over 18%) of its net the Fed’s evolving monetary-policy stance. failed to raise interest rates swiftly enough reserves in a fortnight, presumably in an In January it turned more doveish, aban- to prevent a collapse in the currency. But undeclared effort to prop up the lira. After doning its plans to raise rates in 2019. “We the parallels should not obscure what has the news spooked investors, the govern- don’t see any evidence at all of overheat- changed in the interim. Turkey’s economy ment squeezed the offshore lira market, ing,” said Jerome Powell, the chairman of is better balanced now than it was then. making it harder for foreign speculators to the Federal Reserve, on May 1st after an- In September the central bank reassert- borrow the currency in order to sell it. nouncing that the Fed would maintain its ed itself, increasing interest rates to 24%, But the squeeze also posed a problem patient stance. He also repeated his view where they have stayed since. The combi- for Turkey’s banks, points out Brad Setser that the data do not warrant higher rates. nation of tighter money and a cheaper cur- of the Council on Foreign Relations, an Investors have been delighted by the rency curbed import spending and encour- American think-tank, because they depend Fed’s pause. But the timing and extent of aged exports. As a result, Turkey’s on lira funding in the overseas market. To their change of mood suggests that is not current-account deficit has narrowed far ease their discomfort, the authorities made the full story. One possibility is that their more swiftly than even the government it easier for banks to swap their dollars for previous gloom may have been overblown. had envisaged. Although its import bill is lira from the central bank. That had the ef- “The market collapse in December was dri- hardly the only claim on its foreign earn- fect of temporarily bolstering the central ven by the calendar,” says Catherine Mann ings (its banks and firms must also service bank’s dollar reserves, until the currencies of Citigroup, a bank, as investors reposi- heavy external debts), the lira was relative- are swapped back again. As the financial tioned for tax purposes. The “inverted yield ly stable from December to February. markets cottoned on to what was happen- curve”—that is, yields on long-term bonds Local elections in March were supposed ing, investors began to distrust the central below those on short-term ones, histori- to bring a similar stability to politics, con- bank’s weekly reserves figures. cally a sign that a recession is on the way— cluding a maddening cycle in which Turks Was it trying to mislead investors? Prob- has been ringing alarm bells recently. But marched to the polls seven times in five ably not. As required by imf standards, it Ms Mann doubts its continued predictive years. Instead, the weeks before and since duly reported the swaps in its monthly re- power after a long period in which central- have done the opposite, unsettling both serves statement, which is published with bank intervention depressed interest rates. Turkey’s politics and the markets. a 30-day lag. And in a press conference on The real economy had also shown some Mr Erdogan’s party, which lost in most April 30th, it explained the source of its signs of an approaching downturn, how- of the country’s big cities, has so far refused sudden dollar infusion. ever. Business confidence had soured and to accept its narrow defeat in the Istanbul But although it clarified why its reserves the housing market, so often a leading in- mayoral contest. Citing alleged irregular- had abruptly gone up, it did not reveal why dicator of economic trouble, had sagged. At ities, it has asked for a new vote. That they had suddenly gone down in the weeks the start of 2019 came more bad news, as a would trigger yet more political turmoil, before. Judging by the financial markets’ lengthy partial federal-government shut- which could bring protesters onto the reaction, the conference did little to bolster down depressed both output and consum- streets and send foreign capital running investors’ faith in the lira. The words of er sentiment. The economy had been ex- for the exit. Investors distinguish clearly central banks can be powerful. But al- pected to cool a little anyway, as the between countries that do and do not have though they choose what to say, markets impetus from the Trump administration’s free and peaceful elections, says Ibrahim decide what to hear. 7 fiscal stimulus faded. The fear that a soft 1 Financial Era Advisory Group 70 Finance & economics The Economist May 4th 2019

2 landing might turn into a hard one did not an intermediate staging post. “It supplies seem far-fetched. all the liquidity in the Bitcoin trading mar- Jesse Edgerton, an economist at JPMor- kets,” says David Gerard, a cryptocurrency gan Chase, says there are still reasons to be sceptic. “So everyone has a vested interest cautious, notably weak business confi- in keeping it going.” dence. But more recent data have looked But other signs suggest something is rosier. Sentiment among consumers has amiss. Bitcoin currently trades at a price on rebounded. Jobs growth in March recov- Bitfinex ($5,638 a coin on May 2nd) that is ered from a hiccup in February (April’s fig- roughly 6% higher than on other ex- ures are due on May 3rd, after The Economist changes. This may be because investors went to press). And although gdp growth of trading on Bitfinex are anxiously convert- 3.2% in the first quarter hid some softening ing their Tethers into Bitcoin—thereby bu- components, recent trends suggest that oying Bitcoin’s price on that exchange—in they will bounce back. order to escape the platform. So far Tether’s Investors in the stockmarket seem to market capitalisation has not fallen signif- have forgotten the whole scare, and to be- icantly since Ms James’s announcement, lieve that the economy will grow fast but rival stablecoins have recorded some enough to produce profits but not so fast inflows (over $40m each for Paxos Stan- that the Fed will have to intervene. Inves- dard and usd Coin, two of the largest). Both tors in government debt seem warier. They remain minnows compared with Tether: are still betting that the Fed will cut interest usd Coin has a market capitalisation of rates at least once by the end of the year. $297m. But Eric Turner of Messari, a data- For now, the Fed has decided to sit tight. provider that tracks cryptocurrencies, ex- Since the stockmarket wobbles late last pects traders to drift away from Tether as year, a different difficulty has become more exchanges start to list alternatives, much more obvious. Inflation, which the tus. Cryptocurrencies stem from libertar- which tend to be more transparent. Fed had expected to hover around 2%, fell ian attempts to create a currency resistant Murky exchanges could suffer a harder to just 1.6% in March, based on a measure to central control. Many exchanges thus fate. Unnerved by a lengthening string of that excludes (volatile) food and energy struggle to get hold of dollars, because scandals, regulators are starting to clamp prices. On May 1st Mr Powell said that he banks, which must comply with fraud and down. The Securities and Exchange Com- saw good reasons to expect it to be “transi- money-laundering rules, do not want their mission, an American watchdog, brought tory”. But that is not the behaviour expect- custom. For them Tether, which is pegged nine enforcement actions last year alone. ed of an economy that is humming along one-to-one to the greenback, acts as a dol- “Bitcoin itself is a software program. It can- nicely. It is a better problem for the Fed to lar substitute. Traders use it for transfers not be shut down,” says Bitfinex’ed, a vocal face than an imminent recession—but it is between one cryptocurrency and another. online Tether critic who declines to dis- a problem, all the same. 7 For years Tether said that every coin it close his real name. “But exchanges can.” 7 issues is backed by a real dollar in a real bank account. Yet it provided no audit of Cryptocurrencies these holdings. Ms James’s allegations sug- Foreign-exchange trading gest that at least some of them exist, but Tether tantrum can be misused without customers know- Voice over ing. Because Bitfinex was having trouble getting accounts at banks, by 2018 it had en- trusted over $1bn to a Panamanian firm that would serve as an intermediary to pay traders—“without any written contract or Banks beware: currency trading is assurance”, the attorney-general says. The plot thickens in cryptoland entering the modern age When it was unable to access $850m held ays after allegations of misuse of cus- by the Panamanian entity, Bitfinex is al- he foreign-exchange (fx) market is Dtomer money against Tether rocked the leged to have sought to plug the hole by tap- Tas opaque and old-fashioned as it is cryptocurrency world, the shock wave has ping $900m of Tether’s reserves (Tether enormous. Most of its $5trn of daily trading temporarily subsided. The four-year-old and Bitfinex share the same managers and happens “over-the-counter” (otc), in deals currency, which fell to 97 cents last week, owners). Ms James reckons the cash was negotiated between banks and private cus- has returned to parity with the American then used to meet clients’ withdrawal de- tomers, rather than on exchanges. Many dollar. And after a 10% fall, to $4,953, the mands. Bitfinex has issued a statement orders are still placed by phone. Gauging price of a single Bitcoin, its best-known saying that the attorney-general’s court fil- the market’s size and structure usually peer, has steadied at around $5,400. But ings “were written in bad faith and are rid- means relying on outdated surveys. The cryptocurrency-watchers remain wary. Be- dled with false assertions”. most comprehensive review, by the Bank neath the surface, trouble may be brewing. Tether’s bounceback since the accusa- for International Settlements, is conduct- Doubts had long swirled about the bona tions became public is because of its cen- ed only once every three years. fides of Tether, which has more than trality to the cryptocurrency ecosystem. It Yet modernity is arriving—in fits and $2.8bn-worth in circulation, and Bitfinex, is not the only “stablecoin”, as cryptocur- starts. Last month it emerged that Deut- the exchange it is traded on. On April 25th rencies designed to hold a steady price are sche Börse, Europe’s third-largest stock ex- New York’s attorney-general, Letitia James, called. But it is vastly dominant among change, was close to buying fxall, an elec- accused both of a cover-up intended to them, representing 96% of daily trading tronic fx-trading platform, for a reported hide a loss of $850m in client and corporate volumes in that category. Some 80% of Bit- $3.5bn. If it happens the deal could end up funds. That hit the value of other crypto- coin trades ostensibly involving dollars are being one of the largest in Deutsche Börse’s currencies because of Tether’s unique sta- in fact executed using Tether, which acts as history. It hints at a shake-up in a sector1 https://t.me/finera

The Economist May 4th 2019 Finance & economics 71

2 that has long been deemed antediluvian. The John Bates Clark medal The fx market serves not only inves- tors, but corporations and governments A microeconomist’s macroeconomist seeking to protect trade or bonds against currency swings. fx contracts can be “spot” (for immediate delivery), “forward” (for de- livery at a later date) or “swap” (when cur- rency is exchanged back at maturity). Buy- ers go through dealers (mostly banks), Emi Nakamura puts the macroeconomy under the microscope which source liquidity. Specific needs, such as matching cash-flow dates, are he year 2007, when Emi Nakamura more refined theories of how the economy more easily met using otc trades, which Tearned her phd, was a strange one for worked. Microeconomists were having all can be tailored, than over exchanges. her chosen discipline of macroeconomics. the fun, plundering new sources of evi- That is not about to change. Rather, It marked a turning point between compla- dence and reinventing old techniques for Deutsche Börse is betting that buyers will cent consensus and humiliating division. divining cause and consequence. They abandon “voice” orders, placed via single Pre-crisis macroeconomics had such were also snaffling most of the medals. Of banks, in favour of digital platforms that strong faith in the stabilising power of the 17 Clark winners between 1995 and 2018, pool prices from multiple dealers. The monetary policy that it neglected the dan- only two or three showed much interest in trend is already boosting e-trading in spot gers of financial shocks and the merits of booms and busts. fx. Volumes have doubled over the last de- fiscal stimulus. Like joining the cavalry in Inspired by microeconomists, Ms Na- cade—fxall’s share of this electronic activi- 1914, it was presumably a bad time to be en- kamura and Jon Steinsson, her frequent co- ty has reached 40%. tering the profession. author, set about enlarging the macro data Longer-dated fx-derivatives contracts, Not a bit of it. “I think it was a good repertoire. They extended some series and such as forwards, have withstood the shift: time,” says Ms Nakamura, who now works unpacked others. To study price inertia, for the longer the maturities, the fewer the at the University of California, Berkeley, example, they dismantled the consumer- transactions, and the harder it is to connect and this week won the John Bates Clark price index into its constituent parts: thou- enough users simultaneously in order to medal for the best economist aged under sands of prices, stretching back to the Great get e-trading to work. Yet here too, change 40 in America. “Macroeconomics”, she Inflation of the 1970s. (They used a retrofit- is afoot. Tighter regulation is increasing points out, “is a countercyclical field.” ted scanner to glean older prices from mi- costs, which asset managers are seeking to Yes, financial shocks of the sort that crofilms that were not allowed to leave the offset elsewhere. European regulators also caused the Great Recession were under- Bureau of Labour Statistics building.) They require them to be able to demonstrate that studied, but the consequences were confirmed that, outside of sales, prices they are trading at the best possible price. Keynesian, she says. And the need for a re- were indeed slow to change, contrary to By connecting buyers with multiple deal- sponse turned theoretical curiosities (such blackboard theories. They discovered, sur- ers in an instant, e-trading achieves both, as the liquidity trap that can stymie mone- prisingly, that periods of high inflation did as well as leaving a clear audit trail. And tary policy) into major policy dilemmas. not scramble price signals by driving prices long-dated contracts are becoming more For students of economic ups and too far out of synch with one another. common, which boosts liquidity. downs, the crisis also met a crying need: for To study fiscal stimulus, they divided As fx goes digital, the ranks of dealers a new data point, a new down-and-up to ex- America (one unit of analysis) into its con- will be thinned. At the spot end, the trend amine. The lack of data had made macro- stituent states (50). That enabled them to has opened the door to “principal” trading economics unfashionable. Its practition- measure the impact of extra Pentagon firms, which buy and sell on their own ac- ers crunched the same quarterly, national spending (a source of fiscal stimulus un- count using algorithms. It has also fuelled numbers, which failed to illuminate ever related to economic misfortune) on states competition among banks, slashing mar- with a large defence industry, relative to gins and pushing many towards the exit. those without. And to illuminate monetary That is leaving the bulk of deals to a hand- policy, they turned from the usual yearly or ful of big banks, often in partnership with quarterly data to finer slices of time, exam- principal trading firms. Maturities beyond ining the impact of unexpected Federal Re- a week have been little affected so far, but serve actions and utterances in the min- consolidation is “creeping up the curve”, utes after they reach the markets. says Joanna Nader of rbc Capital Markets. Lately, Ms Nakamura has looked at “job- The rise of centralised clearing is also less” recoveries. She argues that jobs have helping to level the playing field. Only 3% grown more slowly in recent upswings be- of fx derivatives trades currently go cause women’s participation in the labour through clearing houses, which absorb the force is no longer converging quickly with risk one party defaults. Clearing is set to be- men’s. In earlier decades, firms took ad- come more attractive for traders, in part be- vantage of the recovery to snap up women. cause regulators are requiring higher col- Hiring was swift, as employment caught up lateral to be held on some uncleared fx with women’s accelerating desire to enter deals. E-trading already makes it easier for the workforce. In more recent upturns, hir- users to find nonbank dealers. By removing ing was more tepid, as employment caught counterparty risk, clearing will weaken the up with a stagnant trend. advantage that banks with big balance- Not all professions are the same, of sheets enjoy over the newer trading firms. course. In economics, if not in the Ameri- As trading costs fall, fx buyers will can economy, the scope for female conver- cheer. So will Deutsche Börse, which owns gence remains vast. Forty-one people have Eurex, a clearing house that will soon won the Clark medal. Just four, including launch fx products. 7 Nakamura, sans microscope Ms Nakamura, have been women. 7 Financial Era Advisory Group 72 Finance & economics The Economist May 4th 2019 Free exchange Neonatal economics

A dismal scientist offers advice to new parents lished by anti-vaccination groups. The conclusions of serious re- search also need to be treated with care. Unless studies are well-de- signed, the results can be influenced by confounding factors. The purported benefits of breastfeeding, such as conferring a higher iq on the child, can reflect the fact that women who are richer and better educated, and have higher iqs, are more likely to breastfeed. More reliable research attempts to take account of these factors. Whenever possible—and breastfeeding is a case where partici- pants would almost certainly refuse to co-operate—researchers arrange randomised controlled trials, randomly dividing partici- pants into “control” and “treatment” groups, only one of which en- gages in the behaviour under study, the better to isolate its effects. Even when a study is well designed, it can require statistical so- phistication to understand the size of any effect and the signifi- cance of the result. Non-economists may find “Cribsheet” inter- esting as a guide to understanding research findings, though harried parents may focus more on its concrete guidance. There is plenty of this. Breastfeeding, it turns out, provides short-term health benefits to babies (notably by making diarrhoea less com- mon) and reduces the mother’s risk of developing breast cancer. But there is no hard evidence that breastfed babies enjoy long-term health or cognitive benefits compared with bottlefed ones. or new parents, it is a terrifying moment. The hospital doors Still, given the potential benefits, why not do it? Economic ana- Fclose behind them, leaving them with a new and helpless hu- lyses include not only what is gained by a choice, but what is for- man being. The baby’s survival into adulthood seems impossible. gone. For example, putting an infant to sleep beside a parent in bed What if it will not eat? What if it is allergic to water? What if an owl rather than alone in a cot is associated with a higher risk of sudden carries it off? Probably, few parents wish at that moment for the infant death. If there are no exacerbating factors (such as a mother help of an economist. But “Cribsheet”, a new book by Emily Oster of who smokes or drinks), that increased risk is tiny: 22 deaths in Brown University, shows that in the hectic haze of parenthood an 100,000, rather than eight. But why risk it? The answer may be that economist’s perspective can prove surprisingly clarifying. it is worth it. Sleeping side by side can make breastfeeding easier. Ms Oster’s academic work relates to health and health policy. A More importantly, for some parents it is the only way to settle the recent paper, for example, studied how food-purchasing decisions baby (and hence to get some sleep themselves). change in response to being diagnosed with diabetes. Five years Prolonged sleep deprivation is horrible and makes it harder to ago she published a book on pregnancy, drawing on her training as be a good parent—or to function. Some mummy bloggers may find an economist and her own experience (her husband, Jesse Sha- it unconscionable that a mother would expose her child to extra piro, with whom she has two children, is also an economist at risks in order to treat herself to a few hours of sleep. Ms Oster sug- Brown). “Cribsheet” tackles the next step in the journey from gests that, if well-informed parents make that choice, then it is rea- childfree person to parent. Deciding whether to have a child in the sonable: a welfare-enhancing balancing of benefits and costs. first place fairly obviously involves economic calculations, from the impact on the parents’ earning potential to the resources that A mother’s place is in the wrong must be set aside to pay for nappies, child care and university. The Economic reasoning can feel bloodless. But the calculations in Ms decisions that come in a torrent after the birth, in contrast, such as Oster’s book seem more human than “Mummy war” moralising, in whether to breastfeed or how to manage sleeping arrangements, their recognition that parental time and energy are finite. She reck- might not seem so amenable to such thinking. But Ms Oster’s new ons it is helpful to think about work-life balance in bluntly eco- book shows that they are. nomic terms: “What is the optimal configuration of adult work Parents generally try to maximise the welfare, present and fu- hours for your household?” In the past, male economists like Gary ture, of their children (and, secondarily, themselves) subject to Becker used such logic to argue that women should “specialise” in constraints of money and time. That requires choices. Economics homemaking. But Ms Oster points out that the benefits to a house- can help a parent judge these trade-offs. Good choices begin with hold of more income (often a necessity) should not be ignored— good information. Before deciding whether breastfeeding is worth and neither should a mother’s preferences. Although research sug- the time, trouble and physical toll, it helps to know the benefits gests that policies allowing a parent to stay at home in an infant’s compared with feeding with formula. Parents do as most people first months do benefit children, staying at home for two years do when making a hard call: turn to experts, friends, family and rather than one does not meaningfully alter a child’s prospects. the internet. But different sources provide wildly different an- Women who need or want to return to work should not be kept swers—and often with an extraordinary intensity of belief. As Ms from doing so by guilt or others’ expectations, she writes. Oster notes, internet mums frequently write as though ignoring Parenting can be fraught. “Cribsheet” aims to help parents do their advice is tantamount to abandoning a child to wolves. better. And in capturing how they struggle when beset by dubious The help she provides begins with sorting through published information and emotional pressure from peers, it also holds les- research and determining what is worth heeding. This involves sons for economists. Welfare-maximising decisions are hard to more than identifying outright disinformation, of the sort pub- make, and sometimes people need a little help. 7 https://t.me/finera Science & technology The Economist May 4th 2019 75

Fusion power mercial fusion power is 30 years away— and always will be. Doughnuts, apples, smoke rings In light of the work of Eddington and his successors fusion power on Earth is often and shrimps described as mimicking the process which powers the sun. That is not quite true. Solar fusion builds up helium nuclei, which are composed of two protons and two neu- After decades spent within the purview of governments, fusion energy is trons, one particle at a time out of individ- attracting private-sector interest ual protons, the nuclei of hydrogen at- n 1920 Arthur Eddington, an English as- ton’s speculations were confirmed, and oms—with the surplus positive electric Itrophysicist, gave a lecture to the British they still dream of it today—for the fuel charges being spirited away by particles of Association for the Advancement of Sci- needed is abundant, and the process of antimatter called positrons. The average ence on the internal structure of stars. In it, generation carbon-free. period required to complete this reaction is he hypothesised that what makes the sun In one important aspect, though, the about a billion years. shine—then a matter of much debate—was dream of human-controlled nuclear fusion Fortunately, there is a short cut. This is some sort of nuclear reaction. “This reser- has changed in recent years. From Zeta, the to employ hydrogen atoms pre-loaded with voir”, he said, “can scarcely be other than first, fumbling attempt to build a fusion re- neutrons—either one (deuterium) or two the subatomic energy which, it is known, actor, at Harwell in southern England, in (tritium). One in every 6,000 hydrogen at- exists abundantly in all matter; we some- the 1950s, to Iter, the latest over-budget, oms on Earth is actually deuterium, mean- times dream that man will one day learn over-deadline behemoth in the south of ing the substance can be extracted from how to release it and use it for his service. France (see following story), fusion has water. Tritium, which is radioactive, is The store is well nigh inexhaustible, if only been the province of governments. Not any much rarer and has to be synthesised. But it could be tapped.” more. Now there is commercial interest. the process is easy and the raw material, Eddington speculated that the energy in Firms in North America and Europe are de- lithium, abundant. question was released by the nuclei of hy- signing and planning to build what they Deuterium and tritium react together drogen atoms fusing to form the nuclei of hope will be profitable fusion reactors. far more readily than do naked protons— helium atoms. He knew that a helium nu- Their projects have different approaches and no positrons are involved. The result is cleus weighs slightly less than four hydro- and different amounts of money behind helium and a spare neutron. All you need gen nuclei and he suspected that the differ- them. But they all have one thing in com- do to create a fusion reactor, therefore, is ence, converted into energy according to mon, a desire to bury the old joke that com- design and build a device that can contain a the then-recently discovered formula, mixture of deuterium and tritium at the E=mc2, would be enough to power the sun. temperatures and densities required for He was right about this. He was also right Also in this section long enough for the reaction to yield more about people’s dreams of exploiting it. energy than is put into promoting it. In any 77 Iter: fusion’s biggest reactor They began looking shortly after Edding- given machine these parameters of tem-1 Financial Era Advisory Group 76 Science & technology The Economist May 4th 2019

2 perature, density and time can be traded off with temperatures of 3.5m°C that last against each other. Their optimal mix in a around ten milliseconds, rather than the given set of circumstances is known as the microseconds of a conventional frc. tae Lawson criterion, after John Lawson, who hopes, by the end of this year, to have in- was associated with Zeta. creased that temperature to around 30m°C, These days most attempts to achieve and tripled the plasma’s lifetime. All of the Lawson criterion are made using ma- which is clever. But what makes the firm’s chines called tokamaks, which were de- approach special is that it plans to eschew vised in the 1950s by Andrei Sakharov, a So- deuterium and tritium in favour of normal viet physicist who later became famous as hydrogen (the nucleus of which is a lone a human-rights campaigner. And it is the proton) and boron. Instead of a helium nu- tokamak route that several of the commer- cleus and a neutron, this reaction produces cial fusion-power wannabes are travelling three helium nuclei. Indeed, tae was origi- along. One such is Commonwealth Fusion nally known as Tri Alpha Energy because, Systems (cfs), a spin-out from the plasma in the field of nuclear physics, naked heli- physics laboratory of the Massachusetts um nuclei are called alpha particles. Institute of Technology, in Cambridge, The absence of neutrons is crucial. Massachusetts. Another is Tokamak Ener- When deuterium-tritium fusion takes gy, a spin-out from the uk Atomic Energy place in a tokamak about 80% of the energy Authority’s research laboratory at Cul- released is carried away by the neutrons. In ham—Harwell’s successor. a practical power station this kinetic ener- gy would be collected by absorbing the The Lawson and the profits neutrons in a suitable material, thus re- A conventional tokamak is a hollow torus, leasing the energy of motion as heat. That reminiscent of a doughnut or a bagel, with heat would be used to raise steam and drive superconducting electromagnets wound a turbine. If the absorbing material chosen around it. This torus contains the fuel, were lithium, this arrangement would which is a plasma (a gas in which the elec- have the bonus of generating new tritium trons and atomic nuclei have been separat- one that uses a phenomenon called field- to feed back into the reaction. ed) that is composed of deuterium and tri- reversed configuration (frc). In this the The downside of such an approach is tium. The magnets serve both to heat the confining magnetism is generated by the that the rest of the reactor will absorb neu- plasma and to confine it—thus maintain- movement of the electrically charged parti- trons as well, making the whole thing ra- ing its density and keeping it away from the cles in the plasma itself, as that plasma dioactive (though nothing like as radioac- torus wall, for if it touches the wall it in- spins in a vortex similar to a smoke ring. tive as a conventional fission reactor) and stantly cools down. In General Fusion’s machine the spin- ultimately damaging its structure. Also, Tokamaks are normally large machines. ning plasma is, after it has been fired into a each step in the process loses energy. The Iter’s torus, for example, will have a volume spherical reaction chamber, compressed proton-boron method offers a more ele- of 830 cubic metres. The cfs reactor’s torus, rapidly by the simultaneous release of gant way to generate electricity because al- though, will have about a sixty-fifth of the hundreds of pistons attached to the cham- pha particles are positively charged, and volume of Iter’s. It can get away with such a ber’s exterior. These induce a shock wave can thus induce a current directly in an ex- small volume because it has more power- that compresses the deuterium-tritium ternal conductor. No heating is involved ful magnets that squeeze the plasma more fuel, increasing its density a thousandfold and the alpha particles never escape to tightly. As a bonus, these magnets become and pushing its temperature up from 5m°C cause damage elsewhere. superconducting at relatively high tem- to 150m°C. Improving these two parame- There is, of course, a catch. Proton-bo- peratures, so can be cooled using liquid ni- ters of the Lawson calculation means that ron fusion requires temperatures of bil- trogen, which is cheap, rather than liquid the brevity of the third, time, no longer lions of degrees. That is an order of magni- helium, which is expensive. matters. That, at least, is the theory. Chris- tude hotter than anything achieved so far Tokamak Energy’s researchers have also tofer Mowry, General Fusion’s boss, hopes in a fusion experiment. And although such been using nitrogen-cooled superconduc- to demonstrate the truth of it by building plasma temperatures have been produced tors for their magnets. The firm has, how- an experimental plant within five years. in laboratories in other circumstances, ever, eschewed the conventional shape of a Another firm using the frc approach is how tae will do it with the equipment they tokamak in favour of something that, while tae Technologies, of Foothill Ranch, Cali- are using is unclear. still having a hole in the middle, more re- fornia. tae’s latest device, unveiled in July sembles a cored apple. Theory suggests 2017, is a 25-metre-long machine named The mighty shrimp plasma in such “spherical” toruses will re- Norman, after Norman Rostoker, a plasma tae is radical in its choice of fuel. But other main more stable, and thus be easier to physicist at the University of California, Ir- forms of fusion radicalism are possible, handle, than that in the doughnut-shaped vine, who was the company’s founder and too. And, in the actual design of its reactor, variety. Also in contradistinction to cfs, who died in 2014. the most radical of the lot is probably the Tokamak Energy has already built a series Norman is a cylindrical reactor. Plasma path being pursued by First Light Fusion—1 of working prototypes. The latest, st40, injectors at each end of the cylinder fire has reached a plasma temperature of frcs simultaneously towards each other at 15m°C. The company’s target is to reach around 1m kilometres a second. When the Correction On April 20th (“Time to see the blight”) we wrote that “America’s National Science 100m°C within the next few years. That is vortices meet, they merge into a cigar- Foundation rejects grant requests that include the two-thirds of the way to the 150m°C a toka- shaped cloud three metres long and words ‘climate change’, applicants say, because the mak needs to achieve the Lawson criterion. around half a metre wide that is kept spin- administration and its allies have decided it does Tokamaks are not, however, the only re- ning, and thus hot and stable, by beams of not exist.” We are happy to make it clear that, regardless of applicants’ opinions, the NSF does actors in town. In Vancouver, Canada, a deuterium atoms fired into it from outside. accept such requests and has made 14 awards this firm called General Fusion is working on So far, Norman has produced vortices year to proposals with “climate change” in the title. https://t.me/finera

The Economist May 4th 2019 Science & technology 77

2 spun out of Oxford University. Though tae has rustled up $600m in private fund- blem. You know we’ve been at it for 50 years First Light’s process aims to extract energy ing so far. General Fusion has raised over and there’s always been a problem.” Never- from a conventional mixture of deuterium $100m, Tokamak Energy £50m ($65m) and theless, he also says that he knows of no and tritium, the technology it plans to use First Light, which is still at the earliest showstoppers for any of the private compa- to do so was inspired by a shrimp. stages of progress, £25m. nies. “They’re all based on good physics. Pistol shrimps are marine crustaceans Challenges no doubt lie ahead. As Ste- They’re all good people that are doing these that are among the loudest animals on the phen Dean, of Fusion Power Associates, a programmes.” And the prize is enormous. planet. Their noise is generated by a spe- foundation that follows the field, observes, If even one of the fusion startups succeeds, cialised claw half as long as the creature’s “the history of fusion doesn’t give you a lot the world’s electricity supply will be guar- body, and is used to stun prey. When the of confidence that there won’t be a pro- anteed—and carbon free—for ever. 7 claw snaps shut, the rapid change in pres- sure this creates produces vapour-filled How governments do fusion voids called cavitation bubbles in the sur- rounding water. When these bubbles col- lapse the shock waves produce a sound as Power politics powerful as the noise made by a Saturn V rocket taking off. This is enough to kill small fish—which the shrimps then eat. An internationally funded reactor may supply fusion energy as early as 2045 Pistol shrimps were the subject of the rovence, in south-east France, is France’s Atomic Energy Commission, doctorate awarded by Oxford to Nicholas Pknown for its pleasant weather, rata- and who has been director-general of the Hawker, First Light’s founder. Armed with touille and thickly wooded mountain- project since 2015, has shaken things up. the results of his study, Dr Hawker won- sides. But it is also the site of what will The site at the Cadarache nuclear facility dered if he could scale up the shrimp’s be, if and when finished, one of the most near St-Paul-lez-Durance is now busy technique to create plasmas that would complicated machines ever built. Iter with cranes and concrete-pouring lorries meet the Lawson criterion. (originally, “International Thermonuc- (see picture), and Dr Bigot says Iter is The core of First Light’s reactor design is lear Experimental Reactor”,but now 60% of the way to the 2025 startup goal. a device in which one half of a pistol rebranded as Latin, thus meaning “jour- Those first experiments, whenever shrimp’s claw is replaced by a projectile ney”,“path” or “method”) will be a giant they actually happen, will study the made from a small disc of aluminium or fusion reactor of a type called a tokamak. physics of deuterium-tritium plasmas in copper. This is fired, at around 30km a sec- It will have over1m components. Its the reactor—these two isotopes of hydro- ond, at the replacement for the other half of main vessel will weigh more than 23,000 gen being the front-running candidates the claw, a 10mm-sided cube that contains tonnes—three times the Eiffel tower. as the fuel mixture for nuclear fusion. a cavity filled with fuel. The projectile’s im- And it will cost at least $20bn. Only after a decade of such work will pact creates shock waves, and thus cavita- For the optimistic, Iter is an example fusion experiments proper begin. The tion bubbles, in the fuel. As those bubbles of how people from around the world (35 aim is to return at least ten times as collapse the deuterium and tritium within countries are involved) can collaborate to much energy from nuclear reactions as is them will, calculations suggest, be forced achieve a lofty long-term ambition. For used to heat the plasma up in the first into a small enough space for long enough cynics, it is a boondoggle plagued by place. By 2045, Dr Bigot hopes, engineers to fuse. Whether those calculations are cor- delays (it began in 2007 and was sup- will be able to start designing power rect will be tested later this year. posed to begin experiments in 2016, but stations based on Iter’s results. this will not now happen until 2025), Faced with competition from firms Put your money where your mouth is questionable management and balloon- that reckon they can build commercial There is, then, no shortage of ideas about ing costs (double the original estimate). fusion reactors well before then (see how a practical fusion reactor might be It may, however, have emerged from previous story) Dr Bigot says he is ener- built. But any investor also faces the ques- its long, dark teatime of the soul. Bernard gised by these rivals, but has no concern tion of how long it will take to get a new Bigot, a physicist who used to run about Iter becoming an also-ran. He says idea to work. In the field of fusion, the most Iter will be true to its retrofitted name by crucial milestone on that road is probably being the one that shows the world the the achievement of gain. This is the point path to grid-scale fusion electricity. when more energy comes out of a fusing That, he says, is because it will work plasma than went into creating it. on problems that most of the private Everyone talks a good story about this. companies will not. It will, for example, cfs wants to achieve gain by 2025. So does develop new materials to withstand the Tokamak Energy. tae’s next device, Coper- extreme temperatures of the plasma. nicus, will, the firm says, not only achieve And it will develop and test ways to make gain, but will also be a power-station de- tritium efficiently and safely on site at a monstrator. Indeed, tae aspires to supply power plant—for tritium, unlike deute- fusion-based electricity to the grid by 2030. rium, is radioactive and exists only Which is also the year that Tokamak Energy transiently in nature. says it will start generating grid-scale elec- That Iter is based in France, the home tricity—from power plants with a capacity of grands projets, has a certain appropri- of the order of 100mw. First Light Fusion ateness. Iter has grand scale and grand predicts that reactors using its technology objectives. France is also, though, a will be in place some time in the 2030s. country for whose soul dirigisme and All this optimism should be viewed laissez-faire are in constant struggle. Iter cautiously, especially from companies that is dirigisme par excellence. But this is a need to raise capital for future experi- Baking the world’s biggest bagel battle that laissez-faire might win. ments. Capital is, however, being raised. Financial Era Advisory Group 78 Books & arts The Economist May 4th 2019

Art history wondering why, despite centuries of expo- sure to, and appropriation from, other cul- A brave new world tures, the art world still paid attention to only European and American work. That puzzlement came to a head in 1984. Having become director of Kunsthalle Bern in Switzerland, Mr Martin travelled to New York to see the latest show at the Museum PARIS of Modern Art (moma), which focused on Thirty years ago a show in Paris set out to redraw the map of contemporary art the moment European and American art- t the end of the Grande Halle de la Vil- The exhibition was in some ways a flop. In ists saw art from sub-Saharan Africa for the Alette, a former abattoir built by Emper- others it was a harbinger, or catalyst, of the first time. African masks, their makers un- or Napoleon III in the north-east of Paris, way the art world would change with glo- known, sat beside proto-Cubist pieces by lay “Yam Dreaming” (pictured above), a balisation in the next three decades— Picasso—not as creations in their own work by six men from Yuendumu, a com- changes evident at the Venice Biennale, right but as illustrations meant to demon- munity of Aboriginal artists in central Aus- contemporary art’s premier showcase, strate how a “real” artist absorbed such in- tralia. A teeming rectangular floor installa- which begins on May 11th and where work fluences. Mr Martin resolved to do better. tion, it was ten metres long and made from by artists from 90 countries will be shown. Partly as a reaction to the moma show, earth, ochre, paint and crushed herbs. On As Frances Morris, now director of Tate he came up with the idea of “Magiciens de the wall behind it was “Red Earth Circle” by Modern in London, wryly remarks: “It was la Terre”. It would present the work of 100 Richard Long, a British artist, which used the most famous exhibition nobody saw.” living artists, half from the West and half mud scooped from the River Avon, near his Born in Alsace in 1944, Mr Martin grew from the rest of the world. They would birthplace. The circles and spirals on the up at a time when the notion that great art meet on equal terms, and thus, he hoped, floor and Mr Long’s shape clearly shared a meant Western art was a given—at least in reveal a universal spirit of creativity. He connection; you could see it in how people the West. Then, aged 21, a history-of-art pitched the idea to the directors of Docu- stood and stared from one to the other. Per- student and a hippy, he headed overland to menta, a monumental contemporary-art haps the adjacent works pointed in the India in a Citroen 2cv and found himself exhibition that has been put on in the Ger- same direction; perhaps they were aspects man city of Kassel every five years since of the same idea. 1955. They turned it down. It was the first in Such questions delighted Jean-Hubert Also in this section a long series of rejections from people he Martin, the curator who had brought the approached for money, a venue or both. 80 Millennials in China two pieces together. They were just the sort When he finally got lucky it was partly of responses he wanted to “Magiciens de la 80 Geriatric crime through the misfortune of others. After he Terre” (“Magicians of the Earth”), a ground- moved from Bern to Paris to be director of 81 Ethics and evolution breaking show he put on in Paris in 1989. the Pompidou Centre, also known as the 1 https://t.me/finera

The Economist May 4th 2019 Books & arts 79

2 Beaubourg, the Biennale de Paris was sus- the subject of a show at moma; or that tensively about the show. Indeed, Mr Mar- pended, making its venue at La Villette works by Romuald Hazoumè, a sculptor tin avoided non-Western artists who were available. Canal Plus, a French broadcaster, from Benin who makes masks out of bits of actively engaging with modernism, seeing joined as a sponsor. Mr Martin was thus rubbish, are shown at Gagosian, the trendi- them as derivative, even contaminated, by able to stage the show across the two ven- est set of commercial galleries in the world. the influence of Europeans. It was a bias ues, part of it downtown at the Beaubourg, You can also see the show’s influence, if which led him to ignore great artists from part of it out at La Villette. It opened 30 you have access, in private collections—in- Japan, Latin America and north Africa. One years ago this month. The timing was aus- cluding some it inspired. Jean Pigozzi, heir who made the cut, Rasheed Araeen, a Paki- picious. The cold war and its proxy strug- to a French motor fortune, visited on the stani long resident in Britain, has never let gles were ending, while the bicentenary of last afternoon before it closed. The next that involvement stop him criticising the the French revolution provided a context of week he set about building a collection of project harshly. Simply displaying work by equality and fraternity—and of a world African contemporary art, supporting art- artists from all over the world, he says, was turned upside down. ists with brushes, paints and cash for de- never going to undermine the Western- The artists, many of whom had never cades. “‘Magiciens’ was extremely impor- dominated status quo. exhibited outside their own country, were tant in my life,” he says. Mr Martin’s desire that non-Western art presented with no explanation of how they should be “authentic” led him to tradition- fitted into either group—Westerners or the Daylight on the magic al Aboriginal earth paintings, to the col- rest—how famous they were, what prizes What then of the controversy? Start with oured face masks carved by Dossou Ami- they had won or which art school, if any, the name. By calling his artists “Mag- dou from Benin and the multi-headed they had attended. Besides telling visitors iciens”, thus invoking a vague sense of voo- cast-iron sculptures made by Georges Liau- the artists’ names and countries of origin, doo or black magic, Mr Martin showed a taud, a 90-year-old Haitian. For advice, he the exhibition offered no comment, com- taste for the exotic that post-colonial aca- turned not to art galleries or curators, but parison or context: all that was left to the demia was trying hard to dispel. The name to French anthropologists who had worked viewers. Film, collages and installations also suggested that the art was somehow in west Africa, Asia or the Caribbean. were mixed up with masks, earthworks and conjured up, rather than the result of an in- Yet the stripped-down format of his embroidery, as well as the more conven- telligence at work. “The message was that show often undercut the authenticity he tional art forms, sculpture and painting. it’s not real, what they do,” says Glenn Low- claimed to prize. A work like “Yam Dream- Two lines of brightly coloured giant funer- ry, moma’s director. “It’s magic.” ing” is rooted in a spiritual dimension that ary statues (pictured right), by Sunday Jack Some wondered how far Mr Martin’s ap- is specific to the culture of the people who Akpan from Nigeria, formed a guard of parent inclusiveness really went. Many of made it. Seen by people ignorant of that honour next to a wall of pink quartz cubes the Western artists were already uncon- culture and in an alien environment, it is which Marina Abramovic, a Serbian perfor- strained by borders, taking an interest in robbed of some of its essence. The same mance artist, had placed at the height of the global (as in Alighiero Boetti’s embroi- cannot be said of Mr Long’s “Red Earth Cir- her head, her heart, her sex. dered world maps) and the universal (as in cle”, which was much more on its home Some of Mr Martin’s peers were scath- the explorations of the subconscious given turf. Centred on the wall at the end of a ing, he recalls. Kasper König, founding di- form in the sculpture of Louise Bourgeois). high-ceilinged hall, it could not help but rector of Skulptur Projekte Münster and Yet he was not particularly interested in de- recall, for a Western audience, the rose one of the great curators of his generation, veloping-country artists who explored the window of a cathedral. brushed the show aside as “unesco art”— developed world and its ideas, says Lucy The minimal labelling compounded the pro forma internationalism driven by in- Steeds, an art historian who has written ex- problem. To add nothing to the name of an sipid politics. Few institutions were moved established Western artist such as Mr to acquire any of the non-Western pieces. Long—who, having been nominated for the The professionals’ lack of interest was Turner prize in three previous years, was matched by the public’s. When the show about to win it—was efficiently minimal- closed on August 14th fewer than 300,000 ist. Doing the same for unknowns seemed a people had seen it, piddling by the Pompi- denial for artists and viewers alike. dou’s normal standards. The catalogue was In an unequal world art cannot meet on never translated from French. fully equal terms. Memory, history and as- Now that catalogue is prized: a copy will sociation add to a piece’s power. So does cost you €420 ($470) on eBay. The show it scholarship: an appreciation of how this commemorates is remembered as one that work, made here and now, relates to that reshaped the art world—and which re- work there and then. You cannot wish away mains controversial a generation later. those depths—but nor should the art world These days, the two words most often used be divided into siloed provinces and ghet- to describe “Magiciens de la Terre” are “im- toes. Despite its flaws and the assumptions portant” and “troubling”. of its time, “Magiciens” helped sweep away Its influence can be observed wherever many old barriers. you see contemporary art from beyond And it posed an always relevant, always America, Europe and Japan—which vexed question: Who decides what is great means, now, wherever you see contempo- art? The bold way in which it presented its rary art. Take the fact that contemporary- artworks together, yet in isolation, contin- art biennales flicker on and off around the ues to be debated 30 years on. Ms Morris, planet like fireflies on a summer night, fed the Tate director, summarises the chal- by dealers and collectors in places where lenge it embodied: “Once you deconstruct such people were not known before. Or the canon, what do you put in its place?” 7 consider that a Congolese sculptor first ...... seen outside his homeland at “Magiciens”, Images: © mnam-cci Bibliothèque Kandinsky, Dist. the late Bodys Isek Kingelez, was recently Last rites for the Western canon rmn-gps Financial Era Advisory Group 80 Books & arts The Economist May 4th 2019

Millennials in China brought up to believe.” wheelie-bins full of gold, cash and gems As a student in Beijing, Ms Kan was ex- worth more than $20m. Cracks in the wall posed to foreign ideas. Thanks to an Ameri- The Hatton Garden burglary was “the can lecturer’s encouragement, she became last great British heist”, in the words of the obsessed with learning English. In “Under prosecutor who eventually convicted the Red Skies” she tells her story in straightfor- men behind it. It was also one of the od- ward English prose that still suggests her dest, as Dan Bilefsky, a correspondent for Chinese roots. For example, a romantic the New York Times, explains in his enter- crush leads to a little deer roaming in her taining and detailed account of the caper. Under Red Skies. By Karoline Kan. stomach, not butterflies. After graduation The fearsome crew behind the crime of the Hachette Books; 320 pages; $27. Hurst; £20 she found a job writing about Beijing for an century turned out to be a gang of grand- haoqun’s birth was a rebellion. Her English-language publication. Later she pas, led by a 76-year-old who travelled to Cmother hid her coveted but illegal sec- joined the Times as a researcher (the only the raid using his senior citizen’s bus pass. ond pregnancy from officials and neigh- journalistic role that Chinese citizens are The “diamond wheezers”, as the Sun news- bours in her village. At the time, under Chi- allowed to perform for foreign media). paper nicknamed them, overcame diabe- na’s one-child policy, women who already Ms Kan carved her own path through a tes, heart disease and incontinence to carry had children were sterilised or forced to series of small rebellions. Her story shows out a spectacular last job. have long-term contraceptives surgically that, for all the government’s efforts to sup- The story provides a rich slice of Lon- inserted. But Chaoqun slipped through the press the sort of defiance that fuelled the don’s East End underworld, with a cast in- system’s cracks, and was born in1989, just a Tiananmen protests, it cannot seal all the cluding men with names such as “Little few months before the protests that culmi- cracks through which China’s young peo- Legs” Larkins, Billy the Fish and Jimmy nated in a military assault on Tiananmen ple learn about the world. 7 Two Baths. One of the other crooks depict- Square. She grew up to work for the New ed in the book has a pair of Rottweilers York Times. Under her pen name, Karoline called Brinks and Mat (after the Brink’s-Mat Kan, she has written the gripping autobiog- robbery, another celebrated hold-up); an- raphy of a generation—and a superpower— other once kept a pet lion and has a door- caught between tradition and ambition. bell that plays the theme from “Goldfin- There are more Chinese millennials ger”. Some aspects of the Hatton Garden than there are people in America, but they story sound straight from the script of a Mi- rarely tell their own stories. Born during chael Caine film—and indeed, three years and after Deng Xiaoping’s push to replace a after the event, it became one (see picture). Marxist economy with market capitalism, Scotland Yard initially made a hash of they grew up amid relative abundance and the case. The grandpas tripped an alarm as burgeoning shopping malls. The backdrop they broke in, but the police failed to re- of Ms Kan’s narrative is unprecedented spond. In the aftermath of the crime, tips economic growth, mass urbanisation and pointed to an eastern European gang called the cultural changes they engendered. It the Pink Panthers. But soon the Flying arcs from paddy fields to swanky Western Squad homed in on the grandpas, largely parties in Beijing, taking in crowded rooms thanks to John “Kenny” Collins, described in the hutongs, narrow alleys in the older by fellow gang-members as a “wombat- parts of northern Chinese cities. thick old cunt”, who drove to the crime in Like millions of others, Ms Kan’s moth- his own distinctively painted Mercedes. er wanted to move the family away from Police tracked it on cctv and were led to their village in search of a better life. Be- other members of the crew. By bugging cause of their rural hukou (household regis- Lives of crime their cars, they pieced the crime together (a tration certificates that limit migrants’ ac- task complicated by the elderly crooks’ cess to services and work), it was hard to Rough diamonds habit of having the radio on very loud, and find a job in a city. But another crack ap- by their use of obscure Cockney slang). peared, when a relative asked the family to The grandpas were “1980s criminals take over a private kindergarten. As a farm- who committed a crime in the 21st cen- er’s daughter, Ms Kan had to prove herself tury”, as one of their defence lawyers put it. worthy of a place in a city school. She was They used the same mobile phones after taught to behave, study for her gaokao, the the robbery, forgot to throw away their The Last Job: The “Bad Grandpas” and the college entrance exam, and not to think for public-transport smart-cards, and boasted Hatton Garden Heist. By Dan Bilefsky. herself. Yet when her teacher told the chil- about the crime in their bugged cars and in W.W. Norton; 304 pages; $26.95 dren to cry because of the death of “dear their favourite pub (which was Mr Bilef- grandpa Deng Xiaoping”, she thought: how he ten-tonne, bomb-proof door of the sky’s local too, as it happens), where the po- can I cry for a man I never knew? THatton Garden Safe Deposit Company lice were filming them and passing the Later she spent two weeks undergoing has never been breached. But over the long footage to a lip-reader. junxun, basic military training that all uni- Easter weekend of 2015, an ingenious gang Eventually the cops swooped, catching versity freshmen must complete. Ms Kan found another way into the closely guarded the men red-handed with Lidl bags full of emerged even more sceptical of the sys- vault beneath London’s jewellery quarter. loot. “It’s overwhelming I suppose, innit?” tem. She heard whispers and warnings After sneaking into the building, the rob- conceded one of the gang when police con- about the bloodshed around Tiananmen, bers climbed down a lift-shaft, disabled an fronted him with the evidence. It was: the but it was never explained. When she dis- alarm system and drilled through 20 grandpas pleaded guilty and were sent to a covered the truth, she cried sincerely. inches (51cm) of reinforced concrete, be- high-security prison, some of them strain- “China collapsed for me suddenly,” she fore worming their way through the hole to ing with their hearing aids to hear the writes. “I had no faith in what I had been ransack the safe. They made off with judge’s sentence. 7 https://t.me/finera

The Economist May 4th 2019 Books & arts 81

Ethics and evolution splintered into groups, often left the weak- est to die and even resorted to cannibalism. The kindness of strangers Only three crew members lived long enough to be rescued. In contrast, all five survivors of the Grafton eventually made it off the island. Shipwrecks, writes Mr Chris- takis, are good natural experiments in soci- Two books explore the evolutionary origins of human morality and societies ety-building: “survivor camps”, he says, himpanzees and bonobos are human- “provide fascinating data…about how and City’s closest great-ape cousins. They The Goodness Paradox. By Richard why social order might vary, and about look almost the same as each other, share Wrangham. Pantheon; 400 pages; $28.95. what arrangements are the most conducive almost all their (and human) dna and dem- Profile Books; £25 to peace and survival.” onstrate familiar emotions and behaviour. Blueprint. By Nicholas Christakis. Little, The crew of the Invercauld were led by a But in an important way, they are oppo- Brown; 544 pages; $14.99 selfish captain who instilled an attitude sites. Chimpanzees are routinely violent. that every man should look out for himself. Males beat up females to assert sexual 35,000 years ago, after living in Europe for The men of the Grafton, however, stuck and dominance, fight each other and kill rivals, half a million years. It was their cognitive worked together on everything from re- friends and even infants. Bonobos, by con- inability to work and learn together, he pairing boats to sharing their resources trast, enjoy relatively peaceful lives. contends, that sealed their doom. equally, even organising a kind of adult- Where do humans lie on this spectrum These are controversial ideas, not all of education programme to swap skills. This of violence? Are they inherently good or them proven. Given that the fossil record “social suite” of behaviour, as Mr Christa- bad, and how does that shape their societ- can provide only fragments of clues about kis puts it, helped them survive. ies? Two new books offer some answers. how ancient species might have lived, the He argues that this social suite is not In “The Goodness Paradox”, Richard confidence of Mr Wrangham’s claims is just learned from others; it is underpinned Wrangham, an anthropologist at Harvard, bold. Nonetheless, his skilful storytell- by thousands of genes that have evolved to argues that, despite impressions to the ing—which intertwines his hypotheses re- nudge biochemistry and behaviour in such contrary, people have evolved into largely garding primitive humans with rich details a way that people tend towards a good soci- docile animals, much like bonobos. But from decades of observations of chimpan- ety. True, there are still appalling wars and they have maintained the ability to commit zees in Tanzania—makes his book both horrific murders, but that is not the sum of acts of planned violence and cruelty, like stimulating and compelling. who humans are. Look at the progress visi- chimpanzees. They are, at once, much ble all around you, Mr Christakis urges, de- more and much less violent than their pri- Shipwrecked apes spite all the well-known episodes of death mate cousins—the paradox of his title. Successful human societies are the focus of and destruction. Chimpanzees and bonobos have been “Blueprint” by Nicholas Christakis, a social He ranges across sociology, anthropolo- distinct species for around 900,000 years. scientist at Yale. What sorts of behaviour gy, philosophy, genetics and economics, Mr Wrangham says part of the reason for make societies work, and where do they between jungles and laboratories and back their differences is that, on their side of the originate? He begins with shipwrecks. again, at what sometimes feels like break- Congo river, chimpanzees have always had In1864 two ships, the Invercauld and the neck speed. But amid the whiplash, Mr to share their habitats with gorillas; vio- Grafton, were wrecked on opposite sides of Christakis’s deep optimism (and consider- lence and hot-tempered aggression make Auckland Island, which lies almost 300 able evidence) about the arc of human soci- sense when you have more limited food re- miles (480km) south of New Zealand. Sur- ety bending towards good is uplifting. sources. Across the river, bonobos evolved vivors from both crews were on the island Along the way he delves fascinatingly into with abundant fruit and foliage. Natural se- at the same time, but were unaware of each human cultures and customs, exploring, lection reduced their propensity for reac- other’s presence. Over the year after their for instance, why monogamy and marriage tive aggression (the hot, impulsive type). stranding, the19 survivors of the Invercauld have become so common (though not uni- These behavioural shifts mirror those versal), and what friendship really means, of creatures domesticated from their wild from an evolutionary perspective. cousins, such as dogs or farm animals. Bo- Mr Wrangham is also an optimist, and nobos, it seems, have domesticated them- even posits a counterintuitive role for cer- selves in response to their environment. By tain types of pugnacity in keeping humans living in groups, says Mr Wrangham, hu- on the path towards good. Domesticated as mans have been domesticated, too. it may be, the species maintains the capaci- And domestication set the stage for ty for a proactive, cold-blooded kind of ag- thriving human societies. A greater capaci- gression that may have been instrumental ty for tolerance and co-operation allowed in making societies more socially cohe- the creation of large, stable settlements sive. Groups of humans could have worked and civilisations. In any modern metropo- together to identify and root out the most lis humans live peacefully in much closer savage people (usually males) in their quarters than any other species could with- midst. Executing the miscreants not only out dangerous, possibly fatal conse- removed an undesirable type of aggressive quences. As these societies developed, so gene from the pool; it also sent a signal that did social structures, such as justice and re- violence would be punished. ligious ethics, which increasingly keep That, in turn, could lead to the emer- people from unnecessary aggression and gence of a moral code and demonstrate the move the moral needle towards good. Mr benefits of more congenial or generous be- Wrangham contrasts the trajectory of haviour. Be good to your neighbours, in Homo sapiens with the Neanderthals, a hu- other words, lest they gang up and con- man species that became extinct around A mean streak a mile wide demn you to death. 7 Financial Era Advisory Group 84 Economic & financial indicators The Economist May 4th 2019

Economic data

Gross domestic product Consumer prices Unemployment Current-account Budget Interest rates Currency units % change on year ago % change on year ago rate balance balance 10-yr gov't bonds change on per $ % change latest quarter* 2019† latest 2019† % % of GDP, 2019† % of GDP, 2019† latest,% year ago, bp May 1st on year ago United States 3.2 Q1 3.2 2.2 1.9 Mar 2.2 3.8 Mar -2.6 -4.7 2.5 -46.0 - China 6.4 Q1 5.7 6.3 2.3 Mar 2.5 3.7 Q1§ 0.2 -4.5 3.2 §§ 1.0 6.74 -5.9 Japan 0.3 Q4 1.9 1.0 0.5 Mar 1.1 2.5 Mar 3.9 -3.4 -0.1 -11.0 111 -1.3 Britain 1.4 Q4 0.9 1.0 1.9 Mar 1.8 3.9 Jan†† -4.1 -1.6 1.2 -33.0 0.76 -2.6 Canada 1.6 Q4 0.4 1.6 1.9 Mar 1.7 5.8 Mar -2.6 -1.1 1.7 -64.0 1.34 -3.7 Euro area 1.2 Q1 1.5 1.3 1.4 Mar 1.3 7.7 Mar 3.2 -1.2 nil -55.0 0.89 -6.7 Austria 2.4 Q4 5.1 1.3 1.8 Mar 1.8 4.8 Mar 2.0 -0.1 0.3 -43.0 0.89 -6.7 Belgium 1.1 Q1 0.7 1.3 2.1 Apr 2.2 5.7 Mar 0.1 -1.0 0.5 -37.0 0.89 -6.7 France 1.1 Q1 1.2 1.2 1.2 Apr 1.3 8.8 Mar -0.6 -3.3 0.3 -47.0 0.89 -6.7 Germany 0.6 Q4 0.1 1.0 2.0 Apr 1.4 3.2 Mar‡ 6.6 0.8 nil -55.0 0.89 -6.7 Greece 1.6 Q4 -0.4 1.8 0.9 Mar 0.9 18.5 Jan -2.5 -0.4 3.4 -44.0 0.89 -6.7 Italy 0.1 Q1 0.9 0.1 1.1 Apr 0.9 10.2 Mar 2.1 -2.9 2.6 78.0 0.89 -6.7 Netherlands 2.2 Q4 2.2 1.5 2.8 Mar 2.3 4.2 Mar 9.9 0.8 0.2 -51.0 0.89 -6.7 Spain 2.4 Q1 2.9 2.1 1.5 Apr 1.2 14.0 Mar 0.8 -2.4 0.9 -29.0 0.89 -6.7 Czech Republic 3.0 Q4 3.4 2.8 3.0 Mar 2.2 2.0 Mar‡ 0.2 0.7 1.9 14.0 22.8 -6.0 Denmark 2.5 Q4 3.4 1.9 1.2 Mar 1.1 3.7 Feb 6.3 1.0 0.1 -50.0 6.64 -6.5 Norway 1.7 Q4 1.9 1.9 2.9 Mar 2.3 3.8 Feb‡‡ 7.1 6.4 1.7 -24.0 8.65 -6.5 Poland 4.5 Q4 2.0 3.8 2.2 Apr 1.7 5.9 Mar§ -0.6 -2.4 3.0 -7.0 3.81 -6.3 Russia 2.7 Q4 na 1.5 5.3 Mar 4.9 4.7 Mar§ 6.5 2.4 8.2 84.0 64.8 -2.0 Sweden 2.4 Q4 4.7 1.6 1.9 Mar 1.7 7.1 Mar§ 2.6 0.3 0.2 -55.0 9.51 -6.9 Switzerland 1.4 Q4 0.7 1.8 0.7 Mar 0.5 2.4 Mar 9.7 0.5 -0.3 -39.0 1.01 -1.0 Turkey -3.0 Q4 na -1.7 19.7 Mar 16.1 14.7 Jan§ -0.6 -2.3 19.9 736 5.95 -31.1 Australia 2.3 Q4 0.7 2.5 1.3 Q1 2.0 5.0 Mar -2.4 -0.2 1.8 -98.0 1.42 -5.6 Hong Kong 1.3 Q4 -1.4 2.2 2.1 Mar 2.3 2.8 Mar‡‡ 4.5 0.5 1.7 -52.0 7.85 nil India 6.6 Q4 5.1 7.2 2.9 Mar 3.3 7.6 Apr -1.6 -3.4 7.4 -36.0 69.5 -4.0 Indonesia 5.2 Q4 na 5.2 2.5 Mar 2.8 5.3 Q3§ -2.7 -2.1 7.8 96.0 14,250 -2.4 Malaysia 4.7 Q4 na 4.5 0.2 Mar 0.8 3.3 Feb§ 2.4 -3.4 3.8 -36.0 4.13 -5.1 Pakistan 5.4 2018** na 3.4 9.4 Mar 7.8 5.8 2018 -4.2 -6.0 13.2 ††† 470 141 -18.2 Philippines 6.3 Q4 6.6 5.9 3.3 Mar 4.4 5.2 Q1§ -2.2 -2.5 6.0 -25.0 52.1 -0.7 Singapore 1.3 Q1 2.0 2.4 0.6 Mar 0.5 2.2 Q1 17.0 -0.6 2.2 -43.0 1.36 -2.2 South Korea 1.8 Q1 -1.4 2.4 0.6 Apr 1.1 4.3 Mar§ 4.5 0.7 1.9 -87.0 1,168 -8.6 Taiwan 1.7 Q1 2.0 1.8 0.6 Mar 0.1 3.7 Mar 13.1 -1.2 0.8 -27.0 30.9 -4.2 Thailand 3.7 Q4 3.3 3.5 1.2 Apr 0.9 0.9 Mar§ 8.8 -2.5 2.2 -35.0 31.9 -1.2 Argentina -6.2 Q4 -4.7 -0.9 54.1 Mar 46.1 9.1 Q4§ -2.1 -3.2 11.3 562 44.2 -53.6 Brazil 1.1 Q4 0.5 1.5 4.6 Mar 4.0 12.7 Mar§ -1.3 -5.8 7.1 -78.0 3.95 -11.1 Chile 3.6 Q4 5.3 3.2 2.0 Mar 2.2 6.9 Mar§‡‡ -2.5 -1.4 4.0 -50.0 677 -9.4 Colombia 2.9 Q4 2.4 3.1 3.2 Mar 2.9 10.8 Mar§ -3.5 -2.0 6.6 15.0 3,231 -13.1 Mexico 1.3 Q1 -0.8 1.6 4.0 Mar 4.1 3.6 Mar -1.7 -2.3 8.2 66.0 18.9 nil Peru 4.8 Q4 11.4 3.7 2.6 Apr 2.2 7.5 Mar§ -1.6 -2.0 5.6 64.0 3.31 -1.5 Egypt 5.5 Q4 na 5.1 14.2 Mar 12.1 8.9 Q4§ -0.1 -7.3 na nil 17.1 3.7 Israel 2.9 Q4 3.1 3.1 1.4 Mar 1.2 3.9 Mar 2.7 -3.7 1.8 -4.0 3.59 0.6 Saudi Arabia 2.2 2018 na 1.9 -2.1 Mar -1.1 6.0 Q4 3.6 -6.7 na nil 3.75 nil South Africa 1.1 Q4 1.4 1.5 4.5 Mar 5.0 27.1 Q4§ -3.2 -4.0 8.6 36.0 14.4 -12.0 Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. †††Dollar-denominated bonds.

Markets Commodities % change on: % change on: The Economist Index one Dec 31st index one Dec 31st commodity-price index % change on In local currency May 1st week 2018 May 1st week 2018 2005=100 Apr 23rd Apr 30th* month year United States S&P 500 2,923.7 -0.1 16.6 Pakistan KSE 36,784.4 0.8 -0.8 Dollar Index United States NAScomp 8,049.6 -0.6 21.3 Singapore STI 3,400.2 1.1 10.8 All Items 137.7 136.4 -2.4 -13.2 China Shanghai Comp 3,078.3 -3.9 23.4 South Korea KOSPI 2,203.6 0.1 8.0 Food 141.0 139.4 -2.9 -14.6 China Shenzhen Comp 1,636.6 -6.4 29.1 Taiwan TWI 10,967.7 -0.5 12.8 Industrials Japan Nikkei 225 22,258.7 0.3 11.2 Thailand SET 1,673.5 nil 7.0 All 134.3 133.4 -1.9 -11.6 Japan Topix 1,617.9 0.4 8.3 Argentina MERV 29,571.4 -0.6 -2.4 Non-food agriculturals 124.5 125.1 -0.4 -12.6 Britain FTSE 100 7,385.3 -1.2 9.8 Brazil BVSP 96,353.3 1.4 9.6 Metals 138.5 136.9 -2.5 -11.1 Canada S&P TSX 16,502.8 -0.5 15.2 Mexico IPC 44,597.3 -1.0 7.1 EURO STOXX 50 3,514.6 0.3 17.1 EGX 30 14,920.2 1.0 14.5 Sterling Index Euro area Egypt All items 193.6 190.4 -2.5 -9.5 France CAC 40 5,586.4 0.2 18.1 Israel TA-125 1,466.3 -1.2 10.0 Germany DAX* 12,344.1 0.3 16.9 Saudi Arabia Tadawul 9,362.0 1.3 19.6 Euro Index Italy FTSE/MIB 21,881.3 0.7 19.4 South Africa JSE AS 58,528.4 -1.0 11.0 All items 152.8 151.4 -2.6 -7.1 Netherlands AEX 571.6 0.6 17.2 World, dev'd MSCI 2,170.0 0.1 15.2 Gold Spain IBEX 35 9,570.6 1.2 12.1 Emerging markets MSCI 1,080.5 -0.4 11.9 $ per oz 1,268.8 1,283.1 -0.6 -1.6 Poland WIG 60,145.5 -1.3 4.3 RTS, $ terms 1,248.4 -1.2 17.1 West Texas Intermediate Russia $ per barrel 66.3 63.9 2.1 -5.0 Switzerland SMI 9,769.7 1.2 15.9 US corporate bonds, spread over Treasuries Turkey BIST 95,415.6 -0.8 4.5 Dec 31st Sources: CME Group; Cotlook; Darmenn & Curl; Datastream from Refinitiv; FT; ICCO; ICO; ISO; Live Rice Index; LME; NZ Wool Services; Australia All Ord. 6,466.5 -0.1 13.3 Basis points latest 2018 Thompson Lloyd & Ewart; Urner Barry; WSJ. *Provisional. Hong Kong Hang Seng 29,699.1 -0.4 14.9 Investment grade 155 190 India BSE 39,031.6 -0.1 8.2 High-yield 436 571 IDX 6,455.3 0.1 4.2 Indonesia Sources: Datastream from Refinitiv; Standard & Poor's Global Fixed For more countries and additional data, visit Malaysia KLSE 1,642.3 0.3 -2.9 Income Research. *Total return index. Economist.com/indicators https://t.me/finera Graphic detail North Korea’s economy The Economist May 4th 2019 85

Korean peninsula, nocturnal luminosity RUSSIA March 2019 average

CHINA Nocturnal luminosity v GDP GDP per person, 2015-17, by country, log scales at PPP* 100

Shenyang

10

Lights in Pyongyang dimmed sharply in 2015 NORTH 1 KOREA 2013 2015

0.1 1 10 100 Pyongyang Nocturnal luminosity per person

10km North Korea, GDP per person 2018 $, at PPP*, converted using Chinese prices

3,000 Seoul Conventional estimates†

SOUTH 2,000 KOREA Luminosity-based estimate

1,000

2012 13 14 15 16 17 18

Sources: World Data Lab in collaboration with the NOMIS Foundation, Vienna University of Economics and Business, and the 100km International Institute for Applied Systems Analysis; Earth Observation Group, NOAA NCEI; “Illuminating economic growth”, by Yingyao Hu and Jiaxiong Yao, IMF working paper, April 2019 *Purchasing-power parity †Bank of Korea, 2012-17, EIU 2018

that among countries with similar lumi- the country has brightened again. When the lights nosity, autocracies reported gdp growth International sanctions are unlikely to 15-30% higher than democracies did. have produced this darkening. They were go out Nowhere are good economic data rarer made stricter in 2016-17, just as luminosity than in North Korea. The most detailed rose. A drop in the prices of North Korean numbers come from South Korea’s central exports, like coal, may have played a part. bank, which derives them from figures on But the main cause was probably weath- Satellite data shed new light on North production volumes of various goods. er. North Korea relies on hydropower, and Korea’s opaque economy When adjusted for the cost of living in a de- in 2015 it was parched by a drought. The iewed from space at night, North Ko- veloping Asian economy, the bank’s most Bank of Korea also reckons that electricity, Vrea looks like the recently released first recent estimate of North Korea’s annual gas and water output fell by 13% in 2015. image of a black hole: an abyss, ringed by gdp per person is enough to buy goods and The economy may not have shrunk as the brilliant glow of South Korea, China services that would cost $2,500 in America. much as the dimming suggests. Recessions and Russia, from which nothing can es- The picture painted by night lights, caused by power cuts could disproportion- cape. But the Hermit Kingdom does emit a however, is even grimmer. In 2013 a group ately reduce lighting. Many North Koreans bit of light, which orbiting satellites detect. of scholars compared luminosity and gdp own solar panels, which power daytime ac- And nocturnal luminosity is one of the few within rural China, obtaining an equation tivity not shown in night lights. And state reliable sources of information about the to estimate economic output from light. A buildings, whose illumination is a political country. It implies that North Korea’s econ- forthcoming paper by World Data Lab, a choice, make up much of the capital’s glow. omy is poorer, more volatile and more vul- startup, and a team of researchers applies As with physics inside a black hole, no one nerable to weather than formerly thought. this formula to North Korea. It yields a knows what economic laws apply within Night lights are a strong proxy for eco- standard of living that would cost $1,400 a North Korea’s eerie silhouette. nomic activity. A new paper by the imf year in America, making North Korea one Nonetheless, a 40% drop in luminosity finds that they explain 44% of the variation of the world’s ten poorest countries. indicates a serious recession. And this year in countries’ gdp per person—as close a tie The data also suggest that the economy the government has admitted publicly that as that between a person’s height and hand has been unusually volatile. In 2013-15 lu- heatwaves, floods and drought have caused size. In places where records are poor or minosity fell by 40%. That implies a 12% re- a dire food shortfall. The regime appears manipulated, night lights offer an alterna- duction in gdp, including 19% in the capi- much better prepared to weather trade tive measure of output. One study found tal region, Pyongyang. Since 2016, however, sanctions than the wrath of nature. 7 Financial Era Advisory Group 86 Obituary Lyra McKee The Economist May 4th 2019

one article in 2016 she looked into the fact, barely spoken of, that in the ten years after the end of the Troubles the suicide rate had al- most doubled in the province, with a fifth of the victims younger than 25. She raised the idea, again hardly mentioned, that trauma might be passed down from parents to “Ceasefire Babies”, like her- self, who had never known fighting directly but lived in its shadow and, sometimes, died from it. Certain stories turned her into a workaholic monster, working all night and never switching off. A man called Thomas was mur- dered, and a source told her this was “something related to chil- dren”; in 1978 he had passed information about child pornography to the police, but there the trail ended. What then? In 2012 she took up the case of Robert Bradford, a prominent politician shot dead in 1981, who was rumoured to have been “asking questions”. About what, no one would say. But she had to know. In 2017, in Harlem Café just by Ulster Hall, a veteran journalist (often the best sources for young cubs like her) casually mentioned that “a lot of kids” had disappeared during the Troubles. Immediately she had to find out: who? why? where from? And where were the bodies now? People often asked her who she was working for. The truth was, mostly not for anyone, or only for the public, who had a right to know. Her route through journalism had been really haphazard. At Queen’s University, where she went for a spell before she dropped out, finding it too like school, she asked a newspaper editor at a ca- reers fair whether he hired investigative reporters, and he laughed at her. No, they didn’t hire those people any more. She trundled be- tween online media sites and online news, publishing here and A muckraker’s life there, but it was a struggle. One article that took six months’ re- search earned her £50. A lot of the time she was broke. Still, she got her ma in investigative journalism from Birmingham and ended up doing what she loved most in the world, so she was rich for that. Rich from muckraking, such a good word: “to search for and ex- pose misconduct in public life”. It was very hard in Northern Ire- Lyra McKee, investigative journalist, was killed by a stray land, as her Muckraker blog laid bare every week. A Freedom of In- bullet while covering a riot in Derry on April 18th, aged 29 formation request to the police brought the preposterous answer ike many a small child, Lyra McKee at four years old was all that it would take them 10,692 hours to look through six months of Lquestions. Why should her mother, who was poor and had six files for the missing children. Her prime source for “Thomas’s children and was bringing them up single-handed on the Clifton- Story” gave her information that was 80% verifiable, but then had ville Road in north Belfast, have to pay her bills? Why would she go that gap in it. Documents were embargoed. She would spend hours to jail if she didn’t? No answer ever satisfied her, and she would upon hours digging, only to find nothing and feel useless. leave her mother with “Why?” ringing in her ears. Her readers helped, though. She saw them as her collaborators. It didn’t stop when she got older, though. Her hero was Walt Her social network was so wide—all genders, ages, faiths, persua- Disney’s Robin Hood, a talking fox who righted wrongs and, obvi- sions—that if one potential source jibbed at talking to a gay Catho- ously, unearthed them first. So she was almost bound to become, lic with an unkempt geeky look and a Harry Potter t-shirt, another as she did, the most dogged investigative journalist. She got espe- would say, “She’s all right.” Then the site she mostly worked for, cially persistent if she felt there were secrets involved, things peo- Beacon Reader, allowed readers to fund their favourite reporters, ple didn’t want anyone to know. These she had to find out. Not all and she ran with that. She eventually thrived as a freelance because at once, A-Z, which quickly bored her, but little clues, a bread- she crowdfunded her research into Bradford and the lost children, crumb trail, which she could follow to see where it led. giving subscribers exclusive online chunks of her findings and her She was lucky, or perhaps unlucky, that she lived in Northern writings. This brought in $6,000, led to articles in places like Priv- Ireland, where secrets were everywhere. In her Catholic section of ate Eye, the Atlantic and BuzzFeed, and won her time to turn her re- Belfast part of this was cultural, so that having children out of wed- search into a two-book deal with Faber. With the news industry as lock was shameful and suicide in the family was a disgrace, both to it was, she would tell younger journalists (for she was giving lots of be buried deep. And then there was her own huge, aching secret talks now), muckrakers had to be entrepreneurs. that she had kept close since the age of 11, that she was gay and It seemed a long time since all that crazy bargaining with God damned to hell for it, much as she spent long nights in bed bar- and her misery about her own secret. She had told her family when gaining with God to let her off. As a teenager she knew only one boy she was 20 and they had been fine with it, and some years later she who was openly gay, Big Gay Mick with his thin body and baseball told her parish priest, Martin Magill, and that was fine, too. Far cap and camp too-high voice. No one else was that brave, and until from being damned, her career was booming, she had found the he spoke you might have taken him too for one of the hard men love of her life in Sara Canning and had moved to Derry-London- who still loitered along Murder Mile, as people called it. derry—hateful name, great city!—to be with her. All people had to There lay the biggest nest of secrets. The 30-year Troubles be- do was talk to each other, and walls would tumble down. tween unionists and republicans, Catholics and Protestants, had But of course some still wouldn’t talk. They’d fob that pesky officially ended when she was eight with the Good Friday Agree- journalist off. Paper trails ran out, or had never existed in the first ment, and after that the long civil war was swept under the carpet place. And then what? It seemed the best course might be to sniff or was wrapped like a wound under bandages, whatever metaphor when trouble might happen and get up close to it, witness it with you liked; but hidden, although it still permeated everything. In her own two eyes, right beside the gunmen and the police. 7