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A plan for Haiti Massachusetts stuns Obama New rules for banks Dark days for lawyers and consultants

JANUARY 23RD–29th 2010 Economist.com The psychology of power Stop! The backlash against big government www.storemags.com & www.fantamag.com Njetj{fcvtjofttftbsfuif fohjoftpgbtnbsufsqmbofu/

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www.storemags.com & www.fantamag.com www.storemags.com & www.fantamag.com Contents The Economist January 23rd 2010 5

8 The world this week 37 New president in Honduras Lobo alone Leaders 38 Brazil’s presidential 11 Big government biopic Stop! Lula, sanitised 12 The Massachusetts 38 A Canadian election misunderstanding The man who fell to earth Just history 13 Sri Lanka’s presidential election Asia Between a rock and a hard Massachusetts After the man 39 The war in Afghanistan Democrats’ stunning loss, Bombs and baksheesh Barack Obama has no choice 13 After the earthquake but to move back to the centre: A plan for Haiti 40 Pakistan’s vulnerable On the cover president leader, page 12. How Scott The size and power of the 14 Reforming banks In disrepute Brown swept up the Bay State The weakest links state is growing, and 40 Sri Lanka’s Tamil and stymied health reform in discontent is on the rise: 15 Ukraine’s presidential diaspora Washington, DC, page 27 leader, page 11. The return election Next year in Jana of big government means An orange and two lemons 41 Political scandals in that policymakers must Japan grapple again with some Letters basic questions. They are Ozawa at bay now even harder to answer, 16 On Pakistan, water, 41 China’s assertiveness pages 23-26 bankers, housing, Choppy waters Socrates, global warming, 42 Protest in Hong Kong e-readers On track for confrontation 43 Banyan Brieng Indonesia’s books of Daily news and views: news 23 The growth of the state slaughter and forgetting analysis, online-only columns, Leviathan stirs again blogs on politics, economics and Haiti The government cannot travel, and a correspondent’s Middle East and Africa rebuild the country. A diary United States 44 Israel and Palestine temporary authority needs to be set up to do so: leader, page E-mail: newsletters and 27 The Massachusetts Do get talking again mobile edition shocker 45 Israel’s prime minister 13. The world’s attempt to aid Economist.com/email The unstoppable truck The media get at his wife Haitians stumbles against extraordinary diculties of Research: search articles since 28 Health reform 45 The Muslim Brothers transport and communication, 1997, special reports Rip it up and start again Whither its new leader? Economist.com/research page 35. Insuring against 29 The housing market 46 Ethiopia’s election disaster, page 73 Print edition: available online Still in the cellar Jangling nerves by 7pm London time each Thursday 29 Reforming West Virginia’s Economist.com/print legal system Europe Small steps Audio edition: available online to 47 Ukraine’s election download each Friday. 30 California’s Central Valley Economist.com/audioedition Five years on in Kiev The Appalachia of the West 49 Germany’s government 32 Antitrust law and football Waiting for Angela Out of many, one? 50 Sweden leans left again 32 Pets in the recession Trouble at home Howls for help 50 The Irish economy Volume 394 Number 8666 33 Lexington Green shoots The fat plateau First published in September 1843 51 Greece’s public nances Ukraine Whoever ends up to take part in "a severe contest between Pull the other one intelligence, which presses forward, and leading the country needs an unworthy, timid ignorance obstructing The Americas 52 Charlemagne encouragement from the our progress." 35 Chaos in Haiti Europe and China European Union: leader, page Editorial oces in London and also: A massive relief eort 15. The presidential election Bangkok, Beijing, Berlin, Brussels, Cairo, Chicago, Delhi, Frankfurt, Hong Kong, limps into gear shows that the orange Jerusalem, Johannesburg, Los Angeles, 36 Lessons from the tsunami revolution is out of pu, no Mexico City, Moscow, New York, Paris, matter who eventually wins, San Francisco, São Paulo, Tokyo, Washington Too much of a good thing? 37 Chile’s presidential page 47 election Piñera promises a gallop 1 Contents continues overleaf

www.storemags.com & www.fantamag.com 6 Contents The Economist January 23rd 2010

Britain 72 Europe’s co-operatives Mutual respect 53 Manufacturing blues Another one bites the dust 73 Exchange-traded funds Trillion-dollar babies 54 The return of ination A bungee-jump 73 Catastrophe insurance When calamity strikes 55 Defence-spending cuts You can’t ght in here, this 74 Economics focus is the war room Investment in Asia

International Science and technology Base camp Basel New rules Next week 57 Spending on education 75 The psychology of power will make the average bank We publish a special report Investing in brains Absolutely safer. But what about the on online social networks. 58 Schools in poor countries 76 Glaciers and the IPCC outliers? Leader, page 14. O-base camp They are changing the way Regulators are trying to make Reaching the neediest people communicate, work Railways and slime moulds banks better equipped to deal 77 and play, and mostly for the A life of slime with catastrophe, pages 66-68. Business better, says Martin Giles A new round of results, page 70 61 America’s car industry Small cars, big question Books and arts 78 War in Georgia Principal commercial oces: 62 Renault and meddling 25 St James’s Street, London sw1a 1hg politicians Ungodly suering Tel: 020 7830 7000 Fax: 020 7839 2968/9 Attempted carjack 79 Mahathir Mohamad 6 rue Paul Baudry, 75008 Paris, France Tel: +33 153 936 600 Fax: +33 153 936 603 62 The business of What the doctor ordered 79 The music of Carlo 111West 57th Street, New York NY10019 dissecting electronics Tel 1212 5410500 Fax 1212 5419378 The lowdown on teardowns Gesualdo Lurid rhythms 60/F Central Plaza 63 Shenzhen’s fading spirit 18 Harbour Road, Wanchai, Hong Kong of enterprise 80 The European Union Tel 852 2585 3888 Fax 852 2802 7638 No longer so special What is it for? Other commercial oces: 80 Henning Mankell Chicago, Frankfurt, Los Angeles, 64 Professional-services San Francisco and Singapore rms Chewing the fat Lawyers and consultants The Laid-o lawyers, cast-o downturn is sorting the best 81 Indian contemporary art consultants professional-services rms Public notices Subscription service from the rest, page 64. The 65 Schumpeter 81 The Royal Society For our latest subscription offers, visit Consultants in the public Like-minded fellows Economist.com/offers public sector has had its ll of For subscription service, please contact by management consultants: sector telephone, fax, web or mail at the details Schumpeter, page 65 provided below: Obituary Telephone: 1 800 456 6086 (from outside Brieng the US and Canada, 1 314 447 8091) 82 Jyoti Basu Facsimile: 1 866 856 8075 (from outside 66 Reforming banking India’s almost-prime the US and Canada, 1 314 447 8065) Base camp Basel minister Web: Economistsubs.com E-mail: [email protected] Post: The Economist Subscription Services, P.O. Box 46978, Finance and economics 89 Economic and nancial St. Louis, MO 63146-6978, USA 69 The world economy indicators Subscription for 1 year (51 issues) Pulling apart Statistics on 42 United States US$138 70 China’s economy economies, plus closer Canada CN$189 Central heating looks at Israel’s economy Argentina US$287 and gold production Mexico US$240 70 American banks Rest of Latin America US$264 Through FICC and thin Psychology of power 71 Buttonwood It corrupts, but only those who Automated trading think they deserve it, page 75

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of Mr Obama’s policies, one Bold front throw the communist govern- Politics day before the rst anniversa- Taliban suicide-bombers and ment and sentenced them to ry of his inauguration. gunmen staged an attack in up to 16 years in prison. Beset by diculties of co- Kabul, the Afghan capital, as ordination and transport, a Mr Brown’s win put the fate of President Hamid Karzai was Vanquished Viktor massive relief operation to health-care reform in jeopar- swearing in new members of help victims of Haiti’s dy, as he provides the Repub- his cabinet. The attack was earthquake moved with licans with 41votes in the beaten back, leaving 12 dead excruciating slowness. A week Senate, enough to block legis- and more than 70 injured. after the quake, only 200,000 lation. The Democrats said Earlier, parliament had again people had received food aid; they would not try to push rejected many of Mr Karzai’s perhaps 1m need it. But medi- through a bill before Mr Brown ministerial nominees. cal care was improving, and is seated. Mr Obama urged his the United Nations, American party to coalesce around A survey by the UN Oce on troops and aid agencies were those elements of the package Drugs and Crime found that working to set up a supply that people agree on. more than half of Afghani- chain. Some 200,000 people stan’s people had to pay a are feared to have been killed Divided we stand bribe to a public ocial last Viktor Yushchenko, the win- in the disaster. An Iraqi parliamentary panel year. The police topped the list ner of Ukraine’s orange recommended that some 500 of bribe recipients. Nearly 60% revolution ve years ago, was For the rst time in 50 years candidates should be barred of those surveyed saw corrup- resoundingly voted out in the Chile elected a conservative from competing in a general tion as a bigger problem than rst round of the Ukrainian president. Sebastian Piñera, a election, due in early March, lack of security. presidential election. A second wealthy businessman, nar- because of their alleged past round will be held on Febru- rowly defeated Eduardo Frei of ties to the Baath party. This Pakistan’s Supreme Court ary 7th between Viktor Yanu- the Concertación, the centre- angered many Iraqi Sunnis published a lengthy judgment kovich, the front-runner, and left alliance that has governed and increased sectarian conrming that the amnesty Yulia Tymoshenko, the current for the past two decades. tensions, even though more granted to President Asif Zar- prime minister. Shias are on the list. A leading dari and others by the former Hugo Chávez, Venezuela’s Sunni, Saleh al-Mutlaq, is also president, Pervez Musharraf, Under pressure from the Euro- president, ordered yet another included. was unconstitutional. It or- pean Parliament, Bulgaria nationalisation. The govern- dered the government to withdrew its nominated Euro- ment will take over six hyper- At its headquarters in Egypt reopen a money-laundering pean Commissioner, Rumiana markets owned by Exito, a the Muslim Brotherhood, one case against Mr Zardari. Jeleva, who also quit as foreign Colombian business, and of the Arab world’s most minister. The Bulgarians put France’s Casino after it accused inuential Islamist move- forward Kristalina Georgieva, them of raising prices after this ments, elected a cautious a vice-president of the World month’s devaluation of the 66-year-old conservative, Bank, instead. bolívar. Muhammad Badeea, to re- place 81-year-old Mehdi Akef A British court ruled that a Red, white and Brown as its supreme guide. British couple must demolish their home in northern At least 200 Nigerians were Cyprus, in line with a Euro- killed in clashes between pean Court ruling upholding a Muslims and Christians in Jos, Greek-Cypriot claim. There in central Nigeria. Houses, may be more demands by churches and mosques were Greek-Cypriots for demolition burned and 20,000 people Jyoti Basu, leading light of the of holiday homes built on land ed. The violence apparently Communist Party of India they owned before Turkey’s broke out after an argument (Marxist) and chief minister of 1974 invasion of the north. That between Muslim and Chris- the Indian state of West Bengal could upset talks between tian neighbours over rebuild- from 1977-2000, died, aged 95. Greek- and Turkish-Cypriots ing homes destroyed in previ- Tens of thousands of people, aimed at unifying the island. A Republican won a special ous clashes. including most of India’s election for Ted Kennedy’s old leading politicians, attended Mehmet Ali Agca was re- Senate seat in Massachusetts. Riots erupted in Kenya’s capi- his funeral procession in leased from prison in Turkey Scott Brown’s victory, in a state tal, Nairobi, after the govern- Kolkata. after serving 29 years. Mr Agca that has not elected a Repub- ment said it would deport a shot Pope John Paul II in St lican senator for Congress Jamaican Muslim accused of A vote in Hong Kong’s Peter’s Square in 1981. since 1972, was a huge upset for extremism. Many of the rioters Legislative Council to approve the Democrats and came after were Kenyan Muslims, espe- funds for a high-speed rail-link A strike at the Belgian head- Barack Obama had thrown his cially Somalis, who say the with China prompted raucous quarters of Anheuser-Busch full weight behind the Demo- government discriminates protests. InBev led to a shortage of its cratic candidate in an eort to against them. The police raid- beer in Belgium. Belgians, a get out the vote. The Demo- ed a Nairobi suburb populated In a verdict condemned by big beer-drinking nation, were cratic defeat was widely inter- largely by Somalis and arrest- human-rights groups abroad, a urged to quench their thirst preted as a repudiation by ed scores of them for allegedly court in Vietnam convicted with some of the estimated independent voters of many being in Kenya illegally. four activists of trying to over- 8,000 other brews on oer. 1

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 The world this week 9

billion in TARP money. Its In the latest bankruptcy by a Business annual net prot of $12.3 bil- GDP big newspaper publisher, the lion was a record for the com- % change on previous year holding company for Media- World Developing Kraft Foods won a four- pany, which took over Wacho- countries News said it planned to le for month battle for Cadbury via in 2008. Rich countries Chapter 11in a prepackaged 6 after substantially raising its 4 agreement with creditors. The oer for the venerable British In the hangar 2 group’s many titles include the + confectioner, to £11.9 billion Japan Airlines led for bank- 0 Denver Post, San Jose Mercury – ($19.4 billion). The American ruptcy protection as expected, 2 News, Oakland Tribune and food giant’s pursuit of Cad- one of the biggest corporate 4 Salt Lake Tribune. Some of its † † bury led to a debate in Britain failures in Japan. Under a 2009* 10 11 local papers will probably be Source: World Bank *Estimate †Forecast about the demise of manufac- three-year, state-backed re- combined as a result of the turing. The business secretary structuring, the carrier will The World Bank’s annual restructuring. Separately, the said he hoped Kraft would shed a third of its sta, cut 31 Global Economic Prospects New York Times conrmed continue to make perfectly routes (domestic and interna- warned that it would take that it would limit free access formed Creme Eggs in Britain. tional) and retire its eet of many years for economies to its website from the start of fuel-thirsty Boeing 747-400s. and jobs to be rebuilt. But it next year. Warren Buett, who holds a also predicted a steady in- 9% stake in Kraft, insisted the The European Union’s compe- crease in world trade volumes; Hacked o company had done a bad tition regulator gave its uncon- after contracting by 14.4% last There were more repercus- deal. After complaints about ditional approval to Oracle’s year, they are set to expand by sions from Google’s threat to undermining shareholder takeover of Sun Microsys- 4.3% this year and 6.2% in 2011. pull out of China because of value, Kraft reduced the num- tems. The acquisition, an- Meanwhile, China conrmed cyber-attacks. Yahoo! said it ber of new shares it might nounced last April, was held that its economy was roaring was aligned with the deci- issue as part of the deal from up as the regulator investigat- ahead, growing by 10.7% in the sion, though Alibaba, its Chi- 370m to 265m. Mr Buett ed the implications of Oracle fourth quarter of 2009 from a nese partner, called this reck- thinks this is still very expen- gaining control of MySQL, the year earlier. less given the lack of facts. sive currency to acquire leading open-source database. Microsoft rushed to release an Cadbury, but as the amount of An ocial in Dubai divulged upgrade to its Internet Explorer new stock is less than 20% of After several bruising quarters, that Abu Dhabi’s bail-out of after some governments existing capital, Kraft no longer Intel reported that net prot Dubai World, a state-backed blamed it for making the at- needs shareholder approval. surged in the last three months conglomerate saddled with tacks possible. Meanwhile of 2009; revenue was also up. debt, was actually only half Baidu, China’s biggest search Number crunching The chipmaker’s gross prot the headline amount of $10 engine, led a lawsuit against As the Obama administration margin of 64.7% was its highest billion, as this included a its domain registrar in the prepared to announce propos- ever, conrming the com- previous commitment of $5 United States, blaming it for an als that would limit the size of pany’s success in reducing billion in credit. The $10 billion attack on its home-page by the nancial companies that are costs. IBM also beneted from gure soothed markets in Iranian Cyber Army. too big to fail, America’s big cutting costs; its revenue hard- December. This week’s news banks reported their earnings. ly grew, though prot was up brought more gripes about the Other economic data and news Bank of America made a by 8.7% from a year earlier. opacity of the rescue. can be found on Pages 89-90 headline net loss of $194m in the fourth quarter, although this increased to a $5.2 billion loss after including the eects of repaying aid received under the Troubled Asset Relief Programme (TARP). In a sign that its consumer-loan portfolio is still struggling, BofA raised its provision for credit losses to $10.1billion in the quarter from a year earlier. Net write-downs for the year doubled, to $33.7 billion.

Citigroup went back into the red, reporting a $1.4 billion net loss (which increased to $7.6 billion once repayments of bail-out money were accounted for). Citi’s loss for the whole year was $1.6 billion, compared with $28 billion in 2008.

Wells Fargo managed to make a quarterly prot, of $2.8 billion, even though it repaid $25

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The size and power of the state is growing, and discontent is on the rise N THE aftermath of the Senate Conservatives tend to blame the growing thicket of rules on Ielection in Massachusetts, the unwanted supranational bodies, such as the European Union, focus of attention is inevitably and on the ever growing industry of public-sector busybodies on what it means for Barack who supervise matters like diversity and health and safety. Obama. The impact on the They have a point. But voters, including right-wing ones, often Democratic president of the loss demand more state intrusion: witness the wars on terror of the late Ted Kennedy’s seat to and drugs, or the spread of CCTV cameras. Mr Bush added an the Republicans will, no doubt, average of 1,000 pages of federal regulations each year he was be signicant (see next leader). Yet the result could be remem- in oce. America now has a quarter of a million people devis- bered as a message more profound than the disparate mutter- ing and implementing federal rules. ings of a grumpy electorate that has lost faith in its leaderas a Globalisation, far from whittling away the state, has often growl of hostility to the rising power of the state. ended up boosting it. Greater job insecurity among the voting America’s most vibrant political force at the moment is the middle classes has increased demand for safety nets. Con- anti-tax tea-party movement. Even in leftish Massachusetts fronted by global market failures, such as climate change, vot- people are worried that Mr Obama’s spending splurge, nota- ers have demanded a public response. And the emergence of bly his still-unpassed health-care bill, will send the decit soar- new economic powers, especially China, has given fresh re- ing. In Britain, where elections are usually spending competi- spectability to the old notion of state capitalism: more and tions, the contest this year will be fought about where to cut. more of the world’s biggest companies are state-owned, and Even in regions as historically statist as Scandinavia and more and more of its biggest investors are now sovereign- southern Europe debates are beginning to emerge about the wealth funds. size and eectiveness of government. There are good reasons, as well as bad ones, why the state is What should be done? growing; but the trend must be reversed. Doing so will prove Many diculties present themselves to those who would re- exceedingly hardnot least because the bigger and more pow- form the state. One is the danger posed by the fragility of the erful the state gets, the more it tends to grow. But electorates, as world economy. Government stimulus may still be needed to in Massachusetts, eventually revolt; and such expressions of ward o a new slump. But even in the most vulnerable coun- voters’ fury are likely to shape politics in the years to come. tries, governments need to be planning for withdrawal. A further danger consists in equating smaller with bet- How it grew and grew ter. As the horrors in Haiti demonstrate, countries need a state The immediate reason for the rise of the state is the nancial of a certain size to work at all; and more government can be crisis. Governments have spent trillions propping up banks good. The Economist, for instance, is relieved that politicians and staving o depression. In some countries they now play a stepped in to bail out the banks, since the risks of tumbling into large role in the nancial sector; and thanks to bail-outs, stimu- a depression were large. This newspaper also supported Mr lus and recession, the proportion of GDP made up by state Obama in 2008 in part because he wanted to extend health- spending and public decits has rocketed. care coverage. But the rise of Leviathan is a much longer and broader story How much a state spends often matters less than how it (see page 23-26). Long before AIG and Northern Rock ended up spends. Systems in which the state pays and the private sector in state custody, government had been growing rapidly. That provides often work well. Scandinavia’s schools are expen- was especially true in Britain and America, the two countries sive, but they are by and large more ecient than their Anglo- in which the end of big government had been declared in Saxon peers. Much of France’s health care is paid for by the the 1990s. George Bush pushed up spending more than any state but supplied by private hospitals. president since Lyndon Johnson. Britain’s initially frugal La- Even where big change is clearly needed, the history of re- bour government went on a splurge: the state’s share of GDP inventing government shows it is not easy. The quick xes, has risen from 37% in 2000 to 48% in 2008 to 52% now. In such as privatising national telecoms rms, have been done. swathes of northern Britain the state now accounts for a bigger Fortunes have been spent on management consultants in the share of the economy than it did in communist countries in public sector, without much to show for it (see page 65). In 1978 the old eastern bloc. The change has been less dramatic in con- another American state shocked the world by rejecting big tinental Europe, but in most of those countries the state al- government: California’s tax-cutting Proposition 13 paved the ready made up around half of the economy. way for Reaganism, but direct democracy has ended up mak- Demography is set to push state spending up further. Age- ing the Golden State’s government worse. ing populations will consume ever more public health care In these circumstances, hard rules make little sense. But and ever bigger pensions. Unless somebody takes an axe to prejudices are still usefuland this newspaper’s prejudice is to them, entitlements will consume a fth of America’s GDP in 15 look for ways to make the state smaller. That is partly for philo- years, compared with 9% now. sophical reasons: we prefer to give power to individuals, rath- Rising government spending is not the only manifestation er than to governments. But pragmatism also comes into it: of growing state power. The spread of regulation is another. there is so much pressure on the state to grow (bureaucrats 1

www.storemags.com & www.fantamag.com 12 Leaders The Economist January 23rd 2010

2 building empires, politicians buying votes, public-sector tor ones. Public-sector pensions are far too generous, in com- workers voting for governments that promise bigger budgets parison with shrunken private-sector ones. Entitlements can for the public sector) that merely limiting the state to its current be cut back, most obviously by raising pensionable ages. And size means nding cuts. the world might well be a greener, more prosperous place if And cuts can be found. In the corporate world, slimming a the West’s various agricultural departments disappeared. workforce by a tenth is standard fare. There’s no reason why The Economist will return to these areas in coming months. governments should not do that too, when it’s needed. Swe- All raise dierent issues; and dierent countries may need to den and Canada managed it, and remained pleasant countries deal with them in dierent ways. But one large general point with eective public services. Public-sector pay can be cut, giv- links them: a great battle about the state is brewing. And, as in en how secure jobs are: in both America and Britain public- another inuential revolution, the rst shot may have been sector workers are on average now paid more than private-sec- heard in Massachusetts. 7

The Massachusetts election The man who fell to earth

After the Democrats’ stunning loss, Barack Obama has no choice but to move back to the centre OLITICAL upsets don’t get The problem is that the other big theme of his speech will Pmuch more embarrassing have to be jobs. Though the economy is technically out of re- than the one delivered by the cession, it does not feel that way to a lot of voters. Unemploy- voters of Massachusetts on Jan- ment is stuck at 10%; and if you add to that the number of peo- uary 19th, just in time to ruin Ba- ple who are working part-time because they cannot get a rack Obama’s rst anniversary full-time job, as well as those who have simply given up look- in the White House. To lose, on a ing, you reach a gure of around 17%. The proportion of long- 43-point swing, a Senate seat term unemployed is at its highest since the government started that has been in Democratic hands since 1953 takes some do- collecting the statistic in 1948. The terrible fear is that the recov- ing, even in the teeth of the worst recession since the 1930s (see ery will be long, slow and jobless. The greatest challenge he page 27). Nor has it come in isolation; last November the now faces is explaining how he plans to tackle these problems Democrats managed to lose the governor’s race in supposedly without inating the decit even more than he already has. rock-solid New Jersey, as well as the one in Virginia, the state that symbolised the breadth of Mr Obama’s appeal in the Time for a rethink 2008 election. A succession of Democratic senators and repre- One thing, though, is clear. The brief era in which the Demo- sentatives have decided to retire rather than face the voters in crats felt they could push through anything they wanted, cour- this year’s mid-terms. tesy of their thumping majorities in the House and the Senate Mr Obama’s popularity has fallen faster than that of any and their occupancy of the White House, is over. Once Scott post-war president bar Gerald Ford. Independents are running Brown is seated in the Senate, Mr Obama will lose his super- from him as fast as their legs will carry them: in Massachusetts majority there, so a determined opposition (which this one they voted Republican by almost three to one. Mr Obama’s certainly seems to be) will be able to block anything it wants personal intervention there was as ineectual as his two for- to. Making deals with the Republicans once again becomes a ays to Copenhagen. His agenda has been dealt a mighty blow. necessity, not a luxury. That should not be a disaster; most So where does he go from here? presidents have to govern with far fewer than 60 Senate votes. Diagnosing what is going wrong is easier than guring out It is not obvious, though, that the Olympian Mr Obama how to x it, because voters’ concerns are contradictory. Clear- knows how to do this, despite all his ne words along the cam- ly Mr Obama’s health-care proposals are one problem. Most paign trail about a new politics. What he now has to under- voters are happy with their health coverage, and are not in a stand is that he is in a weak position: he needs the Republicans mood to pay more in taxes or see their benets restricted in or- more than they need him. To get what he wants, he will have der to help out the disadvantaged minority; and the bill that to learn to give them much more of what they want. For in- has now been thrown into confusion (see page 28), with its stance, he could now oer the Republicans tort reform and many aws and shady giveaways, is a much harder sell than it genuine cost-control to bring them on board for a slimmed- should have been. A bigger problem, connected to the rst, is down health bill: that might be an oer they could not refuse. the exploding government decit, which an expensive health- Likewise, any hope of getting a climate-change bill through reform plan only makes worse. Hence the spectacular rise of Congress will probably have to involve more nuclear power. the tea-party movement, an alliance of ordinary people Bill Clinton grasped all this after the disaster of 1994, when who are spooked by the huge amount of debt that is being the Republicans took back Congress; the result was a stream of racked up on Mr Obama’s watch. For Democrats to deride good laws that outraged many leftish Democrats, from welfare such people as tea-baggers, a term referring to a sexual prac- reform to free-trade deals to decit-reduction. Mr Clinton won tice involving testicles, is political stupidity of a high order. In- an easy re-election and his presidency, despite his own best ef- stead, Mr Obama urgently needs to make decit-reduction forts to destroy it, was a pretty successful one. Mr Obama, who one of the dominant themes of his ghtback. He can do so in is now faced with the possibility of a similar electoral catastro- his state-of-the-union message on January 27th. phe, needs to copy the great triangulator. 7

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 Leaders 13

Sri Lanka’s presidential election Between a rock and a hard man

Both candidates are ignoring what should be their priority: national reconciliation HE presidential election in His government is widely seen as high-handed, corrupt and TSri Lanka on January 26th crudely nepotistic. Gotabaya, the defence secretary, is just one should have been a cakewalk of three well-placed brothers. A legion of other members of for the incumbent. Last May, what Sri Lankans have taken to calling the royal family have when his government defeated also thrived. Although the economy is well-placed to bounce the Liberation Tigers of Tamil back from a slowdown this year, rising prices and mismanage- Eelam, bringing an end to a ment in health and education have made the government bloody 26-year insurgency, Pres- look inept. So has its clumsy handling of relations with the EU, ident Mahinda Rajapaksa’s popularity among the island’s Sin- where it is poised to lose valuable trade privileges and thus halese majority knew no bounds. As for the Tamil minority, thousands of jobs in the garment industry. thwarted of the independent homeland for which the Tigers All of this has helped forge an extraordinary coalition be- had been ghting, it was, at just 12% of the 21m population, too hind Mr Fonseka. It includes the mainstream opposition, the small to sway an election. Yet, as an ugly and at times violent Janatha Vimukthi Peramuna, or JVP, which espouses an im- election season nears its end, the outcome is now on a knife- probable amalgam of Sinhalese chauvinism and Marxism, edge. Despite the advantages of incumbencysuch as fawning and the Tamil National Alliance (TNA), once seen as a front for state-controlled mediathe main challenger, Sarath Fonseka, the Tigers. What unites these groups is a hatred for the Raja- might yet sneak home. Whoever wins, the prospects for a de- paksas even deeper than the one they hold for each other. cent settlement for the Tamils, most of whom shunned the Ti- gers but nurture legitimate grievances, seem remote. Casting votes going cheap The danger to Mr Rajapaksa does not stem from Sinhalese In a close race, Tamil votes are vital. Just as the Tigers won the voters’ sympathy for foreign criticism of him. The ruthlessness 2005 election for Mr Rajapaksa, by enforcing a boycott of the with which his government prosecuted the nal stages of the polls in areas they controlled, so Tamil voters could now un- war, and then interned some 300,000 Tamils for months, seat him. But neither candidate has oered a proper power- alienated many in the West. But the then General Fonseka led sharing deal to Tamils in the north and east, where most of the army that committed the alleged war crimes. He was the them live. Tamils have little reason to expect their lives to im- architect of a plan for ensuring peace by hugely boosting the prove under Mr Fonseka. Even as a serving soldier, he ven- size of the army after the war. And Mr Fonseka’s biggest mis- tured that Sri Lanka is a Sinhala Buddhist country. He said take as a candidate may have been to appear disloyal to his minorities should not make unreasonable demands. own soldiers by accusing the defence secretary (who happens Tamil demands for equality and for a real devolution of to be the president’s brother) of having ordered extra-judicial power in the north and east are far from unreasonable. They killings (before withdrawing the accusation). are also in the interests of the Sinhalese majority. If Sri Lanka’s No, Mr Rajapaksa is under threat because Mr Fonseka, by next president wants to rule a stable and prosperous country, his very presence, trumps his best card, that of the conquering his rst priority should be to take steps to turn military victory hero. And without that card, Mr Rajapaksa’s hand looks weak. into a political settlement that ensures lasting peace. 7

After the earthquake A plan for Haiti

Haiti’s government cannot rebuild the country. A temporary authority needs to be set up to do it ORE than a week after the around nearly $1billion. Mearth convulsed beneath The urgent task is to connect this supply of help with the de- it, Haiti has still to plumb the mand. That is proving extraordinarily hard (see page 35). Seven depths of suering and want. days after the earthquake, the United Nations had got food to The numbers are still only more- only 200,000 people. Lessons from other disasters are not al- or-less informed guesses, but ways relevant to Haiti. The Asian tsunami, for example, struck their magnitude is grim: per- a ribbon of remote, mainly rural, areas. The governments of haps 200,000 killed, 250,000 the aected nations could lead the relief eort. But Haiti’s insti- more injured and some 3m in desperate need of help. The gen- tutions were weak even before the disaster. Because the quake erosity of the world’s response has also been profound. Barack devastated the capital, both the government and the UN, Obama led the way, dispatching 16,000 American troops and which has been trying to build a state in Haiti since 2004, were marines, but others, from Europe to Brazil, Cuba, China and Is- decapitated, losing buildings and essential sta. So did many rael, responded too. Immediate promises of aid added up to NGOs. The president, René Préval, and his cabinet have been 1

www.storemags.com & www.fantamag.com 14 Leaders The Economist January 23rd 2010

2 reduced to meeting in a police station. around the capital will be hard to shift. Even before the earth- Into that vacuum stepped the United States. Inevitably the quake Haiti was poor, environmentally degraded and aid-de- dispatch of marines, Black Hawks and an aircraft-carrier pendent and had few basic services. This means that building looked to some like an invasion (after all, they have been there back better must be more than just a slogan. It also means that before). A brief caricature of great-power prickliness ensued time is short before the world’s generosity turns to cynicism. as the Americans took charge of the airport and seemed to Fortunately there is a blueprint, drawn up by Haiti’s gov- some others to give priority to their own ights. But by mid- ernment and presented to donors last year. It calls for invest- week the airport was receiving three times as many ights as it ment to be targeted on infrastructure, basic services and com- did before the earthquake. The American forces are well- bating soil erosion to make farmers more productive and the equipped for the vital task of setting up a supply chain for aid. country less vulnerable to hurricanes. The pressing question is That is what they are doing under a sensible division of labour who should do it and how. Haiti’s government is in no posi- eventually hammered out (the Brazilian-led UN peacekeeping tion to take charge, yet the country needs a strong government force remains in charge of security, and the UN will co-ordi- to put it to rights. Paul Collier, a development economist who nate the aid eort). Certainly most ordinary Haitians seemed worked on the plan, reckons that the answer is to set up a tem- pleased to see the Americans. porary development authority with wide powers to act. They are just desperate for water, food, fuel, medicines and Given the local vacuum of power, this is the best idea shelter. Contrary to some reports, there were only isolated around. The authority should be set up under the auspices of cases of looting and ghting. But delay and disarray has cost the UN or of an ad hoc group (the United States, Canada, the many lives. The longer it lasts, the more likely that desperation European Union and Brazil, for example). It should be led by a turns to violence. The UN called for more peacekeepers. Brazil suitable outsider (Bill Clinton, who is the UN’s special envoy oered 800; it may take weeks to muster the rest. If ever a situa- for Haiti, would be ideal, perhaps to be followed by Brazil’s tion cried out for the UN to have a standing army at its dispo- Lula after he steps down as president in a year’s time) and a sal, as The Economist has urged, this is it. prominent Haitian, such as the prime minister. To provide services, it should work with aid groups. From relief to building a better country Some will object that this would undermine a democrati- Amid such chaos, it might seem premature to think about a cally elected government. But there is not much left to under- long-term strategy for rebuilding Haiti. Actually, it is vital. Al- mine. Done well, it could create a state in Haiti able to do more ready Haitians’ resilient response to disaster is creating new than preside over chaos and corruption. Otherwise the suer- facts on unstable ground: the spontaneous refugee camps ing of the past ten days risks being repeated. 7

Reforming banks The weakest links

New capital and liquidity rules will make the average bank safer. But what about the outliers? T IS bonus season again. Bank- as big as its GDP, taxpayers in most rich countries are under- Banks’ equity ers get bashed and govern- writing systems several times larger than their economies, and % of assets I 20 ments invent ways to tax them, it is unclear whether tiny Iceland will honour its commit- United States 15 most recently Barack Obama’s ments. The guarantee is also dangerous. As any capitalist 10 plan to charge banks an annual knows, rms with subsidised funding and no risk of failure 5 Britain insurance fee. Amid all the ran- usually misallocate capital and can be dysfunctional, as the 0 cour (see page 70), some say it is mortgage agencies Fannie Mae and Freddie Mac demonstrate. 1900 20 40 60 80 2005 important to regain a sense of The Basel club is making a decent st of rewriting its rules perspective. Banks have been bailed out throughout history. on capital and liquidity, forcing the banks to operate with larg- People hate it, but they would hate the devastation that a col- er safety buers. But regulators must be brutally honest about lapse would bring even more. Besides, nance’s wild-west era what these reforms will achieve. The banking system is only is over. The Basel club of regulators is tightening its rules and as strong as its weakest links, and even the new, bigger buers there is talk of new curbs on proprietary trading. would not have been enough to prevent the worst blow-ups Problem solved, then? Unfortunately not. The pact be- of the past two years (see page 66). That is understandable: tween society and banks has changed dramatically over the banks’ capital would need to double to deal with the risk that years. Once, banks got liquidity support from a lender of last they might be the next Merrill Lynch or UBS. Passing the cost of resort. In the 20th century they got state-backed deposit-guar- that on to customers could hurt the economy. antee schemes. And now they enjoy an implicit blanket guar- If the state is thus doomed to bail out tomorrow’s basket antee of all their liabilities, allowing them to borrow cheaply. cases, it should charge for the guarantee banks get. One option, All this has let the industry operate with smaller safety buers which Mr Obama has proposed and which this newspaper than in the past, and balloon in size. Relative to the size of the has supported, is a liability levy on banks’ debt to recoup the economy, Britain’s banks are ten times larger than in 1970. subsidy they get from articially low borrowing costs. Banks That blanket guarantee is unfair. Some of the subsidy is already pay a similar levy on their insured deposits; a liability passed on to banks’ customers, but much goes to their sta. It levy would hit investment banks, too. It should help to rein in may be unsustainable: the assets of America’s banks are now bonuses somewhat, and could fund a bail-out kitty. Such a 1

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 Leaders 15

2 levy addresses some of the problems that arise from the blan- tors and counterparties will run if intervention seems likely. It ket guarantee, but in the long run it would be best to withdraw needs absolute authority to impose losses, but over only part it. That will not be easy. Banks’ creditors must suer losses if of a bank’s balance-sheet. This would require banks to ring- taxpayers are to avoid bail-outs. Yet if all creditors and counter- fence the bits worth saving (such as retail deposits), or force parties fear loss, they will run from a weak bank, creating a them to carry debt that gets a mandatory haircut if the state self-fullling prophecy. What is needed is a way to create the has to step in. All big banks would have an implicit guarantee, halfway house of partial bankruptcy. but it would not cover their entire balance-sheets. It is all too easy to pretend that new capital and liquidity Building a half-way house buers will be enough to prevent the need for future bail-outs, One option is for banks to issue so-called Coco bonds that but it is unlikely to be the case. Devising a way to impose con- convert into equity if capital gets too low, although no one real- trolled losses on failed banks’ creditors, and convincing mar- ly knows how such instruments would behave in a crisis. An- kets that it really will be used next time there is a crisis, will be other is to give a resolution agency powers to deal with bad dicult. But anyone with a sense of perspective can only con- banks. This agency cannot be just a gloried contingency plan- clude that public backing of nance has reached unacceptable ner, but it cannot be a despot either, otherwise terried credi- levels. Solving that problem must be regulators’ priority. 7

Ukraine’s presidential election An orange and two lemons

Whoever ends up leading Ukraine needs encouragement from the European Union EMEMBER the excitement of Many in Moscow prefer Ms Tymoshenko, who now has Ra snowy Kiev ve years ago, good relations with Vladimir Putin, Russia’s strongman prime with tent-dwelling protesters minister. Mr Putin’s former champion, Mr Yanukovich, is no rhythmically chanting Yush- longer seen as a Russian patsyindeed, many in the West now chen-ko? Revolutions often dis- favour him. But he remains unapologetic about his attempt to appoint, and Ukraine’s orange steal the election in 2004. He has a thuggish history, including revolution has proved no excep- two criminal convictions. And he shows no sign of having the tion. Indeed, many people (not intellectual or political nous a successful president needs. Ms least in Moscow) see the presidential election on January 17th, Tymoshenko has negatives too: a murky past in the gas indus- when the incumbent Viktor Yushchenko won barely 5.5% of try, populist instincts that have damaged her prime minister- the vote, as the depressing end of the aair. ship and a worrying lack of scruples. Yet she is an abler politi- That would go too far. It is true that the front-runner in the cian who has some grasp of the pressing case for reform. run-o on February 7th is the Russian-backed villain of Neither candidate is convincing; both have serious defects; but 2004-05, Viktor Yanukovich (pictured left). And his rival, Yulia on balance she is a better choice. Tymoshenko (on the right), then a leading light in the orange camp and now prime minister, has become Mr Yushchenko’s A helping hand from Brussels sworn enemy. Yet the election campaign has been fair and the Ukraine matters to Europe. It has 46m people. It lies between nal outcome is too close to callboth of which reect well on the European Union and Russia. Critical pipelines run across the orange revolution’s legacy. Unlike Russia, Ukraine now has it. And its future direction will inuence the entire post-Soviet genuine political competion and a broadly free media. And it space. Western support for the orange revolution in 2004-05 has become a lot more independent from the bear next door, was not just about backing democracy; it was also about even in Mr Yanukovich’s base in the Russian-speaking east. checking Russian irredentism. So how should the West deal Even so Ukrainian voters are right to feel let down by their with Ukraine under a new president, whoever it is? leaders (see page 47). Mr Yushchenko was not a good presi- One idea favoured by the Americans when Mr Yushchenko dent. Under him the political system was dysfunctional and was in oce was to bring Ukraine into NATO. But that looks a some cronies turned out to be almost as corrupt as any prede- blind alley today, not so much because Russia is ercely cessor. Too many businessmen are sheltered from competi- against it (although it is) as because most Ukrainians do not tion. Partly thanks to such failings, the economy has tanked, want it. They are, however, a bit keener on the EUwhich both with GDP shrinking in 2009 by more than in any other big candidates say they hope to move towards. European country. Ukraine has also slipped down the global Any thought of EU membership for an unreconstructed rankings for economic freedom. Ukraine must be years o. The criteria for joininga function- The tasks facing a new president are thus immense. They ing democracy and market economy, the ability to apply the include strengthening the country’s institutions and getting EU’s rules, strong independent institutions, the rule of law the government to function properly; working with the IMF to must be rigorously observed, as they have not always been for restore Ukraine’s nancial credibility; and fostering more other candidates. Experience in eastern Europe suggests that a open competition, greater business transparency and less cor- good way to entice a country on to the path to liberal democra- ruption. The new president must also work more harmoni- cy and a free-market economy is to oer the prospect, even if ously with the Russians than Mr Yushchenko, but without distant, of EU membership. It might not work as easily with conceding them any special inuence. Ukraine. But Brussels should be prepared to try it. 7

www.storemags.com & www.fantamag.com 16 Letters The Economist January 23rd 2010

SIR Socrates most certainly Pakistan’s regions America’s victory in the group that buys houses, is second world war; I said, shrinking in both Germany did not shun his civic or jury SIR The notion that rather, that it was a key compo- and Japan. duty. In fact, he played a Pakistan’s President Asif nent of its decisive productive Who would want to buy a prominent role in the trial of Zardari is whipping up sub- superiority. house knowing that within a the century, the prosecution of nationalist sentiment by Moreover, the erroneous decade the pool of potential the admirals who had aban- playing the Sindh card is comment that Turkey’s dis- buyers had shrunk by 9%, as doned scores of shipwrecked disproved by the actions taken puting southern neighbours will be the case in Japan by sailors after the victory at by this government (Peccavi, are in the Jordan basin is 2020? The lesson for a housing Arginusae. January 2nd). It has pursued a entirely the reviewer’s own speculator is to buy in a coun- Robert Farrell politics of national consensus insertion. Finally, while it’s try with a growing workforce. Fort Mitchell, Kentucky among all of Pakistan’s prov- true that much is made of the Richard Cragg inces and taken action to forge steam engine in my book for London Wanna bet? an understanding between its pivotal inuence in history, I SIR You stated in bold terms them, which is unprecedented am not alone in thinking so. Rigorous philosophy in the history of Pakistan. A The steam engine was singled that the betting is that 2010 new vitality has been injected out as one of the most impor- SIR Your essay on Socrates will be the hottest year on into the federation by address- tant inventions of the millen- was an interesting eort to link record (No hiding place?, ing the grievances of smaller nium in a special issue of The the Athenian philosopher to January 9th). According to the provinces when allocating Economist (Pued up, our time (Arguing to death, recent odds at Intrade, an national nances and December 31st 1999). December 19th). But the claim online betting site, the implied resources. Steven Solomon that Socrates contended that probability of this occurring Take the package given to Washington, DC virtue can be taught is not would be just 22.5%. Market Baluchistan and the amnesty supported by the text in Plato’s odds are among the most reliable predictors of future to political dissidents, which Bankers pay their way Meno. Although Socrates address long-held complaints and his interlocutor probed events. by making a sincere eort, for SIR Regarding new levies on whether virtue could be This is not to say that your the rst time, to listen to the bank bonuses, you argue that taught, the conclusion reached, statement is false, but just to people of Baluchistan with it is fair for the taxpayer to claw in the last paragraph, is that it note that enormous wagers on sympathy. President Zardari back the huge subsidy that all cannot, since all eorts at higher global temperatures are has tendered an apology to the banks have enjoyed (The dening it failed, and that it being made. Governments are Baluch people for past in- real windfall, December 19th). was instead a divine gift. pledging trillions of dollars of justices. Similarly, the rights of Did this subsidy come, per- Hermann Cloeren taxpayers’ money to the pro- the people of Gilgit and Balti- haps, from the 20-27% of all Professor emeritus of philosophy blem and scientists and stan have been recognised and corporation-tax receipts that College of the Holy Cross bureaucrats as well as The they have been given the nancial companies paid in Worcester, Massachusetts Economist have bet their cred- status of a province. the decade before the crisis ibility on a rapid resumption President Zardari’s political (Foul-weather friends, De- SIR Contrary to your claim, of warming. party shares power in cember 19th)? Or was this Socrates denitely would not Chris Riley coalition with all the major subsidy drawn partly from the recognise Karl Rove, David Seattle parties of Pakistan at the longstanding 45% tax on bank- Axelrod, Sean Hannity and provincial as well as federal ers’ bonuses, which has risen Keith Olbermann as akin to Kinky Kindles level. He has taken steps to to 77.5% this year? the sophists, his intellectual ensure the local units are Regarding the suering opponents. Socrates and Plato SIR One of your readers legitimate partners in the taxpayer, are you referring, were deeply interested in the urged us to remember the federation. by chance, to the top 10% of ideas of sophists such as lesson of Betamax video Syeda Sultana Rizvi income-earners, who pay 70% Protagoras and Gorgias when considering which Press counsellor of the total income-tax bur- because their ideas were e-book reader to buy (Letters, Pakistan high commission den? Maybe the banks and profound. They have indeed January 9th). One of the fac- London their employees are simply been inuential, drawing the tors in the demise of Betamax clawing back a small fraction attention and even admiration was the availability of porno- graphic movies on VHS. Waterways of the huge taxes they have down the ages of philosophers paid all these years. as diverse as Hegel, I bought a Kindle. Perhaps I SIR I’d like to correct some Stephen Mooney Kierkegaard and Nietzsche. should have waited to see on errors made in your review of London Stanley Fish, a literary which e-book reader Hugh my book on the history of theorist, has suggested that the Hefner and Larry Flynt choose to distribute their magazines. water (Through the aqueous A buyers’ market entire history of Western humour, January 2nd). It is thought could be written as a Gabriel Nell simply false that I ever claimed SIR Your measure for assess- history of the debate between Seattle 7 that the Roman empire fell ing the fair value of housing Socrates and the sophists, apart because it lacked the missed a vital dimension namely that between philoso- unifying impetus of an demographics (Ratio rentals, phy and rhetoric. I’ll make a Letters are welcome and should be inland waterwaycontrol over January 2nd). The rise in Brit- modest prediction that the addressed to the Editor at The Economist, 25 St James’s Street, the Mediterranean sea-lanes ish house prices between 2003 ideas of Messrs Rove, Axelrod, London sw1A 1hg was always Rome’s key water- and 2007 was given an extra Hannity and Olbermann will E-mail: [email protected] way challenge. Nor did I claim boost from east European not prove so enduring. Fax: 020 7839 4092 that hydroelectric power alone immigration. By contrast, the Hans-Peder Hanson More letters are available at: Economist.com/letters played a ‘decisive role’ in working-age population, the Los Alamos, New Mexico

www.storemags.com & www.fantamag.com Online

Women She’s got it made

Our debate ponders the assertion that women in the rich world have never had it so good OMEN today enjoy opportunities to not so sure. She suggests that the you’ve Wmake a living and shape their lives never had it so good argument has long that their predecessors could only dream been used as a smokescreen by those who about. In the developed world, at least, would avoid or deny society’s most intrac- they are signicantly better o in terms of table problems. For women, she says, it is careers, incomes and social mores than tantamount to being told to sit down and they were just a few decades ago. That is shut up. Ms O’Neill also takes issue with the argument of Richard Donkin, a com- the debate’s focus on women in richer mentator on the world of work, who de- countries. She asks whether the motion ig- fends the motion in our online debate. nores women in the developing world be- However, he is prepared to concede that cause, in her view, their lot clearly contin- despite improvements the lot of women ues to be dire. 7 could be much better yet. Terry O’Neill, the president of Ameri- Add to the cut and thrust at: ca’s National Organisation of Women, is Economist.com/debate

Other highlights

Happier landings An expandable honeycomb cushion designed to absorb the impact of a space module’s landing could be used to soften the blow of a helicopter crash Economist.com/technologymonitor

The mild west In three weeks the Winter Olympics begin in Vancouver. An audio guide tells visitors what to expect of this diverse city, which looks across the Pacic both On the road Barack Obama pledged to seek geographically and culturally a new era of international co-operation Economist.com/audiovideo/doingbusiness during his presidential campaign. He has developed that theme during his rst year in Haitian concerns European politicians are oce, spending 42 days abroad, more than fretting about the EU’s invisibility on the any previous president. Franklin Roosevelt ground in Haiti. After all, if Hillary Clinton got only as far as Canada in his rst 12 can get there, why can’t Catherine Ashton, monthsand that was for a holiday Europe’s new foreign-policy chief? Economist.com/dailychart Economist.com/blogs/charlemagne

A wealth of content is free online. Subscribers to The Economist can search back 12 years by going to: Economist.com/activate

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The Economist January 23rd 2010

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The Economist January 23rd 2010

www.storemags.com & www.fantamag.com 20 Executive Focus

The Economist January 23rd 2010

www.storemags.com & www.fantamag.com Executive Focus 21

he Education For Employment Foundation (EFE) creates Topportunities through education and jobs for youth in the Middle East and North Africa (MENA). Our two fundamental beliefs are that every individual should have an opportunity to create a better life, and that jobs anchor peace. EFE invests in true partnerships and local capacity by incubating indigenous foundations that are locally Are you looking for challenging work? Do you governed and staffed. Established in 2002 as a 501(c)(3) not-for- want to contribute to Latin America and profi t organization based in Washington, D.C., EFE has created a the Caribbean? network of local not-for-profi t organizations in the MENA region You can make a difference at the Inter-American united in their mission to create market-driven, tailored training Development Bank. We are searching for four courses for unemployed youth and to place our graduates in jobs. outstanding individuals to fi ll these positions EFE targets an 85% job placement rate as we bridge the current at our Washington, D.C. headquarters: mismatch between education and employment opportunities for Senior Social Protection Specialists / Social youth. Today, EFE reaches over 1,000 youth in Egypt, Jordan, Protection Specialists and Senior Health West Bank/Gaza, Morocco and Yemen. We are in the midst of Specialists / Health Specialists major expansion to other countries and thousands of additional youth. Closing Date: Wednesday, February 03, 2010 These individuals, with an advanced degree and eight- More information on EFE is available at www.efefoundation.org, plus years of academic and/or professional experience in including an informative video and news clips the design, negotiation, administration and evaluation under “News and Events”. of social protection programs or health and nutrition programs, will join the IDB’s Social Protection and Health he Education For Employment Foundation seeks a dynamic, Division to contribute to both the operational and the knowledge and capacity building program in Latin Texperienced CEO to lead this young, thriving foundation that America and the Caribbean. creates opportunities through education and jobs for youth Profi ciency in at least two of the Bank’s offi cial languages Íin the MENA region. (English, Spanish, French and Portuguese) is required. For a complete announcement see For full job descriptions, responsibilities and requirements please go to: www.efefoundation.org/search/ceo https://enet.iadb.org/jobs/vacancies.asp or contact us at [email protected].

International Oil Pollution Compensation Funds The International Oil Pollution Compensation Funds (IOPC Funds) are three intergovernmental organisations which provide compensation for pollution damage resulting from oil spills from tankers. Detailed information on the Organisations and their activities can be found on the Funds’ website www.iopcfund.org.

HEAD, EXTERNAL RELATIONS AND CONFERENCE DEPARTMENT (Vacancy N°2010-1) Applicants should have an advanced university degree in an appropriate fi eld and signifi cant relevant professional experience. Experience of working in an international context and/or background knowledge of the oil and shipping industries is essential as is signifi cant managerial experience. Profi ciency in English is required. Profi ciency in French and/or Spanish would be an advantage. There are various attractive benefi ts, including six weeks annual leave and a provident fund. Salary is paid in accordance with the United Nations scale (Grade P.5 or D.1 depending on experience).

CLAIMS MANAGER (Vacancy N°2010-2) Applicants should have a university degree in an appropriate fi eld (science, law, engineering, accounting, maritime) and signifi cant relevant professional experience. Experience of working in an international context would be an advantage as well as practical experience of dealing with maritime or oil pollution damage claims. Profi ciency in English is required. A working knowledge of French and/or Spanish would be an advantage. There are various attractive benefi ts, including six weeks annual leave and a provident fund. Salary is paid in accordance with the United Nations scale (Grade P.3 or P.4 depending on experience).

Only candidates from 1992 Fund Member States will be considered. The working languages of the IOPC Funds are English, French and Spanish. The posts are to be ﬁ lled as soon as possible. For further information on the vacancies and a copy of the IOPC Funds' Personal History Form, please visit our website www.iopcfund.org The completed IOPC Funds Personal History Form should be sent to: Human Resources Manager, Finance and Administration Dept., International Oil Pollution Compensation Funds, Portland House, Bressenden Place, London SW1E 5PN or alternatively e-mailed to: Vacancy10-01.HR@iopcfund. org (for Head, ERC) or [email protected] (for Claims Manager). The deadline for the receipt of applications is 26 February 2010.

The Economist January 23rd 2010

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INTERNATIONAL TRUSTEES

The mission of the International HIV/AIDS Alliance is to support communities to play a full and effective role in the AIDS response. Our vision is a world in which people do not die of AIDS. Since 1994, the Alliance and its partners have supported over 3,000 projects, in over 40 countries, reaching millions of people. We are recruiting three trustees for our International Secretariat based in Brighton, UK. The Trustees will lead the Alliance through its ambitious programme to help curb the epidemic and ensure universal access to comprehensive HIV services. We are looking for individuals based in Asia, Latin America/Caribbean and the UK. The Trustees will have an interest in international development issues and HIV/AIDS and a strong belief in the values of the Alliance. In addition, you will have an in-depth knowledge of one or more of the following: ﬁ nance/audit, resource mobilisation, communications and government department funding in international development. High level governance or management experience gained in a large private sector, public or charitable organisation and good communication skills in English are also essential. Personal experience of the impact of HIV/AIDS is desirable. These are unpaid appointments, but expenses to twice-yearly Board meetings will be reimbursed. How to apply: For more details on this post, including Job Description and Person Speciﬁ cation, please see the Trustees section on our website at http://www.aidsalliance.org/Pagedetails.aspx?id=284 Application deadline: Noon (UK time) 8th February 2010.

The International HIV/AIDS Alliance is committed to equal opportunities and welcomes applications from appropriately qualiﬁ ed people from all sections of the community. We attach importance to the gender and geographic balance of the board of Trustees, and welcome applicants from HIV affected communities. Qualiﬁ ed people living with HIV are particularly encouraged to apply.

The Economist January 23rd 2010

www.storemags.com & www.fantamag.com Brieng The growth of the state The Economist January 23rd 2010 23

ly done most to end the era of big govern- Leviathan stirs again ment. Gordon Brown, Britain’s chancellor and later its prime minister, began his ministerial career as Mr Prudent. During La- bour’s rst three years in oce public spending fell from 40.6% of GDP to 36.6%. But then he embarked on an Old Labour The return of big government means that policymakers must grapple again with spending binge. He increased spending on some basic questions. They are now even harder to answer the National Health Service by 6% a year in IFTEEN years ago it seemed that the charge of General Motors and Chrysler, real terms and boosted spending on educa- Fgreat debate about the proper size and the British government was running high tion. During Labour’s 13 years in power role of the state had been resolved. In Brit- street banks and, across the OECD, govern- two-thirds of all the new jobs created were ain and America alike, Tony Blair and Bill ments had pledged an amount equivalent driven by the public sector, and pay has Clinton pronounced the last rites of the to 2.5% of GDP. grown faster there than in the private sec- era of big government. Privatising state- The crisis upended conventional wis- tor (see chart 2). run companies was all the rage. The Wash- dom about the relative merits of govern- In America, George Bush did not even ington consensus reigned supreme: per- ments and markets. Where government, in go through a prudent phase. He ran for of- suade governments to put on the golden Ronald Reagan’s aphorism, was once the ce believing that when somebody hurts, straitjacket, in Tom Friedman’s phrase, problem, today the default villain is the government has got to move. And he re- and prosperity would follow. market. Free-marketeers such as Alan sponded to the terrorist attacks of Septem- Today big government is back with a Greenspan, the former head of the Federal ber 11th 2001with a broad-ranging war on vengeance: not just as a brute fact, but as a Reserve, have apologised for their ideolog- terror. The result of his guns-and-butter vigorous ideology. Britain’s public spend- ical zeal. A line from Rudyard Kipling sums strategy was the biggest expansion in the ing is set to exceed 50% of GDP (see chart 1 it up best: The gods of the market tum- American state since Lyndon Johnson’s in on next page). America’s nancial capital bled, and their smooth-tongued wizards the mid-1960s. He added a huge new drug has shifted from New York to Washington, withdrew. entitlement to Medicare. He created the DC, and the government has been trying to Yet even before Lehman Brothers col- biggest new bureaucracy since the second extend its control over the health-care in- lapsed the state was on the marcheven in world war, the Department of Homeland dustry. Huge state-run companies such as Britain and America, which had supposed- Security. He expanded the federal govern-1 Gazprom and PetroChina are on the march. Nicolas Sarkozy, having run for of- ce as a French Margaret Thatcher, now argues that the main feature of the credit crisis is the return of the state, the end of the ideology of public powerlessness. The return of the state is stirring up - ery opposition as well as praise. In Ameri- ca the Republican Party’s anti-government base is more agitated than it has been at any time since the days of the Gingrich revolution in 1994. Tea-party protesters have been marching across the country with an amusing assortment of banners and but- tons: Born free, taxed to death and God only requires 10%. On January 19th Scott Brown, a Republican, captured the Massa- chusetts Senate seat long held by the late Ted Kennedy, America’s most prominent supporter of big-government liberalism. Many European countries have devoted a high proportion of their GDP to public spending for years. And many governments cannot wait to get out of their new-found business of running banks and car companies. But the past decade has clearly produced changes which, taken cu- mulatively, have put the question of the state back at the centre of political debate. The obvious reason for the change is the nancial crisis. As global markets collapsed, governments intervened on an unprecedented scale, injecting liquidity into their economies and taking over, or otherwise rescuing, banks and other companies that were judged too big to fail. A few months after Lehman Brothers had collapsed, the American government was in

www.storemags.com & www.fantamag.com 24 Brieng The growth of the state The Economist January 23rd 2010

2 ment’s control over education and stantially controlled by the state. over the states. The gap between Four state-controlled companies American public spending and have made it into the top 25 of the Canada’s has tumbled from 15 per- 2009 Forbes Global 2000 list, and centage points in 1992 to just two the number is likely to grow. Chinese percentage points today. state-controlled companies have been buying up private companies The public’s demands during the nancial crisis. Russia’s The expansion of the state in both state-controlled companies have a Britain and America met with long record of snapping up private widespread approval. The opposi- companies on the cheap. Sovereign tion Conservative Party applauded wealth funds are increasingly impor- Mr Brown’s increase in NHS spend- tant in the world’s markets. ing. Mr Bush met no signicant op- This is partly a product of the oil position from his fellow Republi- boom. Three-quarters of the world’s cans to his spending binge. It was crude-oil reserves are owned by na- clear that, when it came to their tional oil companies. (By contrast, own benets, suburban Americans conventional multinationals control wanted government on their side. just 3% of the world’s reserves and A banner at one of those tea-par- produce 10% of its oil and gas.) But it ties sums up the confused attitude is also the result of something more of many of the so-called anti-gov- fundamental: the shift in the balance ernment protesters: Keep the gov- of economic power to countries ernment’s hands o my Medicare. with a very dierent view of the The demand for public services state from the one celebrated in the will soar in the coming decades, thanks to iour of entire industries. Periodic attempts Washington consensus. The world is see- the ageing of the population. The United to build bonres of regulations have got ing the rise of a new economic hybrid Nations points out that the proportion of nowhere. Under Mr Bush the number of what might be termed state capitalism. the world’s population that is over 60 will pages of federal regulations increased by Under state capitalism, governments rise from 11% today to 22% in 2050. The situ- 7,000, and eight of Britain’s ten biggest reg- do not so much reject the market as use it ation is especially dire in the developed ulatory bodies were set up under the cur- as an instrument of state power. They en- world: in 2050 one in three people in the rent government. courage companies to take advantage of rich world will be pensioners, and one in The power of these regulators is grow- global capital markets and venture abroad ten will be over 80. In America more than ing all the time. Policymakers are drawing in search of opportunities. Malaysia’s Pe- 10,000 baby-boomers will become eligible up new rules on everything from the tronas and China’s National Petroleum for Social Security and Medicare every day amount of capital that banks have to set Corporation run businesses in some 30 for the next two decades. The Congressio- aside to what to do about them when they countries. But they also use them to control nal Budget Oce (CBO) calculates that en- fail. Britain is imposing additional taxes on the economy at hometo direct resources titlement spending will grow from 9% of bankers’ bonuses, America is imposing ex- to favoured industries or reward political GDP today to 20% in 2025. If America tra taxes on banks’ liabilities, and central clients. Politicians in China and elsewhere keeps its distaste for taxes, it will face scal bankers are pondering ingenious ways to not only make decisions about the produc- Armageddon (see chart 3 on next page). intervene in overheated markets. Worries tion of cars and mobile phones; they are The level of public spending is only one about climate change have already led to a also the hidden hands behind companies indication of the state’s power. America’s swathe of new regulations, for example on that are scouring the world for the raw ma- federal government employs a quarter of a carbon emissions from factories and pow- terials that go into them. million bureaucrats whose job it is to write er plants and on the energy eciency of The revival of the state is creating a se- and apply federal regulations. They have cars and light-bulbs. But, since emissions ries of erce debates that will shape cousins in national and supranational cap- are continuing to grow, such regulations policymaking over the coming decades. itals all round the world. These regulators are likely to proliferate and, at the same Governments are beginning to cut public act as force multipliers: a regulation pro- time, get tighter. The Kerry-Boxer bill on spending in an attempt to deal with surg- mulgated by a few can change the behav- carbon emissions, which is now in the Sen- ing decits. But the inevitable quarrels 1 ate, runs to 821pages. Fear of terrorism and worries about ris- The shape of the beast 1 ing crime have also inated the state. Gov- Where the money is 2 Total government spending, % of GDP ernments have expanded their ability to British gross median weekly earnings police and supervise their populations. Full-time workers, £ 60 F’CAST Britain has more than 4m CCTV cameras, 550 France one for every 14 people. In Liverpool the 55 525 police have taken to using unmanned aeri- Public 50 al drones, similar to those used in Afghani- 500 Germany stan, to supervise the population. The 475 45 Bush administration engaged in a massive Canada programme of telephone tapping before 450 40 Private the Supreme Court slapped it down. 425 Britain United States Another form of the advancing state is 35 more insidious. Annual lists of the world’s 400 biggest companies have begun to feature 2003 04 05 06 07 08 09 1995 97 99 2001 03 05 07 09* 11 new kinds of corporate entities: compa- Source: Office of National Statistics Source: OECD *Estimate nies that are either directly owned or sub-

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www.storemags.com & www.fantamag.com 26 Brieng The growth of the state The Economist January 23rd 2010

2 over cuts will be paltry compared with that was designed to help people deal with those about the growth of entitlements. Cheques in the post 3 unavoidable risks, such as sickness and old America’s decit, boosted by recession, is America’s federal spending and revenues, % GDP age, is increasingly in the business of trying already hovering at a post-war high of 12% to eliminate risk in general through a prolif- 50 of GDP, and the American economy de- FORECAST erating health-and-safety bureaucracy. pends on the willingness of other coun- 40 Government workers are also good at pro- tries (particularly China) to fund its debt. tecting their own interests. In America, The CBO calculates that the decit could 30 where 30% of people in the public sector rise to 23% of GDP in the next 40 years if it are unionised compared with just 7% in the Spending fails to tackle the yawning imbalance be- 20 private sector, public-sector workers enjoy tween revenue and expenditure. Revenues better pension rights than private-sector Crises can be the midwives of serious 10 workers, as well as higher average pay. thinking. The stagation of the 1970s pre- The public sector is subjected to all pared the way for the Reagan and Thatcher 0 sorts of perverse incentives. Politicians use 1950 60 70 80 90 2000 10 20 30 40 revolutions. More recently, several coun- public money to buy votes. America is Sources: Peter G. Peterson Foundation; OMB; GAO tries have dealt with out-of-control spend- littered with white elephants such as the ing by introducing dramatic cuts: New Zea- John Murtha airport in Jonestown, Penn- land, Canada and the Netherlands all and companies become adjuncts of the sylvania, which cost hundreds of millions reduced public spending by as much as state patronage machine. Giving the impri- of dollars but serves only a handful of pas- 10% from 1992 onwards. matur of the state to global companies is sengers, including Mr Murtha, who hap- In the early 1990s Sweden faced a also fraught with risks. America’s Con- pens to be chairman of a powerful con- home-grown economic crisis that fore- gress prevented Dubai from taking over gressional committee. Interest groups shadowed many of the features of the glo- American ports on grounds of national se- spend hugely to try to aect political deci- bal crisis. The property bubble burst and curity. sions: there are 1,800 registered lobbyists in the government stepped in to save the the European Union, 5,000 in Canada and banks and pump up demand. Public debt Anatomising failure no fewer than 15,000 in America. Mr doubled, unemployment tripled and the The most interesting arguments over the Bush’s energy bill was so inuenced by budget decit increased tenfold. The Social next few years will weigh government fail- lobbyists that John McCain dubbed it the Democrats were elected in 1994 and re- ure against market failure. The market-fail- No Lobbyist Left Behind act. elected twice thereafter on a programme ure school had been gaining strength even These perverse incentives mean that of raising taxes and slashing spending. before the credit crunch struck. The rise of governments can frequently spend lots of This points to an irony: a crisis which cowboy capitalism in Russia under Boris money without producing any improve- promotes state growth in the short term Yeltsin persuaded many peoplenot least ment in public services. Britain’s govern- may lead to pruning in the longer term. In the Chineseof the importance of strong ment doubled spending on education be- Britain power is almost certain to shift government. And the threat of global tween scal 1999 and scal 2007, but the from Labour to the Conservatives, who are warming is an obvious example of how spending splurge coincided with a dramat- much keener on cutting public spending. government intervention is needed to de- ic decline in Britain’s position in the In America the Republicans will make big ter people from overheating the world. Ad- OECD’s ranking of educational perfor- gains in the mid-term elections and Mr vocates of market failure have also been mance. Bill Watkins of the University of Obama, already sobered by his loss in advancing a broad range of arguments for California, Santa Barbara, calculates that, Massachusetts, will have to move to the using the government to nudge people’s once you adjust for ination and popula- centre. behaviour in the right direction. tion growth, his state’s government spent But pruning will still be more dicult But the fact that markets are prone to 26% more in 2007-08 than in 1997-98. No than it has ever been before. Getting the sometimes spectacular failure does not one can argue that California’s public ser- public sector to do more with less is mean that governments are immune to it. vices are now 26% better. harder after two decades of public-sector Government departments are good at ex- The question that we ask today, said reforms. Across the OECD more than 40% panding their empires. Thus a welfare state Barack Obama in his inaugural address, is of public goods are provided by not whether our government is too the private sector (thanks to priva- big or too small, but whether it tisation and contracting out) and works. This is clearly naive: with 75% of public ocials are on some decits soaring, nobody can aord sort of pay-for-performance to ignore the size of government. scheme. The ageing of the popula- Mr Obama’s appeal for pragma- tion makes earlier reforms look tism has some value: conservative easy. Governments will have to attempts to roll back government ask fundamental questionssuch regulations have led to disaster in as whether it makes sense to let the nance industry. But left-wing people retire at 65 when they are attempts to defend entitlements likely to live for another 20 years. and public-sector privileges willy- The rise of state capitalism is nilly will condemn the state to col- fraught with problems. It may be lapse under its own weight. Policy- hard to argue with China’s 30 makers will not be able to give a se- years of hefty economic growth rious answer to Mr Obama’s and $2.3 trillion in foreign-curren- question of whether government cy reserves. But subordinating eco- works without rst asking them- nomic decisions to political ones selves some more fundamental can come with a price-tag in the questions about what the state long term: politicians are reluctant should be doing and what it to let strategic companies fail, should be leaving well alone. 7

www.storemags.com & www.fantamag.com United States The Economist January 23rd 2010 27

Also in this section 28 Health reform: time to start again 29 Is the housing market plateauing? 29 West Virginia’s legal system 30 California’s Central Valley 32 Antitrust law and football 32 Pets in the recession 33 Lexington: Obesity

Democracy in America, our blog on American politics, is open to commentary daily at Economist.com/democracyinamerica

The Massachusetts shocker use his vote to deprive the Democrats of the libuster-proof 60-vote supermajority The unstoppable truck they had been depending on. In Washington, DC, as in Massachu- setts, the Democrats were slow to see the possibility of this remarkable reversal. Their candidate, Martha Coakley, the boston state’s attorney-general, is a capable prose- How Scott Brown swept up the Bay State and stymied health reform in cutor but a stilted politician. She seemed to Washington, DC believe that her battle had ended once she T IS one day before the vote and the Bos- held from 1962 until his death last summer. won September’s close-fought primary. Iton Bruins are taking on the Ottawa Sen- To Democrats the practical conse- The White House evidently thought so ators at north Boston’s TD Garden. Outside quences of this setback, almost exactly a too: Mr Obama had announced no plans the hockey stadium scores of Scott Brown year after Mr Obama’s inauguration, are to visit Massachusetts to stump on her be- supporters, mued against the snow and more stunning even than the symbolism. half. After all the state had not elected a Re- stamping in the cold, wait for their own Senator Kennedy had called health reform publican senator since 1972, and registered would-be senator to arrive. Lower taxes, the cause of my life. His big worry in his Democrats outnumber Republicans by smaller government, shout the placards. nal months was how his death might af- three to one. What the Democrats did not Some of these people have come long fect the nal stages of the bills that have foresee is how swiftly a fast-thinking and distances. Angela Lash, alerted by a friend been grinding through Congress for al- vigorous opposition candidate would be via Facebook, has travelled from Pitts- most a year. Now it is possible that the able to turn this mood of complacent enti- burgh hoping that a Republican victory in great hope of extending medical coverage tlement against them. Massachusetts can kill Obamacare and the to tens of millions of uninsured Ameri- Though little noticed as a state senator, cap-and-trade climate-change legislation. cans may have died with him (see next ar- Mr Brown turned out to be just such a can- Evan Hecht has crossed the continent from ticle). As the 41st Republican in the 100- didate. A lieutenant-colonel in the Nation- Walla Walla in the state of Washington. member chamber, Mr Brown promises to al Guard, and a triathlete with rugged good Robert Fox from Madison, Wisconsin, has looks (he once posed naked for Cosmopol- dropped everything to travel to Boston and itan), he barnstormed around the com- man telephones for the Republican cam- Massachusetts mayhem monwealth in what is now a famous old paign, the rst he has ever joined. He is an- Votes won by party, % pickup truck, portraying himself as a gryand not just about Barack Obama’s Senate result doughty independent taking on the local takeover of health care. I hate the imbal- 2006 2010 Democratic machine and its paymasters in ance of power in Washington, the abuse of 0 20 40 60 80 Washington. A simple conservative mes- the system and the secret rewards to spe- sagehe opposes higher taxes, same-sex cial interests, he says. Republican marriage, gun control and the administra- From the start, the Republican cam- tion’s alleged feebleness on terrorismat- paign for the late Ted Kennedy’s seat in the Democratic tracted a Brown Brigade of enthusiastic Senate felt more like an insurgency than insurgents. In a debate on January 11th Mr politics as usual. And on polling day, Janu- Independent voter split, 2010 Brown was asked what he would do if he ary 19th, the insurgents won. This bluest of 0 20 40 60 80 won Ted Kennedy’s seat. With all due re- Democratic states astonished itself and the Republican spect, Mr Brown shot back, in a soundbite nation by voting 52% to 47% to send the Re- that dened the rest of the race, it’s not the Democratic publican Mr Brown to Washington. There Kennedys’ seat, it’s not the Democrats’ Source: Rasmussen he will take the seat the old liberal lion had seat, it’s the people’s seat. 1

www.storemags.com & www.fantamag.com 28 United States The Economist January 23rd 2010

2 If Mr Brown’s campaign was inventive, one-party state even the supporters of the Health reform Ms Coakley’s was tepid and prone to one party are sometimes restive. gaes. No glad-handing the punters for this That said, the Democrats would be de- Rip it up and start attorney-general. When the Boston Globe luding themselves if they ascribed the asked whether her campaign had been too shock in Massachusetts to a poor cam- again passive, her irritable response was: As op- paign, or to special local factors, as they did posed to standing outside Fenway Park? In in November when the Republicans NEW YORK the cold? Shaking hands? Fenway Park is scored victories in the governors’ races in The vote in Massachusetts leaves health the home of the Boston Red Sox baseball Virginia and New Jersey. As election day reform critically ill team, worshipped by many Bostonians approached and the polls narrowed, the but not, apparently, by the woman seeking national leadership pulled out all the OULD Scott Brown’s victory in Massa- their votes. stops, to no avail. Bill Clinton came. Ted’s C chusetts scupper Obamacare alto- In another interview she appeared to widow, Vicki Kennedy, campaigned tire- gether? There are currently two health think that Curt Schilling, a celebrated for- lessly. On the last weekend before voting, bills, one passed by each congressional mer Red Sox pitcher, was a Yankee fana Mr Obama at last ew up to stump for Ms chamber, that Democrats had hoped to shaming error (though she later claimed to Coakley at Northeastern University. There merge somehow into a nal law. But be- be joking) in a city crazy about baseball. At he warned voters to look under the hood cause the Senate bill passed with just 60 a breakfast on Martin Luther King Day her of Mr Brown’s truck and mocked him for votesthe minimum needed to overcome suggestion that voting for her would keep opposing the new levy on big banks. a Republican libusterRepublican lead- the great man’s dream alive received a Bankers don’t need another vote in the ers are gleefully claiming that Mr Brown’s frosty reception. When Mr Brown turned United States Senate, declared the presi- vow to be the 41st vote against reform up uninvited at this event (he had simply dent. They’ve got plenty.’’ will prove the death blow to that dream. bought a ticket), many breakfasters lined No good. The Bay State just doesn’t hate But hope springs eternal. Barack up to have pictures taken with him. bankers enough. On the other hand, Mr Obama has vowed not to let reform die, or Even before the votes were counted, Obama hardly mentioned health reform so his spokesman has said, and Democrat- White House staers had begun to blame when he was in Massachusetts. That may ic leaders, aghast that a year-long eort the defeat on the local candidate. That is be because the state has already had its re- may have simply run out of time, are con- one way to spin terrible news for the form: since 2006 residents have had near- templating various procedural and politi- Democrats. Another is to note that Massa- universal coverageenjoying its benets cal manoeuvres. The most shameless such chusetts has never been as deep a blue as but worried about its cost. Or it may be be- trick would be to ram through a nal bill the long reign of the Kennedys would sug- cause the president understands that the before Mr Brown is ocially seated in the gest. Although Democrats outnumber Re- policy in which he has invested so much in Senate, which should happen within two publicans three to one, Gallup says that the his rst year is turning into a negative. weeks. There is precedent for this wheeze, Bay State has more independents (49%) Nancy Pelosi, the House Speaker, says but several Democratic senatorsinclud- than Democrats (35%). In the 1994 Senate that the legislation should go ahead some- ing Illinois’s Dick Durbin and Virginia’s race the Republican Mitt Romney gave Ted how, in spite of the setback. But Richard James Webbhave already rejected this Kennedy a mighty scare. Massachusetts Kramer, a middle-aged technical consul- outright. Mr Obama himself appeared to has had four Republican governors in the tant jamming into Mr Brown’s raucous vic- rule it out on January 20th, and it is proba- past two decades, often in protest at the tory celebration, said he voted for the man bly a non-starter. Democratic hegemony. It’s a corrupt and in the truck precisely because a 41st Repub- One alternative is for the House simply feckless legislature, by and large, says lican in the Senate would block the big to pass the Senate version as it stands, rath- Richard Parker, a senior fellow at Harvard’s spending plans that America cannot af- er than negotiate a new compromise bill. Kennedy School of Government. In a ford. Happy anniversary, Mr President. 7 Then, depending on one’s reading of the rules, the nal bill could be amended slightly later on through a procedure known as budget reconciliation, which cannot be libustered, and therefore requires only 50 votes in the Senate. This approach has its fans. The only path I see is for the House liberals to accept the Senate bill as is, insists Len Nichols of the New America Foundation, a progres- sive think-tank, who worked on Bill Clin- ton’s failed eort at health reform in 1994. Steny Hoyer, the Democratic majority leader in the House, says clearly the Sen- ate bill is better than nothing. But many liberals despise the upper chamber’s oering, as it includes a controversial tax on gold-plated insurance plans and lacks any provision for a government- run insurance scheme. When the House bill passed in November, the vote was 220 to 215. Since then, however, Democrats may have lost two votes thanks to the retirement of one congressman and the probable defection of the sole Republican among that 220. They therefore literally The losers cannot aord to lose even one vote now. 1

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 United States 29

The housing market cover all buyers with incomes under a certain threshold, and to last until the end of Still in the cellar April. Although this has boosted sales, it has largely done so by moving them forward (at no small expense to taxpayers). With the end of the programme the bill will come due, in terms of reduced sales. washington, dc All told, government support boosted Small signs of recovery cannot shift the house prices by about 5% last year, accord- general gloom ing to a recent Goldman Sachs analysis. As HEN American house prices nally their end approaches concern has grown, Wstarted rising in June last year, ending not least because the underlying funda- a three-year decline, homeowners and mentals remain shaky. With many mort- economists rejoiced. The steep plunge in gage loans underwater, continuing job values, about 33% nationally from peak to losses are pushing ever more households trough, caused widespread damage in the into default. Nearly 3m properties entered American economy and abroad. The stabi- foreclosure last year, and lings increased lisation of prices turned out to be a precur- by 14% from November to December. Fore- sor to broader economic recovery. closures place downward pressure on Since bottoming out between May and house prices, contributing to a vicious cy- June, prices have ticked upwards every cle of economic pain. month, while sales have risen from their In all likelihood, prices will not begin a recession lows. And yet gloom persists. new and steep decline. Economic output is The pace of foreclosures has not abated, now growing again, and most economists Any ideas? and there has been no improvement in believe the economy will begin adding employment in residential construction. jobs by the spring. Equally important, 2 But not only do liberals dislike the Sen- Worse still, the momentum now seems house prices are no longer out of line with ate bill, dozens of moderate Democrats to be ebbing. Mortgage applications for fundamentals. Relative to rents, for in- also worry that voting for an unpopular re- purchases fell sharply in November, to stance, house prices are now 3% below form bill may hurt them in hotly-contested their lowest level since 1997. Condence their long run average using the S&P/Case- elections this autumn. Stuart Butler of the among home-builders declined in Novem- Shiller national index. At the peak of the Heritage Foundation, a conservative think ber for a second consecutive month. And bubble, they were 40% overvalued. But the tank, insists it would be suicidal for gures released on January 20th showed end of government support will put hous- Democrats in swing districts to vote for the that new housing construction, which re- ing markets under great strain. It is a di- Senate bill as is. It would seem to spurn the covered from the record lows of early 2009 culty the American economy had better voters of Massachusetts, too. to plateau late last year, fell by 4% between get used to. 7 The more radical notion is for Mr November and December. The fear is that Obama to shake things up with a bold pro- prices will soon start to fall again, touching posalperhaps in his state-of-the-union o another round of pain for homeown- West Virginia’s legal system message next weekthat would appeal to ers, workers and banks. Republicans. If, for instance, he were to of- The stalling housing market can be Small steps fer a proposal to take on tort reform, an is- blamed, in part, on the end of the govern- sue popular with Republicans but ignored ment supports that have buoyed recovery. by the lawyer-stued Democratic Con- Purchases of mortgage-backed securities gress and insist on more serious cost con- by the Federal Reserve and the govern- Charleston, West Virginia trols, he might be able to build a new co- ment’s bailed-out mortgage giants, Fannie The road to prosperity runs through the alition for eventual reform. Mr Obama Mae and Freddie Mac, helped keep mort- judiciary now says party leaders must not jam gage credit owing and interest rates low. through reform, a wise position since a But Fed purchases, the bulk of the support, ICHARD NEELY, a retired justice of popular backlash could see any resulting are due to end in March. RWest Virginia’s supreme court and a law overturned by a future Congress. Other interventions are less admirable. distinguished legal scholar, once wrote, That is why the likelier result is that A large tax credit originally oered to rst- As long as I am allowed to redistribute health reform may now have to come in time buyers was extended in November to wealth from out-of-state companies to in- smaller waves of bipartisan eort rather jured in-state plaintis, I shall continue to than a hyper-partisan big bang. This, after do so. Not only is my sleep enhanced all, is what happened after Mr Clinton’s ef- Plateauing when I give someone else’s money away, fort collapsed. He still persuaded Republi- Housing starts*, annualised, m but so is my job security. Even assuming cans in Congress to pass SCHIP, a health an element of tongue-in-cheek, West Vir- scheme for children, HIPaA, a law govern- 2.5 ginia’s courts have long had a reputation ing employer-provided health insurance, 2.0 for being hostile to corporate defendants. and other smaller but helpful bills. In 2007 three of the country’s biggest Barney Frank, a powerful Democratic 1.5 seven verdicts were handed down in West congressman from Massachusetts, issued Virginia. The previous year the state’s su- 1.0 this unusually conciliatory statement this preme court had ruled that out-of-state week: I am hopeful that some Republican 0.5 plaintis could sue out-of-state companies senators will be willing to discuss a revised for injuries sustained out-of-state, so long version of health-care reform. Mr Obama 0 as a company in West Virginia had sold or 2005 06 07 08 09 himself has hinted at something similar. distributed the product alleged to have Source: Census Bureau *New privately owned But will the Republicans listen? 7 caused those injuries. The Institute for Le-1

www.storemags.com & www.fantamag.com 30 United States The Economist January 23rd 2010

2 gal Reform, which is aliated with the US Chamber of Commerce, ranks West Vir- ginia’s legal climate 50th among the states. In May 2008, the state’s supreme court declined to hear an appeal of a $405m verdict issued against three natural-gas companies. Chesapeake Energy Corp., one of the parent companies, promptly cancelled its plans for a regional headquarters in Charleston, and nine months later cut 215 jobs there. It is perhaps no coincidence that West Virginia is among the poorest states, with income per head only three-quarters the national average. Mindful of his state judiciary’s poor image, West Virginia’s governor, Joe Man- chin, announced a pair of reforms to the system on January 13th: public nancing waterMr Chrisman also knows that opti- the Central Valley is badly educated, says for two supreme court seats open for elec- mism has become a minority view. Carol Whiteside, the founder of the Great tion in 2012, and the establishment of an His land is in California’s Central Val- Valley Centre, a not-for-prot organisation advisory committee to recommend candi- ley, a region that covers 19 counties and whose aim is to improve the region. The dates for circuit-court vacancies (although stretches for 450 miles (725km) from the largest farms are often still owned by the West Virginia elects its judges, when one Cascade mountains in the north to the Te- families that arrived a century or so ago retires before the end of his term the gover- hachapis in the south, and is bounded in the descendants of Portuguese and Dutch nor appoints a replacement; over 40% of the east by the Sierra Nevada and the west immigrants are big in dairy farms, for ex- the state’s sitting judges were rst appoint- by California’s Coast Ranges. Much of it ample. But most of the whites tend to be ed rather than elected). was an inland sea in its geological past, and Okies who arrived from the dust bowl of A more interesting reform comes not its alluvial soils and Mediterranean cli- the Great Plains during the depression, from Mr Manchin, but from the state’s su- mate make parts of it, particularly the San such as the ctional Joad family in John preme court itself, which recently said it is Joaquin valley in the south, about the most Steinbeck’s The Grapes of Wrath, who considering rules to ensure full review of fertile agricultural region in the world. drove up and down in search of work on every appeal led. West Virginia’s su- But this status is at risk because water, the stretch of Highway 99 where Para- preme court is its only appellate court, so the vital ingredient to make the soil pro- mount Farms now sits. not many cases get reviewed. In 2006, 2,721 ductive, is increasingly scarce. Some of the Economically, socially and education- of the 47,998 cases led in West Virginia’s reasons are natural; California has been in ally, their descendants have barely moved circuit courts were appealed; but the court one of its periodic droughts since 2006, up. Nor have more recent immigrant heard just 243 cases, on 122 of which it and climate change is a long-term threat to groups such as the Hmong, Thai and Mien, ruled without troubling to explain its rea- the state’s mountain snowpacks. Others who came to work in the elds during the soning. The judicial-reform commission are political; the pumps and aqueducts 1970s and now live in Central Valley cities recommended setting up intermediate- that carry water from the wetter north to such as Stockton, Fresno and Modestoor, level appeals courts, as exist in most other the dry elds in the south are creaking of course, the Mexicans, who have been states. Doing so would cost around $8m a with age, threatening ecosystems and en- coming since then and are now the major- year; the state, alas, currently faces a $120m dangering species. ity of workers in the elds, where Spanish budget shortfall. 7 Water is our biggest issue, says Bill is the common language. Phillimore, the manager at Paramount These demographic trends, combined Farms near Bakerseld, the largest grower with the water shortage, are causing worry. California’s Central Valley of pistachios and almonds in the world, The Central Valley is already one of the and of pomegranates and citrus fruits in poorest regions of the country. And its pop- The Appalachia of America. Water used to be 20% of Para- ulation, about 6.7m in 2008, is among the mount’s costs, he says, but now accounts fastest-growing; it is expected to double in the West for 30%. As a result, many farmers are let- the next 40 years, as new immigrants con- ting their elds lie fallow or switching from tinue to pour in looking for farm work. thirsty crops, such as cotton, to those that This has led to comparisons with Appa- Fields between Bakerseld and Visalia need less. Paramount’s trees, lined up like lachia, which has also relied on a declining California’s agricultural heartland soldiers on parade as far as the eye can see, extractive industry (coal mining) and has threatens to become a wasteland are irrigated by tiny micro-sprinklers at suered from high unemployment, pover- IKE CHRISMAN looks out from his their base so that water hits only the roots ty and a relatively unskilled workforce. A MSUV as he drives through seemingly and no drop goes to waste. report commissioned by Congress in 2005 endless rows of walnut trees on his proper- Farming will not disappear, but wheth- argued that the San Joaquin valley is in ty near Visalia, in central California. I er it will be as big as it is now is a question, some respects behind Appalachia’s coal have to be optimistic, I’m so tied to this says Mr Phillimore, adding that If the agri- country in diversifying its economy. land, he says. His great-grandfather, after culture goes away, there is nothing. In the As the almond trees of the San Joaquin trying his luck in the Gold Rush, settled in San Joaquin valley agriculture provides al- valley go into their February bloom, turn- Visalia in the 1850s, and the family has most 20% of the jobs. The alternatives are ing the plains white with their buds and been there ever since. But as California’s depressing and scant. For example, many abuzz with millions of bees who are tem- secretary for natural resourcesa job at the of California’s prisons are sited in the Cen- porarily imported to pollinate them, it may intersection of the environmental and tral Valley’s wide expanses, in what is be hard to see devastation in the making. farming lobbies, perennially at logger- sometimes called an archipelago. Nonetheless, the Central Valley’s future heads over the state’s scarcest resource, A big problem is that the workforce in looks increasingly barren. 7

www.storemags.com & www.fantamag.com www.storemags.com & www.fantamag.com 32 United States The Economist January 23rd 2010

Antitrust law and football ed in many other courts. But the court of entity, forcing it either to accept the own- appeals for the seventh circuit accepted it ers’ future demands or to strike. Single-en- Out of many, one and found for the NFL. tity status would also allow teams in the American Needle appealed to the Su- same city to set ticket prices jointly, and preme Court. In a rare move, the NFL also permit the league to move its games from asked for a review, even though it had won, free broadcast television to paid cable. hoping that the highest court might grant it Finally, such a ruling could even be- an even more favourable ruling. Whereas come a precedent for other industries. Sin- Is the NFL more than the sum of its the appeals court had held that the NFL gle-entity recognition might give credit- parts? could be considered a single entity only in card networks and chain restaurants addi- MERICA’S sports leagues have always the context of licensing, the league is ask- tional leverage over their employees and Aposed a challenge for antitrust regula- ing the Supreme Court to grant that status customers. And it could allow co-opera- tors. On the one hand, their teams are sep- to all aspects of its business. tives like the Associated Press to reinstate arately owned, and compete for both em- If the NFL wins this blanket recogni- anti-competitive policies that were found ployees (players) and customers (fans). On tion, its owners’ position would strength- illegal long ago, such as allowing current the other, they work together to establish en relative to both players and fans. In the members to block their direct rivals from the game’s rules and schedule, and often past, its players’ union has defeated poli- joining. Most experts expect the court to is- unite to negotiate agreements with players cies designed to reduce salaries by ling sue a narrow ruling. But the mere fact that and with other organisations. In a number successful antitrust claims. It would lose the judges accepted the case shows that of areas, such as broadcasting rights, Con- that weapon if the NFL is treated as a single they take the NFL’s claim seriously. 7 gress has written exemptions to antitrust law to protect such collaboration. Pets in the recession No such exception exists in the case of selling rights to clothing companies to re- produce team logos. Nonetheless, team Howls for help owners in all the main sports have central- New york ised such licensing. Rather than having Hard times have left many pets homeless each club negotiate its own deal with manufacturers, the teams have granted an ARLIER this month the head of People arm of the relevant league oce the au- Efor the Ethical Treatment of Animals, a thority to distribute the rights for every non-prot organisation, wrote to Gold- team together. They then divide the prots. man Sachs. Animal shelters, the letter For decades this practice went unchal- said, are struggling to cope with a surge in lenged. But in 2000 the National Football the number of pets that have been aban- League (NFL) agreed to make Reebok the doned because their owners have fallen exclusive producer of its team-branded on hard times. Maybe Goldman exec- clothing, cutting out all other rms from utives should give their big bonuses to the business. As any Economist reader the dogs? Sadly, it looks unlikely. would have been able to predict, the price As the number of job losses and of caps promptly rose, by 50%, while team foreclosures has mounted over the past jerseys began selling for 40% more. In re- two years, some people have chosen to sponse, American Needle, a hat-manufac- surrender their animals, unable to aord turer that previously drew a quarter of its pet food let alone veterinary care. Many sales from NFL caps, led an antitrust suit. have brought their dogs and cats to shel- The unwanted The league claimed that it was immune ters. Some have been less kind, chaining from antitrust scrutiny because, even them to fences or locking them inside shelters do not have the space or money though it consisted of 32 clubs, it acted as a their foreclosed homes. One kitten was to keep alive animals that have not been single entity, which could not conspire even left in a mailbox in Boston. adopted. Fewer people are coming for- with itself. This assertion had been reject- Looking after these pets is becoming ward to adopt as well, presumably be- more challenging because many shelters cause they cannot aord to. One non- rely on government money and have prot organisation, Pilots ’N Paws, con- seen their funding cut. Animal Care and nects pilots to shelters with dogs that Control of New York City, for example, have not found homes. The pilots volun- saw its grant fall by over $750,000 this teer to y them to other states, giving scal year, around 7% of its operating them a second chance at adoption. budget. Fewer people are coming for- The internet is playing its part. One ward to make donations. Some non- organisation, ForeclosurePets.org, runs prots are trying to step in and encourage an online billboard that allows people people not to abandon their furry friends facing foreclosure to nd a home for their at shelters in the rst place. Pet-food pet. Adopt-a-pet.com uses its website to banks, which give pet food to people in help shelters advertise and send e-mail need, have sprung up across the country. alerts when certain types of animals The Humane Society of the United come in. By the end of 2009 8,500 animal States estimates that around 6m-8m cats shelters were using the site to post adop- and dogs end up in shelters each year. tion listings for 140,000 pets, up from Only half are adopted. The rest are put 6,800 shelters and 98,000 listings at the down. There is some concern that even beginning of the year. Now all that is more are being put to sleep now, because needed is 140,000 good homes. Take it to Washington

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 United States 33 Lexington The fat plateau

Americans are no longer getting fatter, it appears be a blessing, though of course it is a big fall in obesity that is really required. Although a little extra heft is no big deal, many Amer- icans are so ample that it ruins their health. That places a burden on the health-care system: each obese American racks up medical bills 42% higher than an American of normal weight, according to Eric Finkelstein and Justin Trogdon, writing in Health Af- fairs. Add to that the indirect costs of obesity, such as lost productivity due to sickness or premature death. The startling Republican victory in Massachusetts this week throws Barack Obama’s health reforms up in the air. But the issue will not go away. And a plateau in the obesity rate would make some kind of reform a bit less expensive. It will not lead to a sud- den dip in health-care costs, predicts Mr Trogdon. But it could substantially slow the rate at which they are rising. Previous projec- tions typically assumed that Americans would keep on ballooning. As a thought experiment in 2008, Youfa Wang of the Johns Hopkins Centre for Global Health drew a line from recent trends and projected that 100% of Americans would be overweight by 2048. By 2030, his model showed health-care costs at- tributable to excess weight approaching a trillion dollars a year. The latest numbers remind us how little is known about pub- FEW years ago, Burger King, a fast-food chain, conducted a lic health. Of course, people put on weight when they consume Astudy of the eating habits of some of its most frequent cus- more calories than they burn o. But no one knows for sure why tomers. A few dozen SuperFans, as the rm calls them, record- America’s obesity has trebled since 1960. Plausible theories ed and photographed everything they ate for two weeks. The re- abound. As people grow richer, food becomes relatively cheaper. sults were collected in a book called Food for Thought. Time grows more precious: hence the lure of fast food. Desk work Unsurprisingly, this book is not publicly available: amateur pho- burns fewer calories than spadework. And labour-saving de- tos of heaps of junk food are hardly an enticing advertisement for vices do just that: if we still washed dishes and clothes by hand, a rm that supplies the stu. Nonetheless, Food for Thought we would burn o ve pounds of esh each year, reckons Barry gives an insight into why some Americans have such poor diets. Popkin, the author of a book called The World is Fat. All this is The fast-food fans in the book typically lead chaotic lives. no doubt true, but it does not explain why Americans are fatter They often toil long, irregular hours for not much money. They than people in other rich countries, nor why they appear to have grab food when they can, skipping many meals and gorging at stopped getting fatter. unorthodox times. They favour whatever is quick, convenient and comforting. (I selected the pie because it was easy to grab No to nannies out of the fridge, says one.) They often have an imperfect grasp Kathleen Sebelius, the health secretary, says that ghting obesity of nutritional science. (I am eating chocolate muns at work be- is at the heart of health reform. But telling people to eat more cause they are not too heavy, says another.) Oddly for a piece of healthily is like telling them not to have risky sex. Americans are corporate research, the book contains passages that are quite suspicious of the nanny state at the best of times, let alone when moving. One single dad’s diary shows him eating nothing but it nags them to curb their most basic instincts. Some regulations junk for days on end. Then, one evening, he visits his aunt’s help: forcing restaurants to post calorie counts on dishes, for ex- house and she cooks him a feast of real food: pork, okra stew, col- ample, prompts diners to pick less caloric treats. But politicians lard greens and corn bread. are reluctant to attack voters’ favourite vices too vigorously. A re- At 33.8%, America’s obesity rate is ten times higher than Ja- cent proposal to tax sugary drinks, for example, went nowhere. pan’s. In all, 68% of Americans are either obese or overweight. Opponents argued that it would disproportionately aect the (Some studies yield lower numbers, but since they typically ask poor. True enough, but the poor are disproportionately likely to people how much they weigh, rather than weighing them, scepti- be overweight. cism is in order.) Few problems, besides death, aict more peo- The constant barrage of pro-vegetable propaganda in schools ple. Americans are more likely to be overweight than to pay fed- may have raised awareness of the need for a balanced diet, reck- eral income tax. ons Mr Trogdon. And popular pressure has prompted many fast- But the good news is that the nation may have stopped getting food outlets to oer salads and other wholesome fare. But even if fatter. A study published this month in the Journal of the Ameri- good food were freely available, losing weight is hard. Every year, can Medical Association (JAMA) found that American women 25% of American men and 43% of American women attempt it. were no more likely to be obese in 2008 than they were nearly a [F]ailure rates are exceedingly high, notes a JAMA editorial. But decade before. For men, there was a small rise in obesity over the there is hope. Eating is social. Studies suggest that people guzzle same period, but no change in the past three years. Among chil- more if they have overweight friends and relatives, and less if dren, too, there was no change in obesity rates except among the they don’t. So if Americans have stopped getting fatter, their chil- very heaviest boys, whose numbers increased slightly. Could it dren have a better shot at staying trim. 7 be that the American obesity epidemic has reached a plateau? If the national girth really has stopped expanding, that would Economist.com/blogs/lexington

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Also in this section 36 Lessons from the tsunami 37 Chile’s presidential election 37 Honduras’s new president 38 Brazil’s presidential biopic 38 Renaming a Canadian institution

Post-earthquake chaos in Haiti ing mission in Haiti since 2004, lost 18 sol- diersthe biggest loss of life for its armed A massive relief eort limps into gear forces since the second world war. The Hai- tian police force, which the UN has been training, lost around half its strength in Port-au-Prince, according to Ms Byrs. Some of the many NGOs already working in Hai- Port-au-Prince ti were also impeded by quake damage. The world’s attempt to aid Haitians stumbles against extraordinary diculties of Oxfam, a British charity, had 100 sta transport and communications there. Two were killed, and their oce and N ONE of the ramshackle tent cities that the rst of some 2,000, arrived in Jacmel, a warehouse of supplies were both reduced Ihave sprouted in open spaces all across badly aected town south-west of Port-au- to rubble. The UN has dispatched 50 civil- Port-au-Prince, Isa Longchamp, a dishev- Prince. But aid has so far amounted to a ian ocials to Haiti. The Security Council elled and dejected eight-year-old girl, starts drop in the ocean of what people need, called for 1,500 more police ocers and to whimper. After losing her mother when admitted Elisabeth Byrs, the spokeswom- 2,000 extra peacekeeping troops (Brazil the Haitian capital was devastated by the an for the United Nations Oce for the Co- quickly oered 800). earthquake of January 12th, she is now ordination of Humanitarian Aairs. An even bigger bottleneck has been struggling to survive. Batted aside when That is partly because of the huge scale transport. American troops took charge of hundreds of desperate victims of the di- of the disastera third of the population of the airport, and quickly tripled its capacity saster swarmed around aid workers hand- 9m were aected and about 1m are home- to 100 ights a day (and to 153 ights by Jan- ing out a batch of supplies earlier in the less. But the main reason was that the uary 19th). France and Brazil initially com- day, she is still hungry. She depends on the earthquake knocked out both the institu- plained that their ights were turned away charity of her new neighbours. But at least tions and the sinews of transport and com- while a landing slot was found for Hillary she is alive, and fairly healthy. munication on which aid agencies nor- Clinton, the American secretary of state. Her home now is a precarious lean-to mally rely. So co-ordinationdeciding Half of the ten ights that Médecins Sans made from a couple of stained, fraying who does what wherehas been unusu- Frontières (MSF), a French medical charity, sheets tied to some sticks. She shares it ally slow and dicult. The rapid inux of tried to land in Port-au-Prince were di- with what remains of her family. Not far well-meaning aid agencies that now verted, and with them some 85 tonnes of away other earthquake survivors wail in throng the dusty remnants of Port-au- medical and relief supplies. But France’s agony in a makeshift hospital. Field sur- Prince has contributed to the confusion. president, Nicolas Sarkozy, and the UN lat- gery is performed with rudimentary Haiti’s elected government is operating er praised the huge American eort, and equipment and morphine is scarce. Many from a police station near the airport. The Brazil’s foreign ministry said co-ordination of the injured have died because of a lack Cabinet meets there each day. But the had improved. of medical supplies. structure of government has caved in just By January 19th more than 11,000 Like hundreds of thousands of other as completely as the presidential palace it- American troops, marines and sailors had Haitians, she is patiently waiting for a re- self. The UN mission to Haiti was decapi- arrived in Haiti (another 4,000 were on lief operation that has proved agonisingly tated with the collapse of the hotel where their way). They were trying to open tran- slow to get going. Ocials at the World it was based. Its 49 conrmed dead includ- sport links, as well as giving out some aid. Food Programme said that a week after the ed Hédi Annabi, the experienced mission They were due to open an airport at Jacmel earthquake, 200,000 people had received chief, his Brazilian deputy and the Canadi- on January 21st, and were also to use an air- ration packs of high-nutrition biscuits. an police chief. Another 300 UN person- base at San Isidro in the Dominican Repub- American helicopters, operating from an nel, including local sta and peacekeepers, lic. They hoped to get the port working aircraft-carrier oshore, dropped small are still unaccounted for. again in a week or two. Meanwhile, the quantities of supplies. Canadian troops, Brazil, which has led the UN peacekeep- UN was using minor ports at Cap-Haïtien 1

www.storemags.com & www.fantamag.com 36 The Americas The Economist January 23rd 2010

Lessons from the tsunami Too much of a good thing?

Quality counts as much as quantity in disaster relief FTER the Indian Ocean tsunami of victims. Indonesia destroyed 75 tonnes ADecember 2004, aid agencies of out-of-date medicine. And sometimes clubbed together to review their eorts. aid was worse than merely useless. There The main conclusion was sobering: It was a fashion for nancing new shing was local people themselves who pro- boats after the tsunami. A UN agency vided almost all immediate life-saving found that a fth of the boats given to Sri action. But international agencies often Lanka were unseaworthy. Much recon- brushed local capacities aside. struction work was shoddy. A private This lesson is relevant to Haiti now. company with no medical experience Focused on raising money, bedevilled by built health centres in the Indonesian disputes over logistical precedence and province of Aceh. haunted by fears that the country is too Because reconstruction work takes weak to help itself, the Haiti operation longer to organise than emergency relief, shows signs of becoming an aid stam- it has to begin right away. Sri Lanka built pede. Like the tsunami, the earthquake 40,000 transitional shelterssomething has produced an outpouring of gener- between a tent and a proper housein osity amounting to $1billion so far. six months. The experience of the tsunami sug- The tsunami also shows why some- gests that agencies will not be able to one has to be in charge. The aid operation spend it. Nine months on, governments worked best in countries, such as Malay- 2 and Gonaïves. Supplies were also coming and non-governmental organisations sia, that have the most eective govern- in through the Dominican Republic. (NGOs) had disbursed just 39% of the ments. Aceh, the tsunami’s epicentre, had The next set of diculties lie in getting money they had promised to spend. A huge problems because the destruction the aid out to those who need it. The main French NGO, Médecins Sans Frontières was worst there, the province had been arteries in Port-au-Prince are blocked by (MSF), stopped emergency fund-raising, riven by rebellion in the 1990s and 180 rubble. Landslides have severed roads to saying it did not need more. It was criti- dierent NGOs were operating there at outlying towns and villages. This week cised for this, but in retrospect was justi- one point. petrol all but ran out. The UN has designat- ed. As the tsunami evaluation put it, Organisational problems may be ed four sites in the capital as distribution allocation and programmingwere worse in Haiti, which before the earth- hubs for water and food, and 18 local de- driven by the extent of public and media quake had more NGOs per head than pots. But this network is not yet fully func- interest, and by the unprecedented fund- anywhere else in the Americas. But Aceh tioninghence the resort to air-drops. Add- ing available, rather than by assessment managed to bring a measure of control to ing to the problems, telephones and the and need. This seems to be happening the ood of aid by setting up a special internet have worked only patchily if at all. in Haiti, too; MSF has again asked people agency. Paul Collier, an economist at The specialised rescue teams that to switch donations to its general fund. Oxford University who has advised ooded into Haiti in record numbers man- Viagra, ski jackets and Father Christ- Haiti’s government, says it and the UN aged to extract more than 120 people from mas costumes were all sent to tsunami should do something similar. the ruins. The problem was that the lack of medical supplies meant that many more among the survivors died from their inju- from other disasters that could have been Many crowded onto buses to seek refuge ries. This carnage gradually subsided. On applied in Haiti were being ignored. One is with relatives in rural areas. January 15th Partners in Health, an Ameri- that dead bodies are not necessarily an im- Brazil’s ambassador to Haiti, Igor Kip- can NGO which runs 12 hospitals in rural mediate threat to the health of the living. A man, said that the UN peacekeeping force Haiti, took over the capital’s General Hos- Haitian ocial said that some 70,000 bo- had security perfectly under control and pital. Foreign teams set up several eld hos- dies had been hastily buried in mass did not need the help of the American pitals. But some medicines remained in graves. In a society that places great store troops. The Americans, too, stressed that short supply. An MSF doctor was reduced on venerating its dead, that will add to the their job was logistics. But the potential for to buying a saw in a market to carry out trauma of the survivors. friction with Brazil remained. Barack amputations of gangrenous limbs. The Obama’s administration is trying to pull USNS Comfort, a vast American hospital Too dazed to riot o a delicate balancing act by oering ship, arrived on January 20th. Another lesson is that survivors are gener- massive humanitarian relief while avoid- In most natural disasters, points out ally too dazed and weak to riot. An exag- ing giving the impression that they are tak- Graham Mackay of Oxfam, by day four the gerated fear of violent disorder seemed to ing over Haiti, says Daniel Erikson of the aid agencies expect to have set up distribu- be another reason why aid was slow. A Inter-American Dialogue, a think-tank in tion systems for food, water and tempo- few hundred desperate people scavenged Washington, DC. The build-up of troops rary shelter. After the Asian tsunami, Ox- in the rubble in a downtown shopping may have caused short-term delays in aid fam’s rst ight left Britain with supplies street. There were reports of gang leaders deliveries, but will pay o if they quickly within three to four days. That also hap- who escaped when the jail collapsed reopen transport routes without which pened this time. The dierence was the dif- surfacing in shanty towns from which nothing would reach the needy anyway. culty of getting them into the hands of they had been ushed out by UN troops in This relief operation was always going to desperate Haitians. 2006. But generally Port-au-Prince was be unusually slow and chaotic. But Hai- It seemed, too, as if some of the lessons calm. Haitians were helping each other. tians cannot aord for it to remain so. 7

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 The Americas 37

Chile’s presidential election Mr Piñera exudes fresh energy. He won, shareholdings into a blind trust managed despite coming from the right, whereas if by local investment banks and promised Piñera promises we had won, it would have been despite to sell his 26% stake in LAN, the national our candidate, admitted a Concertación airline, before he takes oce in March. He a gallop politician. insists he will be friendly to markets, not Mr Piñera is a former senator for the Na- to business. tional Renewal party, the smaller and One big change may come in Chile’s re- more liberal of the right-of-centre parties. lations in Latin America. Michelle Bache- Santiago He would like to move his coalition to the let, the outgoing president, was close to After 20 years, a move to the right centre, shedding not only its lingering ties Brazil’s president, Luiz Inácio Lula da Silva. HEN the centre-left Concertación co- to the dictatorship but also the extreme so- Mr Piñera is friendly with Colombia’s con- Walition won power in Chile 20 years cial conservatism of his coalition partner, servative leader, Álvaro Uribe. ago, its epoch-making victory signied the the Independent Democratic Union. In- For the Concertación a bloodbath of end of the Pinochet dictatorship and the deed he called for his defeated opponents recrimination will now begin, as one of its restoration of democracy. When it nally to join what he wants to be a government leaders puts it. Its failure to hold a primary lost the presidency in a run-o election on of national unity. prompted division, with a dissident young January 17th its defeat seemed almost pro- He says he will keep the social policies congressman taking 20% of the vote in the saic. Sebastián Piñera, a wealthy business- of the Concertación while raising eco- rst round of the election in December. man and economist, won 51.6% of the vote nomic growth to 6% a year, a rate Chile Chile’s electoral system, in which two-seat for the conservative opposition, narrowly managed in the 1990s but which is harder districts force the parties into two broad co- defeating the Concertación’s Eduardo Frei. now that it is richer. This would see the alitions, provides a powerful incentive for But Mr Piñera was elected with fewer country achieve developed status by 2018. the Concertación to remake itself under votes (just 43% of the electorate) than any There isn’t a moment to lose, we have to younger leadership. But that will take time. president since 1990. Many of the Concer- start to gallop, he said. He will have to gov- Meanwhile, Chile will soon nd out how tación’s voters simply stayed at home. ern without a majority in an almost evenly much change it has opted for. 7 So Chile has not moved radically to the split Congress. But he will have powerful right, it has tired of the Concertación. That support in the media, most of which were is partly a tribute to the coalition’s achieve- hostile to the Concertación. Honduras’s new president ments. As well as rising prosperitysince Some of his promises, such as creating 1990 income per head has almost trebled 1m new jobs in a workforce of 7.3m, will be Lobo alone in terms of purchasing power, to $14,299 a stretch. Even if the new cabinet was these include political stability and some made up of Christ’s apostles, that is techni- strong democratic institutions. Chileans cally impossible, argued Armen have gradually come to take all of this for Kouyoumdjian, an investment banker, in a granted. That made them less susceptible newsletter. Mr Piñera is an impatient man Mexico city to the Concertación’s campaign claim that who is in the habit of sprinting between Picking up the post-coup pieces it’s not all the same [who governs]. meetings (and not listening much to oth- Moreover, Mr Frei was a poor candi- ers). If progress is slower than he promised, VER since Manuel Zelaya was ousted date. He was dubbed by a rival the moai he may be tempted to weaken Chile’s Elast June as the president of Honduras who talks (after the sombre stone statues famed scal discipline. (He will inherit $16 in a military coup backed by the courts and of Easter Island, a Chilean territory) be- billion saved in oshore funds by Concer- Congress, the putsch’s leaders have been cause of his mournful face and stolid man- tación governments when the price of cop- playing for time. The de facto govern- ner. A former president (from 1994 to per was high.) ment’s sole policy has been to survive the 2000), he managed to personify the failure His rst task will be to dispose of his re- seven months left of Mr Zelaya’s term and of the Concertación’s ageing leaders to maining businesses to avoid conicts of in- let an elected successor pick up the pieces. make way for younger talent. By contrast, terest. He has put most of his smaller On January 27th that successor, Porrio Pepe Lobo, will be sworn in. He takes over a country that is diplomatically isolated, economically battered and socially and politically polarised. As a candidate Mr Lobo was evasive, speaking little about the coup and its aftermath. As president his rst task will be to gain recognition of his legitimacy, both abroad and at home. His election in No- vember was widely seen as free and fair. But the coup’s leaders have done nothing to ease reconciliation. They have spent their nal days in oce congratulating themselves: the legislature voted to make the de facto president, Roberto Micheletti, a congressman for life, and granted permanent security details to some 50 top o- cials at taxpayers’ expense. Mr Zelaya, elected as a Liberal, was top- pled because he allied with Venezuela’s leftist president, Hugo Chávez, and went on to campaign for a new constitution, Twenty years on, Piñera makes history arousing fears that he wanted to perpetu-1

www.storemags.com & www.fantamag.com 38 The Americas The Economist January 23rd 2010

2 ate his power. Since sneaking back into the A Canadian misunderstanding country in September he has lived in the Brazilian embassy in Tegucigalpa, the capital, under threat of arrest if he ventured Just history outside. The attorney-general has also led Ottawa charges against the generals who illegally A magazine’s Scunthorpe problem exiled Mr Zelaya. Mr Lobo wants an amnesty for both sides and has oered Mr Ze- ANADIANS have long been proud laya passage to the Dominican Republic. C of the industrious beaver, an animal Getting foreign recognition would re- capable of cutting down 216 trees a year lease aid. The only presidents who plan to with its teeth and of surviving the long attend his inauguration are those of Pana- winter in a purpose-built lodge made of ma and Taiwan. But the United States, Co- mud, twigs and bark. The largest rodent lombia, Peru and Costa Rica all recognised in North America is a national emblem. the election. Centre-left governments in The rst Canadian postage stamp, the neighbouring Guatemala and El Salvador 1851Three-Penny Beaver, carried its are keen to restore relations. But the key image. And one of Canada’s oldest will be gaining Brazil’s support. That will magazines carries its name. require an amnesty for Mr Zelaya, a unity But soon it will not. From April The government including some of his suppor- Beaver will be renamed. A journal of ters and a willingness to discuss constitu- popular history founded in 1920 by the tional reform, says a Brazilian diplomat. Hudson Bay Company to celebrate its Mr Lobo also inherits an economic Man of the people’s picture palaces 250th anniversary, it is now owned by hole. Because of the world recession, the others. Its evocation of the fur that had aid cut and the collapse in condence trig- Before it was even released Veja, a maga- made the trading company’s fortunes no gered by the coup, the economy shrank by zine, pointed out that many of the compa- longer struck the right noteespecially 3-4% last year. Public debt and the scal nies that funded its production (the most since the word has become slang for decit have ballooned. expensive in the history of Brazilian cine- female pubic hair. Outsiders have worried about the pre- ma) have either won or hope to win con- The editors had known for some time cedent set by the Honduran coup in a large- tracts from the government. that a name change was needed. Market ly democratic region, especially if Mr Mi- For all that, the lm is very watchable. It research indicated that many women cheletti and his friends were to get away opens in the poor north-east, where Lula and people under the age of 45 said they with dumping an elected president with- was born into a landscape of bright red soil would not subscribe solely because of out penalty. So far they have done. The and cacti, and ends with his rise as a metal- the name. But it was the internet that price has been paid by their people and it is workers’ union leader in the industrial belt struck the fatal blow. still mounting. 7 of São Paulo in the 1970s. This is a candy- The Beaver website was attracting oss version of the story, however. Lula’s (albeit briey) readers who had little reverses are shown: the little nger lost to a interest in Samuel de Champlain’s astro- Brazil’s presidential biopic lathe, the death of his rst wife and child in labe or what prairie settlers ate for break- childbirth. But he is too good to be true: a fast. They lasted about eight seconds Lula, sanitised perfect student, perfect husband and polit- before moving on. E-mails to potential ical moderate who abhorred violence. subscribers were blocked by internet The book on which the lm is based, by obscenity lters. This is known online as contrast, quotes Lula as approving of an in- the Scunthorpe problem, after the town cident in which a director of a factory that in Britain whose residents were initially is on strike is thrown out of a window. In unable to register with AOL because its São Paulo the lm he runs from the factory appalled. name contained an obscenity. A lm for the campaign trail That is a shame. A more nuanced telling The Beaver Club, a classy dining NCE upon a time it was considered in- would not detract from Lula’s remarkable room in Montreal, and the SS Beaver, a Odecent to turn living people into life story and achievement. replica of an 1835 steamship operating in myths, or even into lms, with too much The lm is doing well at the box oce. British Columbia, remain unperturbed haste. The cycle seems to be shorter now. Its producers say it is running more strong- by any ambiguity. As for The Beaver, it Gandhi had to wait until 34 years after his ly in the north-east than in the populous hopes to expand its 50,000 circulation as death before he appeared on cinema south-east, which means it mirrors Ms Canada’s History. Dull, yes, but at least it screens around the world. George Bush ju- Rousse’s fortunes in the polls. There are will do what it says on the tin. nior, by contrast, was the victim of an Oli- plans to show the lm on mobile screens ver Stone biopic during the last year of his in places with no cinema. It may get an air- presidency. Now a Brazilian director, Fábio ing on television, though there is no such Barreto, has done the same for Brazil’s pres- deal in place yet. ident, Luiz Inácio Lula da Silva, as he starts All this helps a process of mythmaking his nal year of oce. around Lula that is already well under way. Lula, Son of Brazil is the tale of a poor Catching some of Lula’s stardust is Ms boy made good, his aws left on the cut- Rousse’s best hope for capturing the pres- ting table and his virtues in close-up. Since idency in October, and there are some Lula hopes to secure the election of his signs that this is happening. The gap be- chosen successor, Dilma Rousse, in Octo- tween her and José Serra, her main rival, ber, it is controversial. The lm promotes halved between March and December last the worship of a political myth, said Eugê- year and now stands at 14 points. Compet- No, it’s not a pussy nio Bucci, a critic and journalism professor. ing against a celluloid legend is not easy. 7

www.storemags.com & www.fantamag.com Asia The Economist January 23rd 2010 39

Also in this section 40 The courts and Pakistan’s president 40 Sri Lanka’s Tamil diaspora 41 Political scandals in Japan 41 China’s assertiveness at sea 42 Protest in Hong Kong 43 Banyan: Book bans and Indonesia’s problem with the past

The war in Afghanistan cinema and a shopping centre. They were quickly contained by Afghan security Bombs and baksheesh forces, and several were killed. Better still, it was all done by Afghan forces, with little ghting by NATO troops. That will increase condence in Gen- eral McChrystal’s intention to keep ex- Kabul panding the Afghan security forces. The As Afghan security forces contain an attack in Kabul, they still await a government army is projected to grow to 134,000 sol- worth ghting for diers by the end of the year. The general ERRORISM and guerrilla warfare are ligence appears to have been tipped o wants the London conference to approve a Toften intended as macabre theatre. And about the impending attack, and security further expansion to 171,000 by October so it was on January 18th when teams of forces were on heightened alert. In contrast 2011, with the police growing from about Afghan ghters and suicide-bombers with past attacks, when insurgents were 94,000 men to 134,000. This would keep slipped though concentric rings of check- able to enter the Serena hotel, government Afghan forces on target for the 400,000 points and brought mayhem to the centre buildings and a UN housing compound, soldiers and policemen that General of Kabul. They struck as President Hamid this time the attackers were repulsed from McChrystal has said are required by 2013. Karzai was swearing in members of his ministries and other big targets. Last year commanders struggled to recruit cabinet. Nearby, to the sound of explosions Guards at the central bank, the rst and retain enough soldiers to keep ex- and gunre in the streets, foreign guests building to be struck, opened re on a man panding the ranks, but the announcement were huddled in the Serena hotel, the tar- they correctly identied as a suicide-bom- of higher wages (rising from $120 to $165 get of two previous attacks. Smoke bil- ber before he could get inside. Later in the per month, now with an extra $75 a month lowed out of a shopping centre. The Tali- day they also stopped a suicide-bomber in danger pay for front-line units) appears ban kept up an online commentary on the from driving an ambulance full of explo- to have brought a surge in recruits. progress of its martyrdom-seekers. sives into anything worthwhile. The at- The growing size and competence of It was in some ways the most auda- tackers went after softer targets, such as a the Afghan security forces are central ele- cious attack on the capital since the Ameri- ments in General McChrystal’s plan to re- can-led intervention in 2001an act of gain the military momentum, not least be- armed propaganda to demonstrate that Sticky fingers cause President Barack Obama has said neither Mr Karzai nor his foreign suppor- Afghans who paid at least one bribe to a public the American surge would start to ebb in ters could protect the centre of Kabul. It official during the past year, by type of official July 2011. How quickly the drawdown was certainly not the launch that Mr Karzai % of total, January 2010 takes place is the subject of behind-the- wanted for his new government, just ten 0 5 10 15 20 25 scenes arguments. Politicians on both days ahead of a big conference on Afghani- Police officers sides of the Atlantic are keen to see some stan in London; plans to hold a second Provincial officers kind of timetable to begin handing over se- meeting in Kabul this spring may be in Judges curity responsibility, province by province, doubt. And it raises questions about the re- Prosecutors to Afghan forces. Military ocers want cent claim by General Stanley McChrystal, Doctors such transitions to be determined by con- the American commander in Afghanistan, Nurses ditions on the ground, not by a calendar. that the tide is turning against the Tali- Tax officers Another element, expected to be en- ban, now that the rst units of the 40,000- Teachers dorsed in London, is a more active and bet- odd surge troops he has been promised Customs officers ter-nanced programme to reintegrate are starting to deploy. Members of Parliament low- and medium-level Taliban ghters, Yet on closer examination the attack of- Afghan army including the oer of jobs for defectors and fers some glimmers of hope. Afghan intel- Source: United Nations Office on Drugs and Crime the promise of protectionnot just from 1

www.storemags.com & www.fantamag.com 40 Asia The Economist January 23rd 2010

2 the Taliban but from American-led special tacular attacks in Kabul must be expected, In his previous job, he was criticised for forces. Senior NATO ocers will be moni- and perhaps a greater eort to threaten failing to curb police corruption. toring the programme, with hopes that it Kandahar, the second-largest city. The Tali- The ubiquity of ocial corruption is will be nanced by foreign donors, includ- ban have been talking up the failure of the laid bare in a rare UN report that seeks to ing Arab countries. Mr Karzai has called for butcher General McChrystal, and predict quantify it. A survey conducted by the a peace jirga, or tribal assembly, to promote a massive upheaval this year. UN’s Oce on Drugs and Crime found that reconciliation with insurgents. But Ameri- Matters are not helped by the murky half of the 7,600 Afghans interviewed had ca, for one, is sceptical about any attempt dynamics of Mr Karzai’s government. paid a bribe in the previous year (see chart to woo the Taliban leadership before After the scandals over ballot-rigging in on previous page), handing over on aver- NATO is in a stronger military position. last summer’s presidential election, Mr age $160 each time, about a third of average With his extra troops, General Karzai has been humiliated by parliament, annual GDP per head. This extrapolates to McChrystal hopes to expand the ink-spots which has twice rejected most of his cabi- about $2.5 billion worth of baksheesh na- of government-held territory in the main net choices. Many nominees appear to tionally every year: roughly as large as Af- population areas in the south. But the Tali- have been excluded for laudable reasons: ghanistan’s opium economy, and a quarter ban may well intensify their attacks in the their backgrounds as warlords or suspi- of licit economic output. For most Af- hope of minimising the eects of the surge cions of corruption and incompetence. Yet ghans, corruption outranks insecurity and and demoralising NATO forces. Last year many were surprised when Zarar Ahmad unemployment as the country’s greatest was by far the bloodiest for NATO in Af- Moqbel, a former interior minister, won challenge. Corruption corrodes Mr Kar- ghanistan, and the traditional winter lull in more votes than any other minister, and zai’s legitimacy; if he does not curb it, other ghting hardly exists any more. More spec- was given the counter-narcotics portfolio. problems may prove insoluble. 7

Politics and the courts in Pakistan Sri Lanka’s Tamil diaspora In disrepute Next year in Jana

Lahore The countdown to the post-Zardari era begins HE Supreme Court of Pakistan has arguments pave the way for challenges to Tamil émigrés follow the election made its intention clear. It wants to Mr Zardari’s right to sit in parliament. T campaign with jaundiced eyes turf Asif Zardari from the presidency and Morality, said the court, cannot be compel him to return the wealth that he divorced from the constitution. In order N THE dingy back oce of a Sri Lankan has allegedly looted and stashed away in to be a member of parliament, a person Igrocery shop in Harrow, north-west Lon- Switzerland. In a 287-page judgment must be of good character. So anyone don, sales assistants pore over a Tamil released late on January 19th the court commonly known to be disreputable can newspaper, while a customer says he is go- explained why it had ruled the National be chucked out even if there is no convic- ing home to follow events on the internet. Reconciliation Ordinance (NRO) uncon- tion against him. Mr Zardari ’s reputation, Having watched from afar as the Sri Lan- stitutional. The NRO, promulgated by the fairly or not, is that of a Mr 10%. kan army crushed the Liberation Tigers of ousted dictator, Pervez Musharraf, in The Supreme Court cited at length the Tamil Eelam in 2009, British Tamils are 2007, cleared Mr Zardari and his wife, the successful legal battles fought by the again transxed by a campaign on the is- late Benazir Bhutto, of all corruption governments of Nigeria and the Philip- landthis time for an election. On January cases against them. The court’s lengthy pines with the Swiss authorities in their 26th the president, Mahinda Rajapaksa, bids to get back the billions looted by will seek to capitalise on his military vic- Sani Abacha and Ferdinand Marcos. It tory at a presidential poll called nearly two has ordered Mr Zardari’s government to years earlier than it need have been. apply to the Swiss authorities to reopen The news, however, has been mostly the money-laundering case against Mr grim for the 1m or so members of the Sri Zardari and Ms Bhutto. Lankan Tamil diaspora. Most supported Political pundits foresee the end of Mr the rebels and the independent state for Zardari’s presidency. He has thundered which they battled. As the Tigers were de- about a conspiracy against his people’s feated, thousands of Tamils were killed. government, alluding to a nexus be- Now, the choice is between two candi- tween the army, the judiciary and a dates: Mr Rajapaksa, who launched the - section of the press. The army resents nal bloody phase of the war; and Sarath him as too soft towards both America Fonseka, who led the army that waged it. and India. His eorts to bring the gener- For Tamils that constitutes a dispiriting als under civilian control have earned contest. Both candidates are Sinhalese na- their hostility. The judges are on the tionalists; neither seems likely to hurry to- warpath. And the opposition is fanning wards the national reconciliation they the conict, hoping for a mid-term elec- have promised. But with the Sinhalese tion and the rout of Mr Zardari’s party. vote apparently closely split between Mr The court battles ahead are going to be Rajapaksa and Mr Fonseka, Tamils, who nasty. Sooner rather than later, the army constitute only 12% of the population, may is likely to step in try to break the dead- have the deciding say. In Sri Lanka the lock between the judiciary and the exec- Tamil National Alliance, once seen as a utive. Pakistan’s enduring tragedy, how- proxy for the Tigers, has announced its ever, is that its record is no better than backing for Mr Fonseka, as the only way to A poster and reputation in tatters that of the civilians. thwart Mr Rajapaksa. Many Tamil émigrés say they grudgingly support that decision. 1

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 Asia 41

2 Without votes, however, they can do little Mr Ozawa’s decision to clear his name to sway the outcome. while clinging to his exalted position in the They were not always so powerless. DPJ has already started to spatter the party Until May, when the war was won and with mud. It has not helped that Mr Ha- lost, the Tamil diaspora, which accounts toyama has also been involved in a politi- for one-quarter of Sri Lankan Tamils and cal fund-raising scandal, for which one of has large populations in Canada, Britain, his aides has been indicted. Opinion polls America and Australia, exerted huge pow- show public support for the government er back home. By nancing the rebelsto falling precipitously. This bodes ill for the the tune of $300m a year by some esti- DPJ’s eorts to secure approval of an ¥7.2 matesoverseas Tamils sustained a well- trillion supplementary budget for the s- armed guerrilla force, which by the end cal year ending in March, and for next had even a primitive air force able to bom- year’s budget. Both are exercises intended bard the main city, Colombo. to keep Japan’s precariously sluggish econ- The Tigers’ overseas network our- omy from sliding back into recession. ished after many Tamils ed their home- More worrying, analysts say, it may un- land in the 1980s. It controlled many as- Political scandals in Japan dermine the DPJ’s chances of winning a pects of diaspora life, including schools full majority in upper-house elections in and temples. In Tamil-populated areas Out of the July. That could mean a continuation of the such as Harrow, the Tigers’ defeat is sharp- scrappy coalition that has undermined Mr ly felt. Stories abound of humble shop- shadows Hatoyama’s rst months in oceor keepers made millionaires as the Tigers worse, political gridlock. were wiped out before collecting their With polls indicating that most Japa- Tokyo loot. But most lost out. Everyone gave nese favour his resignation, Mr Ozawa has The DPJ may pay a high price for money to the Liberation Tigers, says a 30- changed tack and agreed to be questioned standing behind its xer-in-chief year-old waiter in Sambar, a Sri Lankan by prosecutors. But the ruling party’s posi- café in Harrow. And we lost everything. CHIRO OZAWA (above), who is caught tion is tricky. Some believe Mr Ozawa is the Some Tiger supporters have tried to re- Iup in a messy funding scandal, is one of glue that binds it together; he has huge sup- ignite the campaign for a Tamil Eelam, or those kingmakers of Japanese politics peo- port among rst-time lawmakers who con- homeland. The Global Tamil Forum, one ple love to psychoanalyse. He is consid- sider him a genius at winning elections. of several new outts, says it is planning ered fair game for all manner of theories But others fear he may now be an electoral elections for a transnational govern- about his mood swings, his loneliness and liability. For the DPJ, it may well be best if ment in April. Around the world, referen- his craftiness. Colleagues describe him as he resigns, not least because since last dums are being organised on the Vadduk- an unobtrusive man; enemies nd him year’s elections, voters will have devel- koaddai Resolution, a document adopted cold and hard as a hatchet. oped a taste for kicking out those who let in 1976 by a group called the Tamil United His politics are as mysterious as his them down. If not, and the party shrinks Liberation Front, declaring the Tamils’ mind. Bag-carrier to two brazenly corrupt from kicking him out, the crowning para- right to statehood. bosses of the Liberal Democratic Party dox of his life may be damaging the party The Tigers’ former following, however, (LDP) in the 1970s and 1980s, he quit the he so badly wants to succeed. 7 is now rudderless, allowing dissenters to party in 1993. Leading the rival Democratic speak up. Brutal towards the very Tamils Party of Japan (DPJ), he eventually suc- they claimed to represent at home, the Ti- ceeded in driving the LDP from power last China’s assertiveness at sea gers also put heavy pressure on exiles, September. He did so using the dark arts of threatening to harm their relatives. Ragha- political patronage and cronyism so close- Choppy waters van, a founder of the Tigers in 1974, who ly associated with the LDP. As they all too left them a decade later and now lives in seldom were under the former regime, London, says their defeat is allowing more such practices are now in the dock. moderate views an airing on diaspora ra- The heat on Mr Ozawa rose sharply on dio stations and websites. January 15th and 16th with the arrest of his Beijing His greater hope is that a moderate two former secretaries and a current one, East and south, China makes a splash Tamil voice, without the Tigers to silence it, on suspicion of violating a law on political will now be heard in Sri Lanka itself. Over- fund-raising. The arrests were part of an in- EA of peace is the title China has be- seas, the diaspora will keep up the calls for vestigation by the Tokyo prosecutor’s of- S stowed on its adjacent oceans. But investigations into alleged war crimes, and ce into the source of the funds for a ¥352m sovereignty disputes between China and press for a political settlement to ensure ($3.8m) land-purchase in the city in 2004 its neighbours still roil the waters. In recent lasting peace. But there are fears Tiger ac- by Mr Ozawa’s investment arm. weeks, Japan and Vietnam have com- tivists overseas may seek to undermine Mr Ozawa’s enemies in the justice sys- plained about what they allege to be Chi- Tamil politicians who press for devolution tem may have an axe to grind. The loyalty nese encroachments. Attaching blame is rather than a separate Tamil state. They of the judiciary, like that of most civil ser- dicult. But at a time of a growing percep- might, for example, nance rival political vants, has for decades been to an establish- tion in the West that China is exing its parties. The government has always ar- ment closely allied to the LDP. The prose- muscles (see Charlemagne, page 52), coun- gued that support for the Tigers among the cutors, meanwhile, have leaked furiously tries closer to China’s shores also worry diaspora was almost entirely a result of ex- to the media, which, say Mr Ozawa’s de- that it might be getting more assertive. tortion. Not so, for they have one other sell- fenders, hints at an establishment conspir- Their squabbles are often aggravated by ri- ing-point that survives the evisceration of acy. Many in the party, including Yukio Ha- valry over undersea oil and gas. their coercive powers: the government’s toyama, the prime minister, have backed Less than two years ago, Japan and Chi- refusal to make real progress towards rec- Mr Ozawa, who says the money for the na reached an accord on their rival claims onciliation with its Tamil minority at land purchase came from his own family’s in the East China Sea that made it seem as home. The election may not change that. 7 bank accounts. if a long-running war of words might at 1

www.storemags.com & www.fantamag.com 42 Asia The Economist January 23rd 2010

Protest in Hong Kong On track for confrontation

HONG KONG China for once does Hong Kong’s democrats a favour EPENDING on your perspective, it itself. Half of its 60 members are directly Dwas either a pointless bit of argy- elected. The rest, including most of the 31 bargy outside a milquetoast legislative who backed the rail-link, are chosen by councilor a soul-stirring siege of functional constituenciesunelected Legco. Thousands of Hong Kongers, proxies for business and political in- young and old, came together on January terests, usually on China’s side. 16th to make some noise about spending It was this undemocratic set-up, rather on public infrastructure. Their protests than the improved connection to the were in vain, but the noise was heard. mainland’s railways, that had stoked Despite them, Legco approved fund- anger. The protesters see the oft-repeated 2 last be at an end. Now the two countries ing for a high-speed rail-link with Shenz- promise of representative democracy are at it again. Japan’s press reported that hen and Guangzhou, over the border in receding into the future. Hong Kong’s the foreign minister, Katsuya Okada, on China proper. On January 18th Donald government and ocials in Beijing have January 17th warned his visiting Chinese Tsang, the region’s chief executive, con- reason to feel jumpy. In parallel to the counterpart, Yang Jiechi, that Japan might demned the protesters, warning them to rail-link fracas, some of Hong Kong’s take measures should China go ahead reect, lest they suocate peaceful and democrats have been devising a new unilaterally with development of the rational expression of opinion. form of protest. Frustrated by the delays Chunxiao gaseld (Shirakaba in Japanese). Protesters organised by means of in implementing democratic reform, two Chunxiao lies just to the Chinese side texting, Twitter and Facebook. On Janu- political parties have declared that on of what Japan claims as the line, halfway ary 1st thousands of the same post-80s January 27th they will quit ve seats in between the two countries, dividing their generation had marched in support of Legco, one for each of the territory’s exclusive economic zones in the East Chi- universal surage. This challenges both voting districts. The quitters plan to na Sea. Japan’s fear is that gas extraction in Mr Tsang, who was chosen by an ap- contest the same seats in by-elections. Chunxiao could siphon o gas from Ja- pointed election committee, and Legco Their parties hope to turn these into a de pan’s side of the eld. The agreement facto referendum on democracy. reached in June 2008 was supposed to al- This will not be easy. The Democratic low joint exploitation of the eld. But last Party, the largest of the pan-democratic year Japan noticed activity suggesting that parties, has spurned the campaign. It China was moving in drilling equipment found many voters disapproved of the and preparing to go ahead on its own. Chi- idea, or did not understand it. A poll nds na said it was just conducting mainte- that 50% of voters oppose the by-election nance. Japan had expected a detailed plan, and 24% support it. Kenneth Chan, agreement on how it might take part to be who speaks for the campaign, concedes it reached soon after the 2008 accord. China will be hard work to cast the by-elections has stonewalled. Only after heated debate as a contest pitting democracy against did Mr Yang tell Mr Okada that he still business-as-usual. China’s government, cherished the pact. however, is doing its bit to help. This On January 19th the Chinese foreign week the State Council, or cabinet, ac- ministry, in language that recalled frostier cused the democrats of mounting a times in bilateral relations, said a proper blatant challenge to the authority of handling of the dispute was crucial to rela- the central government. This made the tions between China and Japan as well as by-elections look like a real referendum to regional stability. For good measure, it rather than yet another futile protest. also weighed in on a more arcane dispute Still, the democrats’ manoeuvre is a about a tiny Japanese atoll in the Pacic, dangerous gamble. They hold only 23 of Okinotorishima. China suspects Japan of Legco’s 60 seats at present, so they risk trying to build up what China dismisses as falling below the one-third of seats that merely a rock into a proper island. This allows them to block constitutional could reinforce Japanese claims to an ex- reforms. But then, Mr Chan notes, what clusive economic zone stretching 200 nau- A great night out at Legco has this veto done for them lately? tical miles (370km) from the atoll, which happens to lie on a militarily important route between the American island of cember, to Vietnam’s outrage, China in- surveillance ships. In testimony to Con- Guam and Taiwan. Such claims would cluded the Paracels in its plans for promot- gress on January 13th the American armed gravely damage the interests of the inter- ing tourism in its island-province of forces’ Pacic commander, Admiral Robert national community, said a Chinese Hainan. The Paracels boast ne beaches, Willard, said the Chinese navy had in- spokesman. (And perhaps, he omitted to but are wholly peopled by that uninviting creased its patrols in the South China Sea say, complicate China’s naval activities.) body, the People’s Liberation Army. and had shown an increased willingness China is doing some beeng up of its Worries in the region about China’s to confront regional nations on the high own in the Paracels, an archipelago in the ambitions have grown since tense encoun- seas and within the contested island South China Sea also claimed by Vietnam ters in the South China Sea early last year chains. China bristles at any suggestion (and, half-heartedly, by Taiwan). In De- between Chinese vessels and American that it can be a prickly neighbour. 7

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 Asia 43 Banyan The books of slaughter and forgetting

Why Indonesia’s book bans should not be shrugged o do not do irony) is a book called Lekra Doesn’t Burn Books, a reference to a leftist cultural institute, very inuential in the early 1960s, to which Pramoedya belonged and which was later demo- nised by the Suharto regime. Another banned volume covers In- donesia’s controversial annexation of Papua in 1969. An Australian lm has also been banned. Balibo presents the story of the deaths of ve Australian journalists during the 1975 invasion of East Timor. The lm is awed as a work of history. José Ramos-Horta, president of what is now Timor-Leste, jokingly grumbled to the director that the actor playing him as a young rebrand was not handsome enough. He can have had few other complaints about his portrayal. But its basic plot is the one Australia’s courts have decided is true: that the ve were murdered by Indonesian soldiers. Few Indonesians have much time for Australian eorts to dig up this bit of their country’s past. And some argue that the fuss the usual civil-libertarian suspects have made over the book bans misses the point. Far from sliding back to the authoritarian ways of the past, Indonesia now has arguably the freest and most vibrant press in South-East Asia. Law number 4, passed in 1963 to sanction erce censorship, was lifted for the press in 1999. HE past, even in Indonesia, is a foreign country: they did So, though books, pamphlets and posters remain under the Tthings dierently there. The downfall in 1998 of the 32-year Su- censor’s thumb, newspapers and magazines have proliferated. harto New Order regime seemed to mark the border as clearly They report the latest political intrigues involving Mr Yudhoyono as would a checkpoint and a queue for immigration. This side of with little restraint. The attorney-general’s oce is reportedly the boundary, Indonesia enjoys liberties, a raucous free-for-all of also mulling a ban on a book claiming campaign-nance viola- competing ideas and the luxury of democratic choice. On the tions by the president last year. But as soon as this became other side lurked repression, rigged elections, stied opinions known hawkers started ogging pirated versions across Jakarta. and a long list of banned books. So it is odd and not a little dis- Indonesia has more than 30m Indonesian internet-users, with turbing, in this last respect, to nd the freely elected government access to every fact, theory and guess about their country’s recent of President Susilo Bambang Yudhoyono not doing things dier- past. The censors’ argumentthe one used by their peers every- ently at all. In December the attorney-general’s oce banned ve whereis that the banned works might divide the nation and books. The government is looking at proscribing a further 20, lead to bloodshed. That does not hold water, for censorship no which might, it frets, prove a threat to national unity. longer works. If this is continuity, it is also an attempt to disguise it. Most of By the same token, it does not seem to matter overmuch that the books in question are histories; guidebooks to parts of that censors try to keep a couple of ngers in the information dyke. foreign country which the government still wants to keep out of The attempt to suppress recent history, however, does have two bounds. One tackles the mysterious atrocities that still haunt In- serious consequences. One is that the same mistakes keep being donesia: the massacre of hundreds of thousands of alleged com- made: not because they are forgotten, but because there is little munists and others as Suharto consolidated his power in 1965-66. public exploration of other options. So the blunders Indonesia’s Few horrors have been so unexamined. In Cambodia a awed ju- occupying soldiers made in East Timorthe dependence on tor- dicial process is at last asking questions about the Khmer Rouge ture, the co-option of unreliable local thugs, the closing-o of the terror from 1975-78. Even in China the show-trial of the Gang of region and refusal to discuss it with foreign countrieshave been Four served to hold a few responsible for the crimes of the many repeated elsewhere, in Aceh and now Papua. in the Cultural Revolution (1966-76). But in the villages of Java and Bali people still live side-by-side with their parents’ murderers or SBY’s new New Order? their families. And the torrent of bloodshed in which they were Second, and more fundamentally, the book bans hint at the iden- bereaved has never been ocially acknowledged, let alone sub- tity crisis suered by the Indonesian political elite. The Yud- jected to a truth-and-reconciliation commission. hoyono regime is rightly proud of its other democratic and liberal Back in 1998 the late Pramoedya Ananta Toer, Indonesia’s credentials. But it is not willing to declare a complete break with greatest novelist, a prison-camp veteran who was by then a deaf the past. The president himself is a New Order general who and cantankerous but still eloquent old man, enjoyed a moment served in East Timor. Both the main opposing presidential tickets of untypical optimism. At last, he believed, the truth about 1965 in last year’s election featured another Suharto-era general (each would come out. He dismissed the usual guess of up to 500,000 with a murkier reputation). It is easy to understand why they are deaths, claiming there had been 2m. Now that Suharto had gone, unwilling to confront the past. But until they haveand have re- there was no reason the truth had to lie buried with the many pudiated parts of itIndonesia’s democratic transformation will dead. Today Pramoedya’s books, at least, are unbanned. But had always seem provisional, and the past not so much a foreign he lived, he would be raging against the incompleteness of refor- country as the place where its leaders still live. 7 masi (reformation) and the resilience of censorship. Nor is 1965 the only forbidden territory. Also banned (censors Economist.com/blogs/banyan

www.storemags.com & www.fantamag.com 44 Middle East and Africa The Economist January 23rd 2010

Also in this section 45 Israel’s prime minister and the press 45 The Muslim Brothers’ new leader 46 Nerve-jangling Ethiopia

Peace talks between Israel and Palestine draft also stresses Israel’s Jewishness, the need to accept some facts on the ground Do get a move on (ie, the permanence of the largest close-to- the-line settlements), and the primacy of Israel’s security. But that raises the hackles of the Palestinians, who argue that the latest wording weakens the force of the 100% principle. Harping on Israel’s Jewishness is Jerusalem code, they say, for limiting the rights of Isra- After a long lull, the Americans believe they can get the talks going again el’s 1.5m Arab citizens, a fth of the total. ARACK OBAMA’S peace envoy, George less than what was requested, says Mr The Olmert-Abbas talks have gained B Mitchell, is back in his Middle East bai- Mitchell, but more signicant than any ac- weight as the peace process falters. The liwick after two months away, apparently tion taken by any previous government of two leaders were close to agreement not hopeful he can get Israelis and Palestinians Israel for the 40 years that the settlement only on a territorial principle that most for- to agree to terms of reference that would [movement] has existed. eign governments endorse but also on the let long-stalled negotiations resume. Both Mr Netanyahu’s freeze has two aspects. tricky issue of Jerusalem. Mr Olmert pro- sides still balk at his draft document’s latest Israeli soldiers recently tore down a cara- posed a ve-party commission, compris- wording. Mr Mitchell is begging Egypt, Jor- van put up by settlers at Elon Moreh, a set- ing Israel, Palestine, Jordan, Saudi Arabia dan and the Saudis to help him nudge the tlement in the West Bank’s northern heart. and the United States, to administer the en- Palestinians back to the table. There is now In contrast, Jewish Israelis are moving un- tire Holy Basin, the much-disputed area at least a chance they will succeed. impeded into homes they claim to own in that includes the Old City, what Jews call The Israelis say they are ready to re- the middle of Sheikh Jarrah, an all-Pales- the Temple Mount and Muslims the Noble sume talks with the Palestinian leader, tinian district of East Jerusalem. Recent Pal- Sanctuary, the Western Wall and the main Mahmoud Abbas (also known as Abu Ma- estinian calls for an initial six-month freeze Christian shrines. No single state would zen), without preconditions. But in the on settlement-building in the city’s eastern have sovereigntyonly God. same breath, Israeli ocials suggest that part have so far fallen on deaf Israeli ears. Many prominent Palestinians are sorry Binyamin Netanyahu, their prime minis- Mr Mitchell’s proposed terms of refer- such vital understandings were not nailed ter, may seek alternative approaches, hint- ence for new talks would have both sides down. But Mr Abbas contended then and ing at unilateral map-making of the West accepting the 1967 border as the basis of a later that Mr Olmert was a lame duck, fac- Bank, perhaps even with an American nal accord, with land swaps enabling Is- ing corruption charges and poised to re- wink. They even speak of a Jordanian op- rael to annex the largest settlements closest sign. If and when talks resume, the Pales- tion, a long-discarded old favourite of Is- to the old border, while the Palestinians tinians want to pick up where they left o. raeli hawks that would drastically water would add equivalent tracts to their own But Mr Netanyahu’s people say that Isra- down Palestinian independence. state. The wording would let the Palestin- el’s new government, elected by a right- Mr Abbas, who is still running the Pal- ians contend that what is envisaged is a lurching public, cannot be bound by such estinian Authority despite his promise (or Palestinian state recovering the equivalent unsigned, unpalatable understandings. was it really a threat?) to step down in prot- acreage conquered by Israel in 1967. This Backed by European leaders, Mr Mitch- est against what he sees as Israel’s intransi- dramatic breakthrough apparently oc- ell is urging Mr Abbas to give talks a gence, is sticking to his demand for a full curred in private in talks between Mr Ab- chance. Once they get going, the envoy im- freeze on Israeli settlement-building, in Je- bas and Israel’s then prime minister, Ehud plies, America will press Israel to extend its rusalem as well as in the West Bank, before Olmert, in late 2008but nothing was moratorium. We think that the negotia- the talks can resume. Mr Netanyahu’s an- signed. Israel’s present negotiators stress tion should last no more than two years, nouncement in November of a partial and that Mr Netanyahu has not endorsed this he says. Personally, I think it can be done temporary freeze, welcomed by the Amer- 100% principle. If he did, his largely right- in a shorter period of time. Mr Mitchell is icans, is still not good enough for the Pales- wing government would, they argue, fall. plainly one of nature’s optimists. But he is tinians. The ten-month moratorium is far To soften Israeli resistance, the Mitchell also a tough and shrewd negotiator. 7

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 Middle East and Africa 45

Israel’s prime minister and the media Why they are getting at his wife

Sara Netanyahu proves controversial again ARA does inuence me, says tary who worked for Mrs Netanyahu S Binyamin Netanyahu of his wife, a during her husband’s rst term as prime child psychologist by profession. She minister (1996-99). She would shout at helps me to be a more sensitive person me six times a day, at the press secretary and a more compassionate prime min- three times, and at Bibi onceI’m still ister. She says, ‘Be more attentive to other traumatised. people. Be attentive to the elderly, to Mr Netanyahu insists that Sara, his children, to Holocaust survivors. Be a third wife and mother of his two sons, better father, a better son, a better friend.’ keeps scrupulously out of aairs of state. I owe her a lot. But some people close to him say key Mr Netanyahu’s recent paean to mat- appointments are made and unmade at rimony followed days of ugly reports her behest. They say he loves her but and swirling rumours depicting Mrs fears herand often has to cover for her Netanyahu as a henpecking harridan and stormy temperament. A prominent the prime minister as her squirming commentator recently averred that Mr victim. The couple in turn portrayed Netanyahu is not t to hold his job be- themselves as the hapless casualties of a cause of his domestic circumstances, and nasty press war. everybody knows and is silent. Three days earlier Yediot Ahronot, the In its heyday a decade ago, Yediot sold country’s biggest-circulation daily news- more than all Israel’s other newspapers Badeea bids to bedazzle paper, split its front page, half with a together. It is still a formidable power but report on Haiti, half on a lawsuit led has lately been challenged by a feisty hood’s brand of conservative pan-Islam- against Mrs Netanyahu by a former new free-sheet, Yisrael Hayom, published ism, which nowadays generally eschews housekeeper of her weekend home for by a Jewish-American billionaire, Shel- violence and agrees to play by the rules of allegedly making her life a misery. She don Adelson. He and his paper ardently the secular state even if it thinks them un- demanded that I address her as Mrs Sara back Mr Netanyahu. Yisrael Hayom’s fair, may be losing ground. A growing Netanyahu, the plainti’s suit asserted. new weekend edition is threatening number of young people, frustrated by pa- If I called her Sara she would scream at Yediot’s advertising and circulation. ternalism and impatient for change, seem meWhenever I saw her I had to tell her So conspiracy theorists, privately attracted to more radical trends, such as how clever and pretty she wasShe egged on by both Netanyahus, say that arch-fundamentalist, Saudi-inuenced Sa- phoned me at home at two in the morn- Yediot is targeting Sara as a warning shot lasm that harks back to a pure form of Is- ing to complain about a cushion cov- to her husband that he should somehow lam said to have prevailed in the religion’s erShe insisted I bring four sets of work- rein in Yisrael Hayom. I have no doubt, earliest days, not to mention violent jiha- clothes: for doing the laundry, for clean- the prime minister hinted darkly, that dism. More moderate and even secular ing the loos, for cleaning other rooms and the truth behind this calumny will soon movements have also gained ground for working in the kitchen. come out. Meanwhile, Lay o my among ordinary people in various Arab Every word rings true, said a secre- wife, he pleaded. Target me. countries. In others, state repression has limited the Brotherhood’s sway. In Egypt itself, where Mr Badeea will The Muslim Brothers’ new leader horts face mounting challenges from with- preside over the movement’s headquar- out and within. ters, relentless waves of arrests, followed Which way now? Seen by some as a wellspring of global by trials in special state security courts, Islamist extremism and by others as a have crippled its organising power. With a moderate and modernising defender of general election due later this year, Presi- Muslim identity, the Brotherhood has long dent Hosni Mubarak’s government ap- carried inuence far beyond the borders of pears determined to avoid a repeat of its Cairo Egypt, where it remains the strongest op- humiliation in 2005, when Brotherhood An inuential movement sounds position party, despite sporadic persecu- candidates, running necessarily as inde- unusually hesitant tion and an ocial ban imposed since 1954. pendents, won a good fth of seats and HE election of a new leader of the Mus- Recent years have seen both triumphs would have got many more without the Tlim Brotherhood, one of the Arab and setbacks. Hamas, a Palestinian aliate state’s blunt interference at the polls. world’s most inuential movements, has of the Brotherhood, won the Palestinian Egypt’s interior minister, a man of few aroused an oddly muted response, not just general election in 2006, forcibly ousted words who heads a police force often from the group’s critics but from fellow- Fatah, its secular rival, from the territory a charged with brutality, recently ominously travelling Islamists as well. Muhammad year later and has run the Gaza Strip since. declared that, although the Brothers had Badeea, a media-shy 66-year-old veteri- Other close ideological kin include the achieved electoral success in the past, the narian, whose elevation to the post of the leading opposition parties in Jordan, Ku- situation is now dierent. Brothers’ supreme guide was an- wait, Morocco and Yemen, as well as The Brothers’ decision to choose Mr Ba- nounced on January 16th, is the eighth groups that have been banned and chased deea, a relative conservative who ran the leader of a movement founded in 1928, out of still more authoritarian states, such group’s recruitment and indoctrination with millions of sympathisers across the as Algeria, Syria and Tunisia. arm and has the cachet of repeated spells Muslim world. Nowadays he and his co- Yet in many of these places the Brother- in Egyptian prisons, may reect this dar-1

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2 kening atmosphere. Signs of increased Anxious Ethiopia has fallen by half, school attendance has hostility from a state that has often pre- risen dramatically and life expectancy has ferred to accommodate rather than con- Jangling nerves increased from 45 to 55 years. front the Brotherhood have persuaded Nourishing a liberal democracy or up- many of its members of a need to retrench holding human rights, however, has never and lie low for the time being. As in past been central to that agenda, even less so periods of repression, the group may re- after Mr Meles clobbered the opposition in Addis ababa sort to stressing what some Brothers any- 2005. Some Western diplomats insist, im- Meles Zenawi will probably win the way consider its main purpose: to spread plausibly, that politics has got better since. election. But that may not bring calm correct Islamic values rather than play The government and some opposition par- politics. But with Mr Mubarak ageing after ORRIES about Ethiopia’s election, ties have, for instance, signed a code of 28 years in oce and social unrest in Egypt Wdue in May, are growing. Aid-giving conduct for the coming election. Some of spreading, some Brothers also reckon a Western governments hope it will pass o the opposition groups are genuine, but period of political change is at handand without the strife that followed the last others are in hock to the EPRDF. In any that they should avoid confrontation to one, in 2005, when 200 people were killed, case, the main opposition grouping, Fo- preserve their strength for the future. thousands were imprisoned, and the rum, refused to join the talks, arguing that Yet despite the famed internal disci- democratic credentials of Meles Zenawi, the EPRDF would exploit any agreement pline that has sustained the Brotherhood despite his re-election, were left in tatters. for its own ends. The government has been for decades, nding a replacement for Mr Though poor and fragile, Ethiopia car- smothering potential sources of indepen- Badeea’s 81-year-old predecessor, Mehdi ries a lot of weight in the region. A grubby dent opposition, such as foreign and local Akef, exposed wide schisms. A younger, election could worsen things in neigh- NGOs. It insists it does not censor the press, more liberal faction, including many bouring Sudan, where civil war threatens but newspapers continue to close and in- Brothers who gained prominence in trade to recur. The borderlands near Kenya, dependent journalists are moving abroad. unions in the 1980s, had hoped to rise to where cattle raiding, poaching and bandit- Some farmers allege they are being denied the fore. Instead, elections in December to ry are rife, would become still more dan- food aid for political reasons. Egypt’s 15-man guidance council, which gerous. A renewal of unrest in Ethiopia Forum is demanding the release of one in turn, in consultation with a broader in- would be exploited by its arch-enemy, Eri- its leaders, Birtukan Mideksa, from prison. ternational council, elects the supreme trea, which already backs sundry rebel She was jailed with other opposition g- guide, saw a solid win for conservatives. In groups in an eort to undermine the coun- ures after the 2005 election, later par- an unprecedented breach of Brotherhood try’s government. And it could make mat- doned, then arrested again. She is unlikely tradition, Mr Akef’s second-in-command, ters even worse in Somalia, where jihadist to be let out again before the poll as she a relative reformist, resigned in protest at ghters linked to al-Qaeda want to weaken could, some say, pose a real threat to the what he charged were awed electoral Christian Ethiopia, where a third of the EPRDF in Addis Ababa and other cities. procedures. Non-Egyptian branches were people are in fact Muslim. Foreign intelli- Yet most Western governments seem also said to have been dismayed by the gence sources have long feared a jihadist keen to downplay Mr Meles’s human- outcome and by the promotion of a rela- attack in Ethiopia’s capital, Addis Ababa. rights record, hoping his re-election will tive unknown to the top post. Ethiopia is a country of contradictions. keep his country stable. America is to dis- Like Mr Badeea, many of the Brother- With its present population of around 82m burse $1 billion in state aid to Ethiopia this hood’s new Egyptian leaders belong to a growing by 2m a year, it is poised to over- year, more if covert stu is included. Ethio- generation that suered extreme torture take Egypt as Africa’s second-most-popu- pia can expect a similar amount from the after a wave of arrests in 1965. They remain lous country after Nigeria, with around European Union, multilaterally and loyal to the memory, if not fully to the rad- 150m. It hosts the seat of the African Union. through bilateral arrangements with Brit- ical ideology, of Sayyid Qutb, a Brother- It runs one of Africa’s biggest airlines. This ain and others. And climate-change deals hood intellectual who was arrested in the year its economy is predicted to grow by may bring Mr Meles even more cash. 7 same sweep, then hanged for writings that 7%, one of the fastest rates in the world. It is promoted rebellion against indel re- wooing foreign investors with oers to gimes. Qutb is widely seen as a fount of in- lease 3m hectares of arable land. It is ex- spiration for radical jihad. Since being al- pensively branding its coee for export. lowed to re-emerge in Egyptian politics in Yet the grim side is just as striking. Hun- the 1970s, the Brotherhood has repeatedly ger periodically stalks the land. Some 5m and vehemently renounced the violence people rely on emergency food to survive; that Qutb espoused for political ends, ex- another 7m get food aid. Few people bene- cept in the cause of defending Muslim t from the country’s free market. Ethiopia land; hence its support for Hamas in Pales- has one of Africa’s lowest rates of mobile- tine. Yet the new leadership’s loyalty to phone ownership. Income per head is one Qutb’s philosophy inevitably raises con- of the most meagre in the continent. cerns. Some suspect Egypt’s government All this is the responsibility of Mr of itself promoting the conservatives’ rise Meles’s Ethiopian People’s Revolutionary by arresting moderate Brothers to make Democratic Front (EPRDF), which has run the movement look less appealing. the show since 1991. The party is domin- In his acceptance speech, Mr Badeea ated by former Marxist rebels from Tigray, stressed his belief in peaceful, democratic even though Tigrayans, among them Mr action. The Brotherhood sees neither Meles, make up only 6% of Ethiopia’s pop- Egypt’s government nor Western powers ulation. Not that Tigrayans want to cling to as hostile, he said. But he did condemn power, says Mr Meles brusquely. It is just what he called this global system that ac- that Ethiopia needs consistency to pursue cepts freedom and democracy for its own a long-term development agenda. And the people but denies our people the same. A EPRDF can point to some successes. Since bitter struggle, it seems, will continue. 7 Mr Meles came to power, infant mortality Upwardly mobile Meles

www.storemags.com & www.fantamag.com Europe The Economist January 23rd 2010 47

Also in this section 49 Germany’s divided government 50 Sweden leans left again 50 The Irish economy 51 Greece’s public nances 52 Charlemagne: Europe and China

Europe.view, our online column on eastern Europe, appears on Economist.com on Thursdays. The columns can be viewed at Economist.com/europeview

Ukraine’s election There was little room for hope, faith, love, hatred, commitment or passion in this Five years on in Kiev election. These emotions were replaced by pity, inertia, tiredness, indierence and depression, lamented Zerkalo Nedeli, a Uk- rainian weekly. After the drama of the orange revolu- KIEV and kolomiya tion, disappointment was perhaps inevita- The presidential election shows that the orange revolution is out of pu, no matter ble. But the orange camp’s failure to hon- who eventually wins our its promises has been breathtaking. It is N DECEMBER 3rd 2004 jubilant the wrong direction. Ukraine lies 17th from often blamed on a trap set in 2004 by Mr Ocrowds owed into a snowbound bottom in the latest global index of eco- Yushchenko’s foes, who pushed through a Kiev’s Independence Square, waving their nomic freedom, below Russia and Belarus. constitutional change to split executive orange ags, to celebrate a court decision to It is to the credit of the voters that the power between the president and parlia- annul Ukraine’s rigged presidential elec- failure of Mr Yushchenko and his team has ment. Yet that did not come into force until tion two weeks earlier. They cried and they not discredited the very concept of democ- 15 months later. At the start of 2005 Mr dancedand the world was gripped by the racy, as happened in Russia in the 1990s. In Yushchenko had a free hand and a soaring sight of a sleepy Ukrainian people waking the election Mr Yushchenko was uncere- approval rating. He could have made any up to defend their freedom. moniously booted out, gaining just over reforms: we would have supported him. Days later, their hero, Viktor Yush- 5% of the vote. Viktor Yanukovich, the bad But he wasted an opportunity, laments a chenko, his face disgured by a mysterious guy in 2004, got 35%, against 25% for Yulia truck driver in western Ukraine. poisoning, promised change. Everything Tymoshenko, the prime minister, who Even Mr Yushchenko’s fans now say he will change in Ukraine from today. We energised the crowds in 2004 but has since was weak and had neither a plan of action were independent for 14 years but we were fallen out bitterly with Mr Yushchenko. nor strong advisers to push through re- not freeWe should roll up our sleeves The two front-runners will now face each forms. He destroyed the bureaucratic and work honestly from morning till night other in a second round on February 7th. machine of his predecessor, Leonid Kuch- for this country. He promised that bandits Ukraine is as divided as ever, with the ma, but put nothing in its place. Bandits would go to jail, honest types would re- industrialised, Russian-speaking east and went unpunished; business friends were place corrupt ocials and judges would south backing Mr Yanukovich and the cen- rewarded with lucrative deals. After mak- no longer take bribesand that in ve tre and west supporting Ms Tymoshenko. ing Ms Tymoshenko prime minister, he years’ time Ukrainians would be proud of The only politician who did well all over promptly set about undermining her. In their achievements. For a time Ukraine be- the country was Serhiy Tyhypko, a former 2006, when Russia cut o the gas, he ac- came fashionable the world over. banker who ran and then quit Mr Yanu- cepted a shady gas-trading scheme de- All that enthusiasm has now turned to kovich’s campaign in 2004. He fought the signed by his predecessors. fatigue. Ukraine’s under-reformed econ- best campaign and took 13% of the vote de- omy teeters on the edge of national bank- spite, or more likely because of, being ab- On the edge ruptcy, the rule of law is elusive, courts resent from politics in the past ve years. The roots of Ukraine’s ills stretch far be- main corrupt and the parliament That an unpopular incumbent can be yond Mr Yushchenko’s weakness or Ms resembles a trading platform for business peacefully removed is an achievement of Tymoshenko’s populism. The country tycoons in which deals are made and seats the orange revolution. Yet Ukraine’s free lacks a strong elite or any experience of bought and sold. In April 2005 some 53% of (and frequent) elections are providing nei- sovereignty. Apart from a brief period just Ukrainians said their country was on the ther good governance nor stability, which after the Bolshevik Revolution, Ukraine right track. Now 81% believe it is heading in may explain the voters’ gloomy mood. has never been an independent country in 1

www.storemags.com & www.fantamag.com 48 Europe The Economist January 23rd 2010

2 modern times. It has spent most of its his- Ukrainian language and trying to revise crime. In the late 1990s he became gover- tory under Russian, Polish or Austro-Hun- history. This did little for the Russian- nor of Donetsk and befriended Rinat Akh- garian rule. Its independence in 1991 only speaking east, not to mention Crimea, metov, now Ukraine’s richest steel mag- came out of the Soviet Union’s collapse. In which still has not been fully integrated nate. When the orange revolution began, his book Unexpected Nation, Andrew into Ukraine (and which includes Sebasto- Mr Yanukovich and his supporters Wilson, a historian and analyst at the Euro- pol, host to Russia’s Black Sea Fleet until its brought in nasty-looking toughs from Do- pean Council on Foreign Relations, argues lease runs out in 2017). Mr Yushchenko ob- netsk to balance the orange crowd. that it arrived as much by accident as dejected to Russia’s version of history, but he In the 2004 election Mr Yanukovich sign. And as in other parts of the former too was ideological. He insisted on calling had the backing of Russia’s then president, Soviet Union, independence initially the famine of 1932-33, a deliberate and hor- Vladimir Putin, who rushed to congratu- brought neither economic liberalisation rendous extermination of peasants by Sta- late him. The Kremlin might have expected nor much change at the top. lin, an act of genocide, when it aected the a brutal dispersal of the crowd, but Mr In the late Soviet era, aspirations for Uk- entire Soviet Union. Kuchma would not sanction the use of rainian independence were conned to a He said little of the dark pages in Uk- force. Even today Mr Yanukovich is unre- group of dissident writers and intellectu- raine’s own history, including collabora- pentant: The rigging has not been proved. als. The popular appeal was weaker than tion with Nazi Germany and the role of the What happened in Ukraine would not the force of the KGB: as many as half of all Ukrainian Auxiliary Police in administer- have happened in any civilised country. It political prisoners in the Soviet Union ing the Holocaust. For instance, in Ivano was not an electionit was a coup, he were from Ukraine. When the nationalist Frankivsk, where some 100,000 Jews were complains. Despite a makeover by Ameri- movement was allowed to resurface in the killed, the authorities have put up a monu- can political consultants, Mr Yanukovich late 1980s, it was as much concerned with ment to 27 Ukrainian insurgents who were has not shaken o his image of a thuggish, the revival of Ukrainian culture and lan- killed by the Nazis, but not even a plaque inarticulate man. guage as with democracy or market re- on the site of Jewish mass graves. Anti- Yet his pro-Russian candidate label is forms. Nationalists in eect struck a deal, Semitism is no longer rampant, but it is misleading. He represents the Russian- under which the Communists conceded partly a failure to teach history that allows speaking east, but has done little to ad- independence but were allowed to keep Nadia Mateiko, an art student in Kolomiya, vance Russia’s interests, instead jealously their power and assets. to say of Ms Tymoshenko: I don’t want guarding those of such tycoons as Mr Akh- Leonid Kravchuk, the last Communist this Jew to be the president of my country. metov. What Mr Akhmetov wants is a po- boss, became Ukraine’s rst national presi- It is not their land. (Ms Tymoshenko is not litically and economically stable Ukraine. dent in 1991 with no idea how to run an even Jewish.) Yet some of Mr Yanukovich’s team do not economy. Ukraine fed the entire Soviet History is of little comfort to poor peo- inspire condence. They include a former Union, and we thought that if we were on ple in western Ukraine, where remittances nance minister, Mykola Azarov, architect our own we would be rich. Nobody under- from illegal workers abroad are often a of the repressive tax inspectorate, as well stood the market economy here, he says. main source of income. Five years after the as the creators of the opaque gas-trading By 1993 hyperination had set in, and Uk- orange revolution, hopes for a dynamic scheme with Russia. Mr Yanukovich wants raine suered one of the sharpest drops in and modern Ukraine remain just that. to renegotiate today’s gas agreement, GDP of any country in peacetime. Unlike Some may now be invested in Mr Ty- which excludes shady intermediaries. Russia and Poland, Ukraine did not have hypko, who refuses to back either front- liberal economists in charge, but a shifting runner. Ukrainians have to pick one of two The gas princess kaleidoscope of clans, shadowy business familiar faces: Mr Yanukovich or Ms Ty- Even so, many businessmen worry more and old nomenklatura interests, says Mr moshenko. It is like a choice between the about the populist Ms Tymoshenko. In her Wilson. America and the West focused on plague and AIDS, says Yulia Mostovaya, early days she was known as the gas prin- ridding Ukraine of nuclear weapons and editor of Zerkalo Nedeli. cess, having made money as boss of Un- paid little attention to the economy. Left to Mr Yanukovich has the esh and blood ited Energy System, a gas intermediary their own devices, politicians built a rent- of the clan system. Born into a poor work- that won lucrative contracts from Pavlo seeking, corporatist state. ing-class family in Donetsk, a coal-mining Lazarenko, a former prime minister who Mr Kuchma, who was elected in 1994, at centre, he lost his parents early. By the age partly owned the company and was arrest- least managed to stabilise the economy. of 20 he had two convictions for violent ed and jailed in America in 1999 for mon-1 With Mr Yushchenko, rst as head of the central bank and later as prime minister, he launched a currency in 1996 and set about privatisation. But reforms stalled and Uk- raine slipped into a semi-authoritarian state. Mr Kuchma then overplayed his hand by trying to anoint Mr Yanukovich as his successor. The orange revolution was not aimed personally at Mr Yanukovich but against the idea of transferring power like this. It was also a revolution against a kleptocratic system that held the country back, bullied opponents and had journalists killed. The Ukrainian middle class, tired of muddling through, trusted Mr Yushchenko to smash that system. But the rst real Ukrainian president, as Mr Yushchenko called himself, was too backward-looking. Instead of governing, he tried to boost national consciousness by promoting the

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2 ey-laundering and fraud. But Ms Tymosh- in the Kremlin. enko was not implicated and, as deputy Yet Ukraine is not Russiaand Ms Ty- prime minister in 1999, she used her moshenko is not Mr Putin. She does not knowledge to clean up the energy busi- have a background in the security services. ness. (For her pains, she was even put in She faces regional divisions that make cen- prison for a few months.) tralisation of power hard in Ukraine. In 2004 her charisma and energy elec- Democratic forces are stronger and criti- tried the orange revolution, but as prime cism from the West has more weight than minister in 2005 she revealed a worrying in Russia. Moreover, low credit from the populism, trying to regulate meat and pet- voters and the dire state of public nances rol prices and advocating state control of mean that whoever wins the election will the commanding heights of the economy. be constrained in what they can do. She also rattled some oligarchs by revers- Ukraine’s economy has been kept ing the dodgy privatisation of a vast steel aoat by IMF money. But late last year the factory and reselling it for six times as IMF suspended its programme because of much. But when she was red, the orange ballooning public spending. Ukraine’s coalition fell apart. budget decit stands at 12% of GDP and the Two years later, she came back as prime country has no real way of nancing it. Uk- minister and managed to scrap RosUkr- raine’s sovereign international debt is Energo, the biggest and shadiest of the manageable, but its domestic obligations country’s gas intermediaries. But her gov- are not. Mr Pynzynek estimates that, by the ernment made little progress with other re- spring, Ukraine will run out of cash to pay forms. For this she blamed Mr Yush- pensions and salaries. This may at last chenko, who vetoed many of her Power-hungry princess force squabbling politicians to act. decisions. She then managed the feat of The winner on February 7th will need winning an IMF bail-out without fullling press conference before the election had a to raise heavily subsidised gas prices and the fund’s demands to raise gas prices and Putinesque tone. It is not hard to imagine cut public spending with a vengeance. He cut public spending. her doing dodgy deals with Mr Putin in ex- or she must trim red tape and hope that Viktor Pynzenyk, who resigned as - change for Russian help to keep her in Ukrainian business pulls the country out nance minister last year after failing to stop power. Nor does she have many scruples of its hole. Ukraine may be tempted to ask a deliberately unrealistic budget, says that about her allies. One is said to be Viktor Russia for helpand Russia may be tempt- the IMF money was not the cure but the Medvedchuk, Mr Kuchma’s notorious ed to grant it in order to secure more inu- hair of the dog. In 2009, when the econ- chief of sta, who is accused of harassing ence. After 18 years of independence the omy shrank by 15%, budgeted spending the media and bullying businessmen. Mr biggest threat to Ukraine is its inability to rose by 35%, he says. The crisis gave us a Medvedchuk, who asked Mr Putin to be a govern itself. The election is tight, and the chance to reform the economy and we godfather to his child, is a welcome guest country can ill aord another deadlock. 7 wasted it. Yet, by juggling gures and budgets, Ms Tymoshenko has managed to sustain much of her political support. Germany’s divided government There are at least two reasons why she may win on February 7th despite lagging Waiting for Angela behind in the opinion polls. First, she is a much cleverer and more appealing politician than the inarticulate and slow-thinking Mr Yanukovich. (Her profession is to speak and to lie beautifully and I can’t do it BERLIN like her, Mr Yanukovich admits.) Second, Germany’s coalition still struggles incessantly to agree she seems more desperate for power than Mr Yanukovich, who enjoys hunting and N A Berlin cabaret theatre, a comedy that promised this much when it agreed to join tennis as much as politics. Tymoshenko’s Iopens with the discovery that Angela the ruling coalition. But scal conserva- priority is to be in power at any cost. Princi- Merkel has disappeared is leaving audi- tives within the CDU and its Bavarian sis- ples are secondary, says Mr Pynzenyk. ences rolling in the aisles. Party ocials ter party, the Christian Social Union, fret But that may also make her a riskier rush about the stage asking one another more about bringing back into balance a choice. She campaigned on the slogan of where’s Angela? A few blocks away, in budget decit that may reach as much as bashing the oligarchs and will have to the government district surrounding the 6% of GDP this year. make an example of some. But she has also Bundestag, the absence of leadership by On January 17th Ms Merkel met the been trying to reassure and pull to her side Ms Merkel is less of a laughing matter. Her leaders of all the coalition parties to try to people like Mr Akhmetov and Viktor Pin- centre-right coalition continues to squab- stop the incessant sniping between these chuk, another magnate. They may not ble over such fundamental policies as tax ostensible allies. Yet despite all of them is- want to jeopardise their wealth and safety cuts and health-care reform three months suing a grand-sounding Berlin declara- by opposing her. The danger is that she will after it took oce. One result is that it is tion, little of substance seems to have ac- seek to maximise her power rather than slipping in the opinion polls. tually been settled. Ms Merkel promised to push through reforms and strengthen the The main sticking-point is a dispute reform the structure of the tax system next institutions that would then keep her am- over tax cuts between Ms Merkel’s Chris- year, without giving any details. As to bitions in check. tian Democratic Union (CDU) and her ju- whether cuts will actually be implement- She has certainly found a common lan- nior coalition partner, the liberal Free ed, that decision will be made only in May, guage with Mr Putin, now Russia’s prime Democratic Party (FDP). The FDP wants to when new revenue forecasts are in. minister, who has said he could work with reduce taxes by almost 20 billion ($29 bil- Yet deferring a decision on tax cuts is as her. Her nal three-hour long televised lion) next year and believes that it was good as kiboshing them. Ms Merkel man-1

www.storemags.com & www.fantamag.com 50 Europe The Economist January 23rd 2010

2 aged to push through 8.5 billion in tax re- Sweden leans left again lief for families and a reduction in value- Scandinavian sorrows added tax for hotel stays towards the end Trouble at home Swedish: of 2009. But enthusiasm for further cuts in GDP, % change budget balance, taxes is waning by the hourespecially on previous year % of GDP since it emerged that the FDP’s largest cam- 5.0 paign nancier was a wealthy hotelier who will prot nicely from the VAT cut. Fredrik Reinfeldt’s government is 2.5 Debate over the new budget, which be- falling out of favour with voters + gan in parliament this week, is likely to be overshadowed by continuing agonising E DID our best, said Carl Bildt, as 0 over an air strike in Afghanistan last Sep- Whe handed over the presidency of – tember. Starting on January 21st a parlia- the European Union to Spain at the start of 2.5 mentary committee will look into the inci- January. The Swedish foreign minister dent, in which civilians made up a large takes pride in his country’s accomplish- 5.0 2005 06 07 08 09* part of the 142 casualties. Under scrutiny ments, which included shepherding Source: Economist Intelligence Unit *Estimate will be not just the events leading to the through the much-delayed Lisbon treaty, airstrike, but also whether the new de- making progress with EU enlargement and fence minister, Karl-Theodor zu Gutten- doing some good work on nancial regula- of the centre-right coalition, seems to be berg, misled parliament about it. tion and climate change. Fredrik Reinfeldt, warming to the idea. But another referen- His is not the only reputation on the the prime minister, even averted a possible dum is unlikely to be held soon. The Social line, amid much grumbling over Ms Mer- row among his colleagues in the delicate Democrats, who lost the previous one, kel’s overall handling of the war. This even matter of lling top EU jobs. Most EU lead- have said they do not want the issue put to extends to the army. Colonel Ulrich Kirsch, ers praised Sweden’s centre-right govern- voters during the next parliament. head of the German Armed Forces Associ- ment for its competent stewardship. If Mr Reinfeldt ends up losing in Sep- ation, this week called for Germany to re- But Mr Reinfeldt’s voters are less happy. tember to the Social Democrats’ Mona inforce the 4,500 soldiers it has in and A recent poll put support for the opposi- Sahlin, it will have historical resonance. around Kunduz, arguing that reconstruction Social Democrats at 52%, giving them Sweden’s previous centre-right govern- tion cannot take place without more boots a whopping 11-point lead over the government, an energetic reforming one led by on the ground. Even more cutting was his ment. Mr Reinfeldt, who led his centre- Mr Bildt in the early 1990s, lost in 1994 large- demand that Ms Merkel should take re- right coalition to victory in 2006 after 12 ly because it had the misfortune to be hit sponsibility for co-ordinating the disparate years in the political wilderness, has just by an economic crisis. Something similar civilian reconstruction and military eorts eight months left to narrow the gap before occurred in the late 1970s. If it happens this that are under way. A committee to do this the next election, on September 19th. September as well, Mr Reinfeldt might be has just been set up. But for most of the The economic crisis will make his task forgiven for concluding that, in Sweden, past year or two the chancellery has much harder. Along with most of the EU, the centre-right is forever jinxed by crises seemed to want to have as little to do with Sweden’s economy started to recover in that are largely not of its making. 7 the war as possible. In the months before the second half of 2009, albeit slowly. But the election, Ms Merkel’s knack of avoid- the previous 12 months of recession have ing controversy by steering clear of any left deep scars. Heavyweight Swedish The Irish economy awkward policy issues seemed adroit. companies such as Saab, Telia and the air- Months into her second term, her unwill- line SAS have shed thousands of jobs. Al- Green shoots ingness to make hard choices is being though the government plans to keep its viewed less charitably. 7 scal-stimulus measures in place, unemployment will rise further. The government predicts a level of 10.7% this year, up from 8.5% in 2009. Anders Borg, Sweden’s Good news on the public nances respected nance minister, concedes that suggests Ireland’s recession is over the jobs situation will remain dicult. Public-spending and benet cuts are OR the gloomier sort of Irishman, the likely to make life harder for the govern- Fbrutal downturn that followed the ment. Many pensioners are complaining country’s long boom is proof that nothing about the bipartisan formula that links good ever endures. Thankfully recessions pensions to GDP growth, since it has do not last forever, eitherand Ireland’s meant reduced pensions in the recession. may already have come to an end. Figures Some welfare recipients are objecting to released just before Christmas showed the government’s heartless eorts to get that GDP rose by 0.3% in the third quarter them back into the workforce. In hard of 2009, broadly in line with the rest of the times Swedes’ natural centre-left instincts euro area. Unemployment is still rising, tend to come to the fore. but at a slower pace. It jumped from less One surprising result of the crisis has than 5% of the workforce at the end of 2007 been a softening of opposition to the idea to 12% by June 2009, but it has only barely of adopting Europe’s single currency, the edged up since. euro. Swedes rejected a proposal to join in The most encouraging signs of recovery a referendum in 2003. For the most part are to be seen in the public nances, which they have since shown little inclination to were ruined by recession. Ireland’s nance change their minds. A recent poll, how- minister, Brian Lenihan, revealed on Janu- ever, reported a slim margin in favour of ary 5th that the 2009 decit was 620m A chancellor prays for more unity joining. Even the Centre Party, a member ($860m), smaller than he had forecast in 1

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2 his budget only a month previously. That the third quarter. GDP rose only because formidable. The full force of past measures good news owed much to tax revenues in imports fell even faster. And GNP, which to tackle Ireland’s huge budget decit will December that proved stronger than ex- includes net interest, actually fell because be felt this year. Property wealth is shrink- pected. Just as a depletion in the state cof- of rising interest costs on foreign-owned ing and consumers are weighed down by a fers was an early sign that Ireland’s boom public debt. debt burden made heavier by falling was ending, healthier revenues augur well The jobless gures may also mislead. wages. But each grim fact also contains a for recovery. The number of foreign-born workers germ of optimism. After December’s se- Most economists are still cautiousa shrank by almost a fth in the year to the vere budget, the sense that public nances single month of better revenues is scarcely third quarter, and many of those who lost are no longer out of control will boost con- a trend. Quarterly GDP numbers are their jobs left Ireland. Jobless Irish may not dence, and not only in nancial markets swayed by seasonal factors (agriculture is linger either. There are well-trodden trails (the opposite of what is happening in still a biggish part of the economy) and by abroad, such as to Australia. There are even Greece, see box). Spending dropped faster the activities of a handful of big foreign- tales of the Irish following migrants back than incomes last year as householders owned rms. Spending by consumers, to Poland in search of work. hoarded cash. The saving rate, some 2.3% in companies and the government all fell in Obstacles to a brisk recovery are still 2007, may have risen as high as 11.5%, says Alan Barrett at ESRI, a Dublin-based research institute. As condence returns, Greece’s public nances even a small reversal in this trend would give spending a llip. Pull the other one Wages are falling, but so are prices. Both are helping to improve Ireland’s competi- ATHENS tiveness, a vital gain for a small open econ- A Greek decit-reduction plan is greeted sceptically omy. Exports have held up fairly well, a re- ONFRONTING the vociferous farm growth forecasts of 1.5% next year and silience that owes much to the presence in C lobby is a critical test for every Greek 1.9% for 2012. Unable to aord a stimulus Ireland of American drug and medical- prime minister. A year ago thousands of package, Greece seems more likely to stay equipment rms, whose output is largely farmers blockaded main roads across the in recessionthe economy shrank by 1.2% recession-proof. country, intimidating Costas Karaman- in 2009than to stage a rebound. That in Sluggish growth in the rest of the euro lis’s conservative government into turn would make it less likely that rev- area is something of a mixed blessing (see coughing up a 500m ($705m) package enue-raising targets would be hit. page 69). One plus is that it has sapped the of support. A year later they are up to the Credit-rating agencies also seem euro’s strength, which will help Irish ex- same trick, asking George Papandreou’s unconvinced by the Greek plan, reiterat- porters to sell more to America and Britain, socialist government to nd 1billion for ing their negative outlook for Greece, a their two biggest markets. Another is that it further crop subsidies, along with cheap- veiled threat of further downgrades to is deterring the European Central Bank er fuel and a three-year freeze on debt the country within two or three months. from raising interest rates. A rate rise repayments. By January 20th more than Worse, nancial markets reacted badly. would hit Ireland hard, because of its high 2,000 agricultural vehicles were blocking Spreads on ten-year government bonds household debts and still-fragile banking roads around Greece. over German Bundsa measure of the system. These weaknesses may play to But the cash-strapped government is perceived risk that Greece may default on pessimists’ fears, but at least for now the hardly in a position to make any conces- debt repaymentsedged upwards. Prices optimists have something to cling to. 7 sions to special interests. On January 14th of credit-default swaps, a form of insur- it unveiled an ambitious plan to cut its ance against default, hit record levels on budget decit from 12.7% to 8.7% of GDP January 20th. this year, and to below the 3% ceiling for Greece must borrow 55 billion this euro-area members by 2012. Reaction to year to nance a public debt swollen by the plan in Brussels was lukewarm; in years of budget overruns. Many fear that response, George Papaconstantinou, the the country will struggle to manage this. nance minister, promised to take further About 25 billion of existing debt must tough measures later this year if targets be rolled over in April and May. Normal- were missed. ly Greece’s debt-management agency Economists have queried the plan’s would already be raising extra funds to ensure that all goes smoothly in the spring. But the agency has not yet an- Default worries nounced a fund-raising programme for Credit-default-swap* spreads, basis points this year. Since November it has resorted to issuing short-term treasury bills with 400 maturities of up to one year, which are 350 Ireland seen as less risky than ve- or ten-year 300 bonds. But it is having to pay a sizeable 250 premium even on these. 200 To avoid calamity, the nance min- 150 Greece istry will try to make private placements 100 of debt with international banks. Yet 50 some traders in Athens fear that a crunch 0 cannot be avoided. And if Greece falters, SONDJFMAMJJASONDJ it could drag other struggling euro-area 2008 09 10 members like Ireland down too, even if Source: Markit *5 year their scal eorts have been braver. Good for you once more

www.storemags.com & www.fantamag.com 52 Europe The Economist January 23rd 2010 Charlemagne Europe and an inscrutable China

The European Union gets more realistic about Chinaand China gets more realistic about the EU bullied Barack Obama over arms sales to Taiwan and meeting the Dalai Lama. In private meetings with European envoys, Chi- nese ocials have unveiled a hubristic new argument for lifting the arms embargo: unless it goes, in years from now Europe will not be able to buy its arms from China. In Brussels it is hard to overestimate the shock caused by the EU’s failure to achieve its goals at December’s climate-change summit in Copenhagen. In the EU hard problems are xed like this: call a summit of leaders, set out public goals for action, declare a nal deadline and then thrash out a compromise behind closed doors. Deals are done with a judicious blend of appeals to principle, arm-twisting and redistribution towards less wealthy nations. That model failed utterly in Copenhagen. True, everyone has a dierent story about Copenhagen. Euro- peans are cross with America, India and others in a low-ambi- tion coalition. But their strongest words are reserved for China, accused of a refusal to accept anything touching on its sovereignty and of secretly inciting small, poor allies to obstruct a deal. American ocials say the summit came too soon. They complain that the Europeans thought they could bounce Mr Obama into binding emissions caps that Congress was not willing to ap- NCE upon a time, or about two years ago, the European Un- prove. Senior Chinese analysts say that European threats of bor- Oion was full of optimism about China, and how it was be- der taris on Chinese goods fuelled a sense that the rich world coming a responsible stakeholder in the world. Reports poured was out to get China and tax its growth. out of think-tanks with titles like Can Europe and China shape American and European ocials at least agree that Copenha- the new world order? Europe had a good chance of persuading gen was a disappointment. China’s government hailed the out- China that its interests lay in co-operation over climate change, come as excellent. That does not sound like a responsible stake- Africa or nuclear proliferation, it was said. And Europe was better holder talking. China was amazingly rude at Copenhagen, placed than America: European co-operation was a model and, sending a deputy minister to shout at with Mr Obama, for in- unlike America, Europe was not a strategic rival. stance. Such assertiveness punctures happy Euro-dreams of a Head into ancient history, or to 2004, and such leaders as multipolar world. It turns out that the only thing that alarms France’s Jacques Chirac were telling Chinese leaders they shared Europeans more than a swaggering American president is one a common vision of the world, based on a multipolar system who seems weak. And Copenhagen popped yet another bub- in which international balance would be achieved by closer blethe idea that leading by example can be used to coerce oth- ties between Europe, China and Russia. In case that jab in Ameri- ers. Europe’s strategy was to press others to match its own conces- ca’s eye was not clear enough, France and Germany led calls for sions on carbon emissions. But the EU barely existed at the talks. the lifting of an EU arms embargo imposed on China after the Tiananmen Square protests in 1989. (European discussions on lift- E pluribus disunity? ing the embargo were shelved in 2005, under heavy American American and Chinese illusions about European unity are also pressure.) This was also the age of books with titles like Why Eu- popping like soapsuds in the sun. The Lisbon treaty came into rope will Run the 21st Century. Europe was bullish about its ex- force in December. EU leaders appointed underwhelming gures emplary wealth, social harmony, and post-national kindliness, to ll the top posts it created, and are now squabbling about how and how such values would soon span the globe. the new structures will work. Although it is early days, ocials in The mood is dierent now. Inside China, America and Europe Beijing and Washington now suspect that this is about as united several bubbles of optimism have burst at the same time. Charles as Europe is going to get. Grant of the Centre for European Reform, a London based think- Where now? The good news is that European and American tank, says he and others who felt China was about to embrace views of China are converging. Arguments about engagement or multilateralism were guilty of wishful thinking. A closed-door containment now sound quaint, and fantasies involving China gathering of Chinese, American and European ocials and an- as Europe’s ally against American hegemony sound worse. Chi- alysts, known as the Stockholm China Forum, this week heard na looks like a giant that has every right to rise, yet rejects many how China has been unhelpful over climate change, Iran’s nuc- values that Europe and America share. lear programme (China is counselling patience, not sanctions), its The bad news is that clashes with China loom over trade bar- currency (kept articially cheap despite American and EU prot- riers and currency manipulation. Some in Europe and America ests) and its cyber-attacks on Western corporate and public com- are converging in the direction of protectionism. The coming year puter networks. Such attacks, many coming from China, have will pose some severe tests. It is in everyone’s interests to avoid a reached damaging levels of intensity, and are now high on the trade war. And European and American policymakers seem to radar of leaders, it was reported. understand what they share, and what China wants from the In 2009 China jailed more dissidents, sacked reformist editors world, more clearly than before. But that is only a start. 7 and executed a British citizen for drug smuggling, brushing aside British government appeals that he was mentally ill. China has Economist.com/blogs/charlemagne

www.storemags.com & www.fantamag.com Britain The Economist January 23rd 2010 53

Also in this section 54 The return of ination 55 Defence-spending cuts Bagehot is on holiday

More articles about Britain are available to subscribers at economist.com/britain

Manufacturing blues The emotions roused by the ght for the chocolate-maker go far beyond the busi- Another one bites the dust ness specics, however. Two sensitive themes are intertwined. The rst is that foreigners are buying up Britain’s most famous rms, and weak sterling may exacer- bate the trend. The second is the long, slow erosion of Britain’s manufacturing base. Take foreigners rst. The phenomenon Cadbury goes American. Is this healthy for British manufacturing? has been described as the Wimbledon ef- HY can’t Britain hang on to owner- into the purchase price, and perhaps force fect: Britain provides the beautiful arena Wship of iconic brands such as Jaguar, undesirable cuts to operations. Cadbury is where foreign champions come and beat Land Rover, the Mini, Rowntree, the Times no sluggish layabout: under its current the hell out of British players. The annual and now Cadbury, purveyor of chocolate management it has slimmed, oshored Oxford-Cambridge Boat Race is much the to children of the British empire? On Janu- and become lean and mean, so swingeing same: a slugfest between predominantly ary 19th, after a four-month battle, Roger cuts will take out bone, not fat. non-British mercenaries. For centuries, Carr, chairman of Cadbury, said his board Received wisdom has it that three-quar- British investors have bought up more for- was recommending to shareholders a £11.9 ters of mergers fail to create shareholder eign assets than foreign investors did Brit- billion ($19.5 billion) takeover bid by Kraft value and half actually destroy it. In such a ish ones, and lived handsomely o the Foods, of Northeld, Illinois. Somehow, sensitive consumer sector, the risks of a rents. That net outward ow of investment despite the blustering of politicians and culture clash and brand destruction are continues, although in 2005 and 2006 the the protests of organised labour, great com- high. That is what happened to Terry’s, a trend temporarily reversed. Yet the public panies like this one have been slipping out smaller York-based chocolate company perception is that Britain is selling the fam- of British control. bought by Kraft in 1993. Terry’s has lost visi- ily silver. Does it matter that ultimate con- In business terms, Kraft’s acquisition bility in Britain since production was relo- trol of decision-making, brands and intel- (which will go through unless rivals top cated to central Europe in 2005. Something lectual property in many big companies is the bid by January 23rd) may be a good of the same could await Cadbury. shifting away? deal for both companies. They have com- There are understandable fears that for- plementary markets across the globe in eign owners will be more likely than do- which to cross-sell their products: Cad- A lagging indicator mestic ones to axe British jobs or use Brit- bury is strong in India and various Com- Private companies, gross operating surplus, £bn ish prots to pay o their global debts. And monwealth countries; Kraft is solid in con- perhaps the British taxman focuses less tinental Europe, Russia and China. Greater 120 hawkishly on the precise source of a for- Non-financial services scale may help the two develop in the 100 eign-owned rm’s earnings than he might. emerging markets that probably hold the But all successful big rms, British and for- key to future fortune. That will be good 80 eign alike, respond to the demands and op- news for Cadbury’s workers, wherever 60 portunities of the global marketplace they are based. Manufacturing these days, and, as Cadbury’s current man- Less rosily, the fact that so much of the 40 agers have shown, their behaviour is rare- Financial services deal ($7 billion) is nanced by debt is a neg- 20 ly determined by their nationality. ative: borrowing that looks cheap today So the outow of control and know- could double in price tomorrow. That 0 how is no bad thingas long as the outgo- would eat up the cost savings on market- 1989 1992 94 96 98 2000 02 04 06 08 ing old rms are constantly replenished by ing and administration already factored Source: ONS new and equally good or better ones, with 1

www.storemags.com & www.fantamag.com 54 Britain The Economist January 23rd 2010

2 universities, science parks and business in- ing, target-setting and manager appraisal, cubators constantly launching tomorrow’s they lag behind the others, according to Bounce back stars that will hire today’s workers. The studies since 2006 by McKinsey, a consult- Prices, % change on a year earlier problem is that this may not be happening, ing rm, and John Van Reenen, director of or not in sucient quantity, thanks in large the Centre for Economic Performance at 6 5 part to over-regulation of business and in- the London School of Economics. RPI dierent education of the masses. One problem appears to be the lower 4 If fear of foreigners is one reason why qualications, on average, of both senior 3 Cadbury has touched a national nerve, so managers and the workforce at British 2 CPI too is nostalgia for Britain’s vanished 19th- rms. In terms of management standards, 1 century glory as the world’s workshop. Al- Britain looks like a mid-European coun- + 0 though manufacturing output has in- try, says Mr Van Reenen. – creased marginally over the past decade The silver lining, the study found, is that 1 and a bit, its share of GDP has shrunk, from the management practices of multina- 2 2005 06 07 08 09 21% in 1994 to 12% in 2008. As productivity tional companies tend to be better than the Source: ONS has risen, employment has fallen, by over average in any country they operate in. In a third since 1998. So the signicance of theory, then, Kraft’s takeover of a British manufacturing to the economy, measured rm should bring better management to billion ($325 billion) with newly minted in corporate returns, has been reduced, Britain. One problem: Cadbury is itself a money to counter the collapse in nominal while that of service companies, particu- multinational, and in no need of lessons demand. This quantitative easing, say larly nancial services, has ballooned (see from Kraft. A pity, perhaps, that its share- critics, is inationary. chart on previous page). Given that an in- holders went for the short-term gain. 7 But the surge in ination is largely creasing share of many manufacturers’ down to base eects that pre-date quan- earnings is derived, in fact, from servicing titative easing. Consumer prices rose in De- their products, the economy’s shift away The return of ination cember 2009 by 0.6% compared with No- from making things is greater still. vember, a fairly typical increase for the This change is hardly conned to Brit- An embarrassing month. What was unusual was that they ain; most developed countries are seeing fell by 0.4% in December 2008, which they the same transformation. Relocating pro- bungee-jump did for three reasons. First, the chancellor duction abroad is the near-inevitable op- of the exchequer cut the main VAT rate tion for low-value products. Mechetronics, from 17.5% to 15% to provide a temporary a small company in Durham which has boost to the economy. Second, petrol The inationary surge should be been making solenoidscoil components prices fell as world oil prices plunged. And short-lived but may hurt Labour for electric motorsfor over 60 years, nally, there was intense discounting in bought a factory in China two years ago S NATIONAL output tumbled last year, shops. Last month, by contrast, VAT re- and moved its low-value-added produc- Adeation loomed threateningly over mained at 15%, petrol prices stayed put and tion there. You pay £1,800 for a machine in Britain’s debt-laden economy. Indeed, re- retailers discounted much less than a year China which would cost £16,000 in Brit- tail prices did fall on an annual basis dur- earlier. Further base eects, mainly owing ain, says James Ingall, its sales manager. ing most of 2009 as mortgage-interest pay- to the steep cuts in interest rates in late Mechetronics lost its independence last ments nosedived. The narrower con- 2008, lie behind the even bigger jump in re- year when it was bought by an American sumer-prices index (CPI), which excludes tail-price ination. rm, Curtiss-Wright. owner-occupier housing costs and is used There is worse to come. The VAT rate re- There are, of course, a fair number of for the government’s 2% ination target, verted to 17.5% at the start of this year. As a world-beating high-tech, British-owned rose by just 1.1% in the 12 months to Septem- result, CPI ination now looks certain to manufacturers, including engine-maker ber, down from 5.2% a year earlier. head well above 3% in January, requiring Rolls-Royce, GSK, a pharmaceutical com- But since last autumn, ination has re- Mervyn King, the governor of the central pany, BAe Systems in defence equipment turned (see chart). Ocial bank, to write publicly to and others. But a surprising proportion of gures published on Janu- the chancellor explaining manufacturing rms in Britain are nothing ary 19th showed CPI ina- why ination is more like that. Some two-fths are foreign- tion jumping from 1.9% in than a percentage point owned, according to a survey by BDO Stoy November to 2.9% in De- away from the 2% target. Hayward, an accounting rm, and EEF, a cember, the biggest That letter will be pub- manufacturers’ association. As for the rest, monthly increase since lished when new ina- studies show a wide spectrum running the series began in 1997. tion gures come out on from family rms, many of them poorly Ination measured by the February 16th, but Mr managed, to well-run high-performers, longer-running retail- King got his excuses in ear- some of them kept to the mark by private- prices index leapt from ly in a speech shortly after equity funds. 0.3% to 2.4%, the biggest this week’s numbers were In the aggregate, howeverthanks to a monthly rise for 30 years. released. He acknowl- long tail of dozy rmsmanufacturers in Such dismal news ap- edged that ination was Britain score badly against their American, pears to vindicate critics likely to exceed 3% for a Japanese, German and Swedish counter- who say that the Bank of while, but said it should parts. Measured for accepted management England’s Monetary Poli- return to the target in due best practice, such as performance-track- cy Committee (MPC) has course, not least since forsaken its job of meet- monetary growthde- Correction: British Airways. In Falling Star (December ing the ination target. spite quantitative easing 19th) we said that British Airways cabin sta work a Since March the bank has was undesirably low. maximum of 900 hours a year in the air, far fewer than European Union (EU) guidelines allow. Wrong: the EU purchased nancial as- The governor pointedly maximum is also 900. Sorry. sets worth almost £200 reminded his audience 1

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 Britain 55

2 that in both of the past two years ination cession has opened up lots of spare capaci- think he will funnel funds from the for- picked up as a result of temporary price- ty, which is bearing down on domestic eign-aid budget into development projects level factors and then fell back, as the MPC costs, notably pay. Average earnings rose at associated with British military activities. had predicted. an annual rate of just 0.7% in late 2009, ac- The government already does a bit of this. In fact, ination has been running high- cording to gures out on January 20th. Labour, for its part, has historically er than the bank’s forecasts. One big worry Wage pressures will remain weak if the re- been unusual among Europe’s centre-left is that core CPI ination (which leaves covery is as feeble as most expect. parties in having a strong defence tradition out volatile items such as energy and food The are-up in ination may be short- of its own. (Geo Hoon, the former de- costs) rose in December to 2.8%, its highest lived, but it could exact a political price. fence secretary who hinted this week in on record. Mainly, that reects more expen- Special pleading about temporary factors his testimony to the Chilcot inquiry into sive imports caused by sterling’s steep de- will count for little at the general election the Iraq war that Britain’s participation preciation from mid-2007. likely in May. The bungee-jump in prices had been underfunded, speaks for it.) That Yet Mr King’s sanguine prediction still gives electors another reason to vent their tradition is weaker nowthough many looks plausible. The big fall in sterling was anger on Gordon Brown for the economic manufacturing jobs, especially shipbuild- over by early 2009. The severity of the re- disaster over which he has presided. 7 ing ones in Scotland, are bound up with the carrier project. Neither party seriously contemplates Defence-spending cuts abandoning Britain’s nuclear deterrent, though they may scale it down. Indeed, far You can’t ght in here, this is the from being a dividing line between the two big parties, defence increasingly war room seems a conspiracy of silence uniting them. Both know that cost savings are inevitable, but both are reluctant to be specif- ic until they conduct a strategic defence review, conveniently scheduled for after the The heads of the armed forces compete for diminishing funds general election this spring. VEN in a great seafaring nation, the re- fancied themselves as the party of nation- Sir David says that spreading the cuts Emorseless logic of austerity forces ad- al defence, are split on the issue. Some are across the three services would impover- mirals to plead for their budgets. It has long angry that David Camerontheir leader ish them all. But predicting the nature of fu- been clear that xing the scal crisis would and, the polls say, the likely next prime ture threats (and thus which service will be mean taking money from the already cash- ministerhas pledged to spare the Nation- most needed) is a fraught task. When Brit- strapped Ministry of Defence. Where to al Health Service and foreign aid from the ain was engaged in humanitarian inter- make the cuts is something military chiefs budgetary axe but not the armed services. ventions in places such as Kosovo and have started to argue about in public. The party’s recent green paper on national Sierra Leone about a decade ago, it might On January 19th Sir Mark Stanhope, security lists population growth and cli- have seemed that the future lay in air pow- Britain’s top admiral, defended long-stand- mate change as threats before it gets round er and small but highly trained ground ing plans to build two expensive new air- to mentioning conict and terrorism. forces. A few years later, Britain was eld- craft carriers. The country is bogged down All this makes sense as part of ongoing ing tens of thousands of troops in the long now in an Afghan ground war, he said, but eorts to soften the Tory brand. But popu- wars of Iraq and Afghanistan. Having a bit future conicts may require projecting lar anguish at the losses in Afghanistan of everythinga sizeable army, a blue-wa- power by sea. Britain has irted with phas- may mean that voters are keener on deter navy, jets and bombers, special ing out its carriers before, only for the Falk- fence (and cooler towards aid) than Mr forcesis the prudent choice. The question lands war to prove their indispensability. Cameron imagines. In any case, many is whether it is any longer aordable. 7 The day before, Sir Mark’s opposite number in the army, Sir David Richards, said that Britain’s agonies in Afghanistan showed the need for more helicopters and unmanned drones, and for better- equipped troops. An impressive amount of this gear could be bought if money were redirected from expensive equipment intended for big state-on-state wars; the risk of such conicts was small enough to be dealt with through NATO (ie, America). Though Sir Richard did not say carriers should be cut (he oered to get rid of some army tanks), they are an obvious target. No less costly than the carriers themselves are the jets that will y o them, and here is where the Royal Air Force enters the intra-service squabble. The RAF, echoed by the army, believes it can provide air cover from land bases when needed. (In Af- ghanistan, air power is provided mostly by the Americans.) The admirals are wary of the air-force chiefs, ever-suspicious that they want to kill o naval aviation. The Conservatives, who have always What sort of soldier, what sort of war?

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www.storemags.com & www.fantamag.com International The Economist January 23rd 2010 57

Spending on education Also in this section Investing in brains 58 Poor-world schooling

Green.view, our online column on the environment, appears on Economist.com on Mondays. The columns can be viewed at Should the economic squeeze mean cuts, reform or more spending on education? Economist.com/greenview N CALIFORNIA the students are revolt- uary 18th, found that half of American comes. What it does show is that good Iingnot against their teachers, but in states will have spent all of their stimulus exam results tend to be followed, a few sympathy with them. The state’s governor, money for education by the end of July. years later, by small but measurable im- Arnold Schwarzenegger, has cut $1 billion, Cuts will follow. Privately funded schools provements in economic growth. That some 20% of the University of California’s and colleges have seen their endowments does not convince sceptics such as Alison budget, as he tries to balance the state’s and donors’ enthusiasm wither. Wolf, author of a book called Does Educa- books. Fees may rise by a fth, to over Elsewhere, the cuts are less severe. Ja- tion Matter?. She describes the OECD $10,000. Support sta are being red; aca- pan, for example, is reducing university study as ridiculously supercial. Educa- demics must take unpaid leave. spending by a at 1% over each of the next tion may be something fun and desirable That is part of a global picture in which ve years. In France President Nicolas Sar- that countries spend more on as they get cash-strapped governments in the rich kozy last month announced plans to bor- richer, rather than being the engine of eco- world are scrutinising the nearly 5% of row money to nance a 35 billion ($50 nomic growth. GDP they devote to education. Those bud- billion) spending plan, the lion’s share of gets may not be the top candidates for the which will go to universities. Though that Just supposing chop, but they cannot fully escape it. is only a temporary boost, and the money Assuming the relation between test scores Just before Christmas the British gov- will have to be repaid, it highlights the and future growth is indeed causal, the ernment said it planned to reduce spend- hopes that governments place in educa- OECD study also works out the economic ing on higher education, science and re- tion’s role in future economic growth. benets of improving cognitive skills by search by £600m ($980m) by 2012-13, just Believers in that will welcome a new the equivalent of nine months’ worth of as a chilly job market is sending students study from the Organisation for Economic schooling. That is a reasonable target: Po- scurrying to do more and longer courses. Co-operation and Development (OECD), a land’s education reforms between 2000 The trade union that represents academic rich-country think-tank. It provides new and 2006 brought slightly more than that sta claims that up to 30 universities could evidence of the link between educational gain. Over many decades, the small rise in close with the loss of 14,000 jobs. A House attainment and prosperity. To be pub- average growth rates this could bring of Commons select committee is investi- lished on January 27th, the study, entitled makes a big dierencea stonking $115 tril- gating the eects on British science. The high cost of low educational perfor- lion in extra wealth for its member coun- Even where education spending has mance, compares international data on tries by 2090, the OECD reckons. A more not been slashed, it may face a squeeze as 15-year-olds’ cognitive skillshow they ap- ambitious target, such as getting educa- short-term stimulus spending ends. Amer- ply their science, maths and reading abili- tional attainment up to Finland’s stellar ica’s $787 billion Recovery Act passed by tieswith their countries’ economic levels, would mean even bigger gains. Congress nearly a year ago included $100 growth. That would require a huge and unlikely billion for education. More than half is to Admittedly, the real picture is more shake-up in school education in the rich be spent this year, meaning that the budget complicated than some in the education world. And reforms are even more badly will have to be cut in 2011. A study by the lobby would concede. The OECD study needed in poor countries (see story on Centre for the Study of Education Policy at does not link education spending to eco- next page). But big changes are likely in Illinois State University, published on Jan- nomic successor even to educational out- higher education, which is more sensitive 1

www.storemags.com & www.fantamag.com 58 International The Economist January 23rd 2010

2 to market pressures. ate-sector providers. These already com- The UNESCO report shows stark dier- British universities are right to be wor- pete strongly in oering professional qual- ences within the 80-plus countries it cov- ried. Bahram Bekhradnia of the Higher ications. Colleen Gray, a London-based ers. In Nigeria about 10% of young Yoruba- Education Policy Institute, in Oxford, says law professor with Pepperdine, a not-for- speaking adults have under four years of they are worst-placed to cope with the prot Californian university, says the priv- schooling; for Hausa-speakers the gure is cuts. Unlike their continental European ate sector is more innovative in designing over 60%. Focusing on ethnicity or region- competitors, they have already diversied courses and more exible in providing al disparities can be controversial. The gov- their revenues by charging fees. Raising them. Alan Jenkins of Kaplan (owned by ernments of Turkey and India are unhap- them further will be hard. But they could the Washington Post group) looks forward py about the report’s mentions of, become more ecient. At Britain’s inde- to a more level playing eld as the state respectively, Kurdish girls and low-caste pendent University of Buckingham, the subsidy drops. And the University of children. vice-chancellor, Terence Kealey, cheekily Phoenix, America’s largest private educa- Attending school is only the rst step to- welcomed the spending cuts and the two- tion provider, has sharply increased enrol- wards education. Even spending time in year undergraduate degree courses that ments, from 384,000 to 455,000 in the past school does not guarantee good outcomes. may result. His university had been teach- year. It is also talking to the Californian au- In Ghana, for example, sixth-graders sit- ing such courses for years, he noted. thorities about providing education on- ting a simple multiple-choice reading test The squeeze on state spending in higher line. The state’s ability to supply education scored on average the same mark that education oers big opportunities for priv- is one thing. Demand for it is another. 7 would be gained by random guessing. So what to do? More government spendingas suggested by the reportis Education unlikely to be a complete answer. Others, such as James Tooley, a British academic Reaching the poorest who advises a chain of low-cost for-prot schools in India, say private-sector education in poor countries routinely outper- forms the free, taxpayer-subsidised version. Teachers turn up; parents complain if standards slip or pupils ounder. Enrolling the world’s poorest children in school needs new thinking, not just more Another answer may be performance- money from taxpayers related pay for teachers. Two researchers, AWN has just broken but classes have In India, for example, research by the Karthik Muralidharan of the University of Dalready started at the village school in World Bank reveals that 25% of teachers in California at San Diego and Venkatesh Aqualaar, in the Garissa district of Kenya’s government-run schools are away on any Sundararaman of the World Bank, tested arid north-east. Around 30 children, most- given day; of those present, only half were that idea in 300 state-run schools in An- ly from families of Somali herders, sit lis- actually teaching when the bank’s re- dhra Pradesh in India. The extra pay was tening as an enthusiastic 18-year-old teach- searchers made spot checks. That is dread- three times more eective in boosting stu- er, Ibrahim Hussein, gives an arithmetic ful but not unusual: teacher absenteeism dent test scores than spending the same lesson. The school is really little more than rates are around 20% in rural Kenya, 27% in money on teaching materials. When a sandy patch of ground under an acacia Uganda and 14% in Ecuador. schools are poorly run, studying what is tree. Mr Hussein’s blackboard hangs from Despite the inspiring rhetoric that ac- wrong is the most vital subject of all. 7 its branches. There are no desks or chairs. companied the adoption of the UN’s Edu- Pupils follow the lesson by using sticks to cation For All goals in 1999, progress has scratch numbers in the sand. been patchy. The numbers of unenrolled The lack of basic kit is only too typical school-age children dropped by 33m in of schools in poor countries. What is un- 2007 compared with 1999. About 15m of usual, sadly, is that Mr Hussein was actual- that fall came in India alone (though UNES- ly present and teaching when his school CO says statistics may understate the pro- was visited by Kevin Watkins, the lead au- blem by up to 30%). In countries like Libe- thor of Reaching the Marginalised, a ria and Nigeria the numbers have hardly new report on education in the developing budged since 1999. Of the 72m still outside world by UNESCO. school, 45% are in sub-Saharan Africa. Dig, and it grows still gloomier. Two- thirds of the fall in out-of-school numbers School’s out, scream and shout! was in 2002-04. Since then, improvement % of 17-22 year-olds with fewer has been scanty, though getting the nal than four years of education* chunk of children into school is necessar- Total Poorest Poorest quintile, ily the trickiest task as the easy cases are al- population quintile female ready solved. The hardest job is enrolling children from remote areas, who speak mi- 0 20 40 60 80 100 nority languages; or come from cultures Uganda (2006) that place little value on schooling or (in In- India (2005) dia) from castes that have been long ex- Nigeria (2003) cluded from it. In more than a third of the 63 countries for which such data were Yemen (2005) available, more than 30% of young adults Pakistan (2007) have fewer than four years of schooling. Niger (2006) Nineteen of these countries are in Africa; the remaining three are Guatemala, Paki- Source: UNESCO-DME *Most recent year stan and Nicaragua.

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www.storemags.com & www.fantamag.com Business The Economist January 23rd 2010 61

Also in this section 62 Renault and meddling politicians 62 The cost of making smart-phones 63 Entrepreneurial spirit in China 64 Professional-services rms 65 Schumpeter: The tale of Mr Jackson

Business.view, our online column on business, appears on Economist.com on Tuesdays. Past and present columns can be viewed at Economist.com/businessview

America’s car industry come from selling big vehicles. That is why Ford’s chief executive, Alan Small cars, big question Mulally, set out in early 2007, controver- sially at the time, to remake the rm around his One Ford global design and development strategy. That is also why GM belatedly realised that selling its Euro- pean arm, Opel/Vauxhall, would have been a fatal error. And that is why the idea Can Americans learn to love small cars? The industry’s future depends on it of Fiat saving Chrysler is not as crazy as it OR ALL the woes of the city that hosts it, doubling of petrol prices in 2008 and were rst seemed. But the question which no- FDetroit’s annual motor show is still a convinced that even though gas was cheap body can yet answer is whether Ameri- bellwether for America’s car industry. Last again, a business model built on it staying cans will pay enough for smaller cars to January, as the industry grappled with its that way was broken. make them even modestly protable. biggest crisis in living memory and at least That led to another inescapable conclu- The rst company to nd out will be two of Detroit’s Big Three carmakers tee- sion. Although some Americans will re- Ford. Having just bagged both the North tered on the brink of collapse, the usual fuse to be parted from their pickup trucks American car and truck of the year awards razzmatazz was replaced by fear and fore- and muscle cars, catering to American with, respectively, the Fusion Hybrid and boding. This year hope had returned, but automotive exceptionalism was no longer the Transit Connect van, it unveiled the accompanied by deep uncertainty. an option. The new CAFE standard meant star of the Detroit show, the new Focus Hope, because both Ford, which avoid- that cars would have to be hitting 42mpg (pictured above). It is a handsome and ed bankruptcy, and General Motors, which (26mpg for trucks) in less time than it typi- technology-laden compact car that will be did not, had attractive new vehicles on dis- cally takes to develop new car models. The sold (and made) in every big world market play amid signs that the market is picking carmakers would have no choice but to try from next year with only small tweaks to up, and could reach sales of 12m vehicles in to sell Americans cars developed for Eu- suit local conditions and tastes. America this year. Uncertainty, because rope and Asia. Furthermore, only by using However, whereas the Focus that Ford the vehicles on which Detroit is pinning its the same platforms all over the world currently sells in America for around future, and which dominated the show, are could the carmakers begin to compensate $20,000 is a stripped-down version of a smallish cars of the kind that have long for the loss of the fat prots that used to car that was replaced in Europe ve years been the bedrock of the European market, ago, the new Focus will have to sell for but which Americans have always regard- prices closer to those that Europeans are ed as poor man’s vehicles. Small, but getting bigger accustomed to paying if it is to make a pro- There are several reasons for Detroit’s Global small-car sales*, % of total light vehicles t for Ford. That suggests a sticker price of conversion to small cars. The biggest is the World excluding United States at least $30,000 before taxes for a mid- pressure that every big carmaker is under United States range version. to meet increasingly tough rules on fuel 60 Well before the Focus hits the market, economy and emissions. In the middle of Ford will launch the new Fiesta in America last year Barack Obama announced that 50 this summer. This slickly styled subcom- the new 35mpg CAFE (corporate average 40 pact has been a top seller in Europe since fuel economy) standard would come into 30 late 2008. There is a lot riding on the Fiesta, force in 2016 rather than 2020. Instead of not just for Ford but for the whole industry. protesting noisily, as in the past, Detroit 20 Jim Farley, the marketing guru Ford praised his wisdom. With their survival 10 poached from Toyota, has been planning dependent on federal bail-out funds, GM 0 its launch for nearly two years. Mr Farley and Chrysler had little choice other than to 2005 07 09† has used social media and viral-marketing grin and nod, but Ford was just as keen. All Source: IHS *City, superminis and small techniques to generate excitement and Global Insight family cars †Estimate three had been badly burned by the near- name-recognition. But even he does not 1

www.storemags.com & www.fantamag.com 62 Business The Economist January 23rd 2010

2 believe Ford will be able to sell the Fiesta version to $20,000 with all the extras compact in America since 1997, when it for anything like the kind of prices17,250 around the same prices Honda charges for dropped the wretchedly mediocre, Kore- ($24,700) for the top-of-the range versions the Fit, a capable but less dynamically ac- an-built Aspire. Critically, it is far from cer- that accounted for 30% of sales last year complished subcompact. At those prices, tain whether Ford’s dealers will even that Europeans are willing to pay. Ford will struggle to make much prot know how to sell such a car. The Fiesta may set new class standards even if buyers choose lots of extras. A wave of great small cars is about to hit for renement and handling, but it is still a Ford is on a roll thanks to its improving the forecourts of American dealersnone small car and some industry observers product quality and the halo eect of hav- better than the European-developed cars fear that it may be too sophisticated for the ing avoided bankruptcy. But the Ford that Ford will be oering. The big question market. Although BMW’s ultra-premium brand is still best-known for rugged F-150 now is whether Americans can be per- Mini fetches over $30,000, Ford will oer pickup trucks and hulking SUVs. The com- suaded to pay enough for them to give the the Fiesta from about $14,000 for the basic pany has not even bothered to oer a sub- industry a viable future. 7

The business of dissecting electronics The lowdown on teardowns

Ripping apart smart-phones reveals their true cost ADGET-LOVERS the world over are al- Gready salivating at the thought of getting their hands on Apple’s much-hyped tablet computer, which is expected to be revealed on January 27th. Most of them just like the idea of playing with a new high- Renault and meddling politicians tech toy. But a few have darker designs. They cannot wait to rip the device apart, Attempted carjack analyse its design, identify its parts and cal- culate how much it costs to make. PARIS These teardowns, as they are called, The French government tries to grab the wheel at Renault are common practice in the electronics in- N AN o-message moment in front of French taxes, not salaries, account for dustry, and are usually performed in- Ijournalists on January 15th, Christian most of this. For small cars, on which the house. Now, however, more of this activity Estrosi, France’s industry minister, assert- margins are especially thin, an extra is being outsourced to specialised rms ed that he and the president, Nicolas 1,400 easily makes the dierence be- such as iSuppli and UBM TechInsights. Sarkozy, make industrial decisions for tween prot and loss. Their ndings provide a glimpse into the Renault, a carmaker. Mr Estrosi was During more than a decade of having inner workings not just of individual de- quickly put back on message, but Renault the state as its biggest shareholder (it was vices but also the fast-growing consumer- was furious. privatised in 1996), Renault has never electronics business itself. The row had been sparked by a report experienced such intervention. Mr Es- Derek Lidow, iSuppli’s boss, says com- that Renault was considering moving trosi even called for the state to increase panies that design and market gadgets production of a future version of the Clio, its current stake of 15%, though this was sometimes hire rms like his to tear apart its popular small car, from France to ruled out by the budget minister. The and analyse products whose manufacture Turkey. The government ordered Renault government’s recent loan of 6 billion to they have outsourced to others. Some cus- to halt any such plans and summoned its the auto industry was made in exchange tomers simply want to know why their chief executive, Carlos Ghosn, and chief for promises not to close factories, but the competitors, often of Chinese provenance, operating ocer, Patrick Pélata, to the future of Flins is not in question: next can be so cheapeither to prove suspi- Elysée Palace, Mr Sarkozy’s ocial resi- year it will start to manufacture Renault’s cions of dumping or to show their own en- dence, on January 16th. The European new electric car, the Zoé. gineers how to do better. Union’s competition commissioner, Renault has hardly budged. It has With a smart-phone, for example, iSup- Neelie Kroes, threatened to take action agreed to base some production of the pli starts by looking at how its 1,000 or so over what could have been a breach of new Clio at Flins as well as in Turkey, but parts are put together. Apple has the most EU competition rules. has refused to specify what proportion, creative and dense designs, says Andrew Renault already makes just over half or for how long. It may, however, create a Rassweiler, who heads iSuppli’s teardown of the current, mark three Clio at its fac- new board-level committee to discuss service. But its rivals are catching up fast. tory at Bursa in Turkey. Two-fths of Renault’s industrial policy with the two The design of Google’s recently launched them are made at Flins, near Paris, and government-appointed directors who sit phone, the Nexus One, made by HTC of the rest in Spain. One plan under dis- on its main board. But executives at the Taiwan, is almost as advanced as that of cussion was to make all the new Clios in rm reckon political interest will subside the latest iPhone. Turkey. Renault says it costs a tenth more after France’s regional elections in March. The next steps in a teardown are identi- to make a vehicle priced at 14,000 There is no way that the government fying the parts and calculating the costs of ($20,000) in France than in places like will take industrial decisions for Re- materials and assembly. Components, es- Slovenia, where it also has a plant. nault, says a manager close to the rm. pecially memory chips, have continued to fall in price. This is why the rst iPhone 1

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 Business 63

2 model cost $218 to build and the latest only long ago, it was a city that needed every- $170, despite its superior performance. As- Sum of the parts thing and attracted everyone. Immigrants sembly costs are minimaljust $6.50 for Cost of components*, 2009, $ ooded in from the rest of China, anxious the current iPhone. Even though the parts to seize a unique opportunity. Few laws, if Palm Apple Toshiba Motorola in high-end smart-phones dier widely, Pre iPhone† TG01 Droid any, restrained business. Factories could be their total construction cost often falls in a opened anywhere. Even the most quali- Integrated 83.96 91.38 68.39 60.83 narrow range of $170-180 (see chart). Mak- circuits ed people found they could get better ers apparently set a budget and see what Display/ 38.80 34.65 35.30 35.25 jobs by moving to Shenzhen. they can t in, says Mr Rassweiler. touchscreen That has changed. China has begun to Most smart-phones’ retail prices (be- Mechanical‡ 19.63 17.80 21.88 20.23 develop large corporations that attract tal- fore operator subsidies) are around $500- Camera 7.50 9.35 12.80 14.25 ented employees. Shenzhen itself has at $600. Not all of the dierence is prot. least two global leaders, the telecoms Battery 4.25 5.07 4.71 4.25 There are many other costs, such as re- giants Huawei and ZTE. Land has become Other 16.51 11.82 30.60 44.30 search, design, marketing and patent fees, harder to nd and, inevitably, more expen- as well as the retailer’s own costs. But the Total 170.65 170.07 173.68 179.11 sive. One of the last big parcels was not di- *Latest data available †3GS 16GB big gap between the cost of building a ‡ vided up for small businesses but trans- smart-phone and its price in the shops Source: iSuppli Includes electromechanical ferred to BYD, a fast-growing manufacturer should widen further as ever more previ- of cars and batteries. Many laws have been ously discrete components are packed on devices, most of the value lies not in manu- enacted to protect workers and the envi- to a single main microchip. Howard Curtis facturing but in all the services and intel- ronment, making it more costly and com- of UBM TechInsights predicts that as soft- lectual property it takes to create and mar- plex to start a business. As factories have ware and mobile services come to repre- ket such products. That is something for moved away, so has low-skilled labour. sent more of a smart-phone’s overall val- politicians to ponder: instead of making In some respects this is good news. ue, this too will widen the gap between empty promises about saving ailing Small rms with slipshod standards are manufacturing costs and selling prices. manufacturers they might instead consid- being replaced by bigger, better ones. What this gap demonstrates is that for er how best to promote the growth of high- Where people are creating companies, smart-phones, like most other electronic value service industries. 7 they are doing so out of choice, not economic necessity. But not all the news is so positive. The study also examined two oth- Capitalism in China er things. Only 9% of the respondents said the technology they hoped to use in their The spirit of enterprise fades new venture was truly innovativeless than one year old. That makes Shenzhen more engaged in innovation than Brazil or Russia, but far less than Japan or Israel, and thus more vulnerable to competition. The study also showed a sharp recent HONG KONG decline in the interest of private investors. The cradle of China’s start-up rms is showing its age That is, at least in part, a reasonable re- HINA’S remarkable resurgence began so than in America, but much stronger sponse to the nancial crisis. But it is none- C three decades ago with the designa- than in Japan. The strongest signs of enter- theless a real problem, because the Chi- tion of Shenzhen, just north of Hong Kong, prise in China can be observed in very nese banks lean heavily toward large as a special economic zone. Businesses poor, rural areas that are just beginning to state-controlled companies. Shenzhen has in the zone were free to re-engage with develop beyond agriculture. become a global synonym for business overt capitalism and make prots by satis- There are any number of explanations creation, but there is reason to wonder fying customers, not the state. The result for what is happening in Shenzhen. Not how much longer it will remain so. 7 was the transformation of a farming village into a city of 9m people, bustling with production lines and sewing machines, making everything from iPods to Nikes, in a burst of entrepreneurial zeal. But that may describe its past more accurately than its future. Inevitably, prosperity has aected people’s attitudes and the local business environment. A study by the Shenzhen Academy of Social Sciences and the Chinese University of Hong Kong, released on January 18th, shows a precipi- tous drop in the fraction of the population involved in starting new businesses, from 12% in 2004 to 5% in 2009. It’s not so special anymore, says Kevin Au, a professor of management at Chinese University. Five other medium-sized Chinese cities that are part of a separate study show similar results, says Mr Au. Collectively, their levels of enterprise dier little from those seen in western Europe, which is to say slightly weaker than in Britain, much less Chinese capitalism at work: the thrill is gone

www.storemags.com & www.fantamag.com 64 Business The Economist January 23rd 2010

Professional-services rms ing is booming, as law rms parcel out some of their more basic work to reduce Laid-o lawyers, cast-o consultants costs. One of the leaders of this nascent market, Pangea3, whose oces in Delhi and Mumbai take on work from clients worldwide, expects to earn twice as much revenue this month as in January 2009. Another booming business is helping NEW YORK the government sort out the economic The downturn is sorting the best professional-services rms from the rest mess. This is favouring the market leaders HAT do you say to a recent law- sey and Bain are said to have suered slight most, says Heidi Gardner of Harvard Busi- Wschool graduate? A skinny double- falls in revenues last year, while BCG, after ness School, because the crisis has made shot latte to go, please. From New York to a strong second half, was slightly up. All governments risk-averse about whom Los Angeles, Edinburgh to Sydney, the three deny making lay-osalthough it is they hire. Slaughter and May, a big London downturn of the past two years has hit the said that they made their attrition rates law rm, earned £33m ($54m) for its work legal profession with unprecedented se- increase, by signicantly raising the bar on on the nancial crisis, including on the na- verity. As even some leading law rms their traditional up or out policy. McKin- tionalised Northern Rock bank. Sullivan & struggle for survival, recruitment has dried sey now has 10% fewer consultants. Cromwell in New York has also done nice- up. The lucky few who get jobs are often The experience of some once-booming ly from helping the American government being told to nd something else to do for boutique consultancies has been even with troubled banks. Big management now, and report for duty on some far-o worse. Marakon Associates was bought consultancies have done well too, despite date. The same is true for MBA graduates for a song by CRA International after the their poor record in the public sector (see seeking jobs in management consulting. bankruptcy last January of its parent, Trin- Schumpeter, on next page). BCG, for in- Even the mighty McKinsey is said to be sum; and Katzenbach Partners was saved stance, has advised the quango created to postponing start dates by several months. by Booz & Company after shrinking alarm- oversee America’s state-rescued car rms. Given that new graduates are the ingly in the rst six months of 2009. grunts of the professional-services indus- Perhaps the hardest hit of the profes- Under the knife tries, earning less than anyone else and sional services has been human-resources Though the best will gain at the expense of working the longest hours, the lack of de- consulting, where revenues fell by 20% in the rest throughout professional services, mand for their services is the clearest indi- Britain last year. Pay-and-benets consul- the legal profession seems likely to un- cator of how bad things are. Although a tants also suered: sharply falling rev- dergo the most profound structural deeper-than-usual cyclical downturn is enues were one reason why Towers Perrin changes. For the rst timelong after IT largely to blameand is hitting hardest and Watson Wyatt decided to merge last and nance departments went through those rms that specialised in nancial- year. And although accounting rms are the same experiencethe corporate legal market activities such as mergers and ac- less exposed to the cycle than most profes- departments that hire law rms are under quisitions, and private equityit is already sional-services rmsannual reports still great budgetary pressure, and are thus de- clear that there will be long-term structural have to be prepared and audited, whatever manding much better value from them. consequences, not least a growing gap be- the state of the economyin the year to last In a recent paper, The Death of Big tween the best rms and the rest. June the two biggest accountants, Pricewa- Law, Larry Ribstein, a law professor at the Cutting lawyers’ jobs used to be terhouseCoopers and Ernst & Young, each University of Illinois, argued that after de- frowned upon in the profession and thus suered 7% falls in revenues. cades without changing, law rms are like- rarely happened, even in recessions. But Of course, rms with countercyclical ly to have an outburst of experimentation last year was the worst year ever for law- activities, such as bankruptcy work, have with dierent business models: even the rm lay-os, reckons Law Shucks, a legal- fared better. Consultants oering out- venerable and lucrative billable hour industry blog. It counted 218 reports of lay- sourced services, like IBM and Accenture, method of charging clients is in doubt. The os at 138 big rms, including no less than have also done well as cost pressures have experimentation may include more rms ten rounds of cuts at Cliord Chance, a driven other companies to use their ser- abandoning their traditional partnership British rm whose ambitious global ex- vices. In particular, legal-process outsourc- model to go public, following in the foot- pansion before the crisis now seems a big steps of an Australian law rm, Slater & mistake. Thacher, Prott & Wood, a New Gordon, which went public in 2007. York rm which by 2007 earned around Not everyone is excited by this idea. At half its revenues from structured nance, rms like McKinsey it was the partnership was devastated by the bursting of the sub- ethos that helped them through the crisis, prime mortgage bubble and ended up be- as partners believed they were in it for the ing dissolved in December 2008. It was fol- long term. At some law rms too, says Jay lowed in March 2009 by the venerable but Lorsch of Harvard Business School. Con- property-exposed Philadelphia rm of trast that with the investment banks that Wolf, Block, Schorr and Solis-Cohen. switched from being partnerships to pub- As for management consulting, in the lic companies, such as Goldman Sachs. If third quarter of last year Marsh & McLen- you talk to some older Goldman partners nan reported a 10% decline in its consulting they are unhappy with the behaviour of revenues, in line with the overall shrink- those now running the rm, who have age of the industry. Figures from other big abandoned the partnership ethos in farms are patchy, since they are private part- vour of aggressively pursuing prots and nerships. Still, in 2009, to ensure they had have ended up looking like greedy bas- enough cash to weather the nancial tards. As they adapt to survive a tougher storm, even leading rms such as McKin- climate, lawyers and consultants will need sey and BCG held back a chunk of their to ensure that any changes do not put their partners’ bonuses. Of the big three, McKin- culture of professionalism at risk. 7

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 Business 65 Schumpeter The tale of Mr Jackson

The public sector has had its ll of management consultants mark when it came to Washington, DC, on a wave of hope and hype (Mr Obama even created the new job of chief performance ocer). Monitor Group, based in Boston, has signed up Libya’s Colonel Qadda as a client. McKinsey actually scented an opportunity in the credit crunch: an article in the consultancy’s house magazine urged that governments needed to go in for whole-government transformation if they were to cope with the mess. But even the most ingenious consultants will be challenged in the coming years. Yawning decits will force governments worldwide to cut back on necessary expenditure, let alone unnecessary splurging. And there are many who argue that consultants represent unnecessary splurging. In Britain, consultancy fatigue is even more pronounced than New Labour fatigue. Successive parliamentary in- quiries have revealed appalling examples of waste. From the NHS to the BBC, consultants are regarded as fork-tailed devils. This counterblast against consultants is largely to the good. They have frequently left devastation in their wake and have treated the public sector as dumping grounds for airy-fairy ideas such as transformation that have been rejected by the private sector. They have built overly elaborate management structures ARGARET THATCHER regarded Beatrix Potter’s Ginger that make it harder for people to do their jobs. And they have de- Mand Pickles as the only business book worth reading. The motivated people who like to feel that they are working for the BBC recently elaborated on this insight in a series on The Beatrix public good. The government has wasted huge amounts of mon- Potter Guide to Business. Jemima Puddleduck is a treatise on ey on botched IT projects designed by consultants. The worst ex- enterprise. Samuel Whiskers is a parable about the importance ample, a £12.7 billion project to improve the health service’s sys- of rolling audits. And Mrs Tittlemouse? It is a warning about tems, has now been partially abandoned; but the Ministry of the dangers of employing management consultants. Defence is still struggling with a project that is currently £180m Mrs Tittlemouse is a most terribly tidy particular little over budget. mouse, forever cleaning her house and shooing away intruders. But one day Mr Jackson, a fat-voiced toad, arrives and makes Blame the paymaster, mostly himself at home, lounging in the rocking chair and putting his That said, it is worth adding two qualications to the general feet on the fender. He not only refuses to leave, he scours the chorus of condemnation. The rst is that just because some con- house for tasty morsels, spreading chaos as he goes. It takes Mrs sultants have given bad advice does not prove that they are inca- Tittlemouse a day to clear up after him when he nally leaves. pable of giving good advice. Civil services are congenitally in- Management consultants have been hopping all over the pub- ward-looking organisations, led by people who are plucked from lic sector for years. The growing pressure to get more for less elite universities and shielded from the rest of the world in gov- persuaded governments to turn to the private sector for inspira- ernment palaces; it helps to expose them to innovations from the tion. And the challenges of adopting information technology private sector. The private sector routinely introduces reductions prompted them to turn to IT consulting giants such as IBM and in costs and improvements in performance that are almost un- Accenture. Britain’s New Labour government led the world in its known in the public sector. The IT debacles may be dispiriting. infatuation with consultants. Tony Blair and Gordon Brown But few government departments possess the internal expertise talked excitedly about transforming Whitehall and its fuddy- to master new technology on their own. duddy ways. Consultants crawled over everything from the Cab- The second is that the people who are ultimately responsible inet Oce to the health service. New Labour apparatchiks were for the debacles are not the hired hands but their political mas- much more likely to wax lyrical about Tom Peters and Michael ters. Gordon Brown and Tony Blair were suckers for ashy but in- Porter than Keir Hardie and Nye Bevan. substantial ideas about transformation. Lower-level politicians The result was a bonanza for the management-consulting in- were lazy managers. In 2006 the National Audit Oce provided a dustry. Money poured into the consultants’ pockets, especially devastating list of ways in which the government had failed to during 2004-06. Over that period, spending on consultancy in- make the best use of consultantsranging from failing to appreci- creased by a third. And a New Labour-consultancy complex ate what could be achieved with their own sta to refusing to formed at the heart of government. The Downing Street Policy learn from what the consultants were telling them. Unit was full of former McKinsey consultants. Lord Birt, a former But the biggest reason for the failure is that politicians have re- BBC boss, was much criticised for working simultaneously for peatedly used consultants to avoid dealing with the dicult Downing Street and McKinsey. Patricia Hewitt, a former head of questions by dressing up antiquated institutions in fashionable research at Accenture (then called Andersen Consulting) was business garb. Back in 1995 Peter Drucker argued that if politicians health secretary in 2005-07; David Blunkett got a consultancy job were serious about really reinventing government they would when he resigned as work and pensions secretary in disgrace. go back to rst principles and ask if large parts of government Consultants are nothing if not ingenious in getting their feet needed to be there in the rst place. Tell Mr Jackson to follow on the fender. The Obama administration looked like a perfect Drucker’s advice and he might yet produce value for money. 7

www.storemags.com & www.fantamag.com 66 Brieng Reforming banking The Economist January 23rd 2010

strict, they may endanger the recovery. Base camp Basel And how can supervisors deal with the basket-case banks, for which no reasonable buer will be adequate? In the days when banks (and their customers) could not rely on governments to save them, they carried huge buers to protect themselves against losses and drops in Regulators are trying to make banks better equipped against catastrophe condence. In the late 19th century a typi- HE world’s banking system is both bureaucrats run them is as unattractive as cal American or British bank had an equity Tmindbogglingly complex and too vital leaving the discredited masters of the uni- buerie, core capitalequivalent to to fail. After only a year’s deliberation, the verse in charge. And despite promises that 15-25% of its assets (see chart 1). As recently nest minds in governments, regulatory regulators will be cleverer and central as the 1960s British banks held more than a bodies and central banks have decided bankers more alert, banks are certain to get quarter of their assets in low-risk, liquid how to improve the way it is supervised. into trouble again, as they always have. form, such as cash or government bonds. Their answer, it appears, is thicker insula- The way to protect taxpayers, the argu- Over time governments have supplied tion and better preparation against folly ment goes, is to compel banks to have bu- more protection against disaster. First and accident. In December, under instruc- ers thick enough to withstand higher came liquidity support by central banks; tion from the G20, the Basel club of bank losses and longer freezes in nancial mar- deposit insurance followed; in the latest supervisors published new proposals on kets before they call for state help. crisis governments have given all creditors capital and liquidity buers. These could The proposals have already been a blanket implicit guarantee. As a result, be in force by the end of 2012. dubbed Basel 3which tells you regula- banks have been prepared to let their insu- The speed of the reaction is impressive tors have been here twice before. Alas, the lation wear thin. Going into the crisis, and most of the proposals look sensible. record of bank-capital rules is crushingly some Western institutions’ core capital 1 Yet a feeling remains that the ne minds bad. The Basel regime (European and have evaded the really dicult question. If American banks use either version 1 or 2) the banking system resembles a line of represents a monumental, decades-long Padding is for wimps 1 climbers roped together, then regulators eort at perfection, with minimum capital Banks’ equity, % of assets are busy making the clothes warmer, the requirements carefully calculated from de- 25 maps more accurate, the rations more ll- tailed formulae. The answers were precise- United States ing and the whistles louder. Unfortunately ly wrong. Five days before its bankruptcy 20 none of that is any good if someone falls Lehman Brothers boasted a Tier 1 capital over the edge, as a handful of banks are ratio of 11%, almost three times the regula- 15 wont to do in nancial crises. Unless a way tory minimum. is found to solve this problem, taxpayers That poses an obvious question for 10 will remain destined to rescue the akiest bank supervisors: if they have already Britain 5 rms time and time again. tried and failed to make capital rules fool- In part the focus on capital and liquid- proof, why should they do better this time? 0 ity buers reects the poverty of the alter- They do not just have to worry about rules 1880 1900 20 40 60 80 2005 natives. Breaking up banks is hard and of being too slack. If they overreact to the - Source: “Banking on the State” by Piergiorgio Alessandri uncertain benet. Having public-sector nancial crisis and devise rules that are too and Andrew Haldane, Bank of England, November 2009

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 Brieng Reforming banking 67

2 was 3% of their assets or less, and less than executive of Standard Chartered. a tenth of those assets were liquid. Gov- Eating up capital 2 Part of the answer, however, is plain: ernment support may also have given Peak cumulative losses* as % of banks should have sucient capital to sur- banks an incentive to grow much bigger, so risk-weighted assets, 2006-present vive a crisis as severe as the one Western - that most European countries now un- 0 5 10 15 20 nancial systems have just suered. This is derwrite banking systems several times Merrill Lynch the sum of two parts. The rst is the mini- larger than their GDPs. As Andrew Hal- UBS mum below which a typical bank loses the dane of the Bank of England has noted, the condence of depositors, other creditors world has come a long way since 1360, HBOS and its counterparties. This is largely a mat- when a banker in Barcelona was executed KBC ter of mass psychology: the rule of thumb in front of his failed rm. Citigroup in the markets is that it has perhaps dou- Such extensive government guarantees RBS bled to about 4% of risk-adjusted assets. render redundant the normal laws of com- Wachovia This already has semi-ocial endorse- panies’ capital structure, which dictate that Average US bank ment: both America’s and Britain’s recent (Fed stress tests) high leverage and over-reliance on short- Sources: Federal Reserve; *Including unrealised losses on stress tests used this as the oor. term borrowing are a suicidal combina- company reports; The securities; excluding goodwill, On top of this, banks need enough capi- Economist estimates tax and changes in value of own debt tion. A bank can operate with almost no tal to avoid breaching the 4% minimum in equity, safe in the knowledge that it will a market meltdown. Here, the experience still be able to borrow and raise deposits could be held with little capital against of the crisis has already produced some cheaply, because creditors know they are them, on the basis that credit-rating agen- guidance. The results of America’s stress guaranteed. Furthermore, if a bank knows cies had graded them triple-A. Risk-adjust- tests suggest that the country’s big banks the state will always provide liquidity if ed according to Basel 2, they were judged will, through their underlying losses, have markets dry up, it has a big incentive to rely almost as safe as government bonds. eaten up capital worth about 4% of risk- on short-term borrowing (which is typical- The new proposals go a long way to weighted assets. A recent Bank of England ly cheaper than long-term funds). It fol- remedying these failures. The denition of study of banking crises since the late 1980s lows that if banks in a state-backed system capital will be much stricter. In essence, in Japan, Finland, Norway and Sweden are to have safety buers, the state must only pure equity will be included and that found that the average bank ate up 4.5% of determine their thickness and quality. after deducting spurious benets such as risk-adjusted assets. tax assets and including nasties such as Adding these two elements together Third time lucky? short-term losses on securities. According implies that a typical bank should run Since 1988 global capital rules have been to some estimates, that alone could wipe with core equity capital of 8-9% of risk-ad- set by the Basel Committee, a club of regu- out much of the equity of several Euro- justed assets, which would be eaten away lators which relies on national authorities pean banks, although the changes are like- to 4% during a crisis. Not surprisingly, most to implement its standards. Basel 2, a ly to be introduced slowly. José María Rol- big banks are near this point after a bout of souped-up version of the original rules, dán, of the Bank of Spain, who chairs the equity-raising. America’s four largest has been introduced by most European Basel club’s implementation committee, banks have core capital of $400 billion, al- banks in the past two years. America’s big says the more revolutionary we are, the most twice as much as a year ago. banks are on track to implement it by next greater the need for a slower transition. The view of most, but not all, regulators year. It involves two stages. The rst is de- At the same time, risk-adjustment will is that the absolute level of capital in the ning capital: crudely, the gap between as- become less dependent on rms’ own in- system is approaching acceptable levels. sets and liabilities. The second is compar- ternal models, be harder on investment They still want to add more bells and whis- ing this with assets. Since not all assets are banks and encourage banks to cross-exam- tles. Capital requirements for risky trading the same, the rules adjust them for risk, of- ine the credit ratings of their assets. For operations could rise by as much as three ten using complicated modelling: a gov- good measure the Basel club has also pro- times. In anticipation of this, pure-play in- ernment bond is regarded as absolutely posed a new liquidity regime that would vestment banks such as Goldman Sachs safe and so needs no capital behind it, but a require banks to be able to withstand a 30- are running with core capital of more than risky property loan requires lots. The rules day freeze in credit markets and force them 10% of risk-adjusted assets. To augment the say that Tier 1 capitalsupposedly, in the to become less reliant on short-term capital rules, bad-debt provisions are likely main, common equity and equity-like in- wholesale funding. The tests, says an to be more forward-looking. And how the strumentsmust be at least 4% of a bank’s American ocial, are tough and have been new capital range is managed is still up for risk-adjusted assets. informed by the crisis. debate. Central banks, with their renewed However, the denition of Tier 1 capital desire to avert credit bubbles, are likely to was far too lax. Many of the equity-like in- The big question: how much? take a keen interest. The Basel proposals instruments allowed were really debt. In ef- None of this really answers the all-impor- clude sanctions on rms that are close to fect, the ne print allowed banks’ common tant question of how much capital banks the capital oor, preventing them from equity, or core Tier 1, the purest and most need. There is a trade-o between safety paying dividends. exible form of capital, to be as little as 2% and economic growth: a bank that took no Working out whether banks have al- of risk-adjusted assets. In hindsight, says risks at all would not be much use in pro- ready pre-empted the proposed liquidity one regulator, this was very, very low viding credit to companies or individuals. requirements is more dicult. Some unacceptably low. Furthermore, inves- Getting this trade-o right is dicult. A banks, such as Belgium’s Dexia and Brit- tors lost condence in the way assets were 2009 study for Britain’s Financial Services ain’s HBOS, still rely heavily on state fund- adjusted for risk to compute a capital ratio. Authority concluded that because period- ing. But overall a dramatic shift towards For instance, dodgy mortgage securities ic meltdowns do so much damage, bank- long-term funding has taken place. Three- ing systems should ideally be better capi- quarters of the balance-sheets of Ameri- Correction: In an article on China’s economy (Not just talised and less volatile than they were ca’s four biggest banks are now funded by another fake, January 16th), we quoted a UBS report: before the crisis. The Basel club plans to do equity, long-term debt or deposits. "China’s steel capacity of almost 0.5kg per person is its own impact study over the next six Yet for all this, a single, horrible truth ex- slightly lower than America’s output in 1920 (0.6kg) and far below Japan’s peak of 1.1kg in 1973." All those months. It is incredibly important to get ists. Because most big banks are too inter- gures should be tonnes, not kilograms. the trade-o right, says Peter Sands, chief connected to fail, and could be brought 1

www.storemags.com & www.fantamag.com 68 Brieng Reforming banking The Economist January 23rd 2010

2 down by a counterparty, the system is only ments are unable to bear losses while a counterparty, in much the same way that as strong as its weakest member. Although bank is a going concern. American International Group, a once- the average American bank ate up about Ideally, then there would be a layer of mighty insurer, became a rubbish dump 4% of risk-adjusted assets in losses during creditors who could absorb losses while for the tail risks no one else wanted. If the crisis, the worst banks consumed far the bank remained in business. The most that happened to Cocos, they might mere- more (see chart 2 on the previous page). Ci- concrete idea so far is contingent converti- ly shift losses from one place to another tigroup, HBOS and Belgium’s KBC, for ex- ble capital, or Coco: debt that converts and save taxpayers nothing in the end. ample, lost 6-8% of risk-adjusted assets. At into equity if a bank gets into trouble. In the crazy end of the spectrum, Merrill November Britain’s Lloyds, which took Between going and gone Lynch, which had lots of dodgy securities over HBOS and was bailed out by the state Cocos deserve a chance, but there is an al- that were marked-to-market (so that losses in 2008, issued a Coco bond equivalent to ternative. This is to try to create a middle were recognised upfront), lost 19%. It 1.6% of risk-adjusted assets. It pays a cou- state for banks between going concern and would have needed a core-capital ratio of pon, like a normal bond, unless the bank’s gone: a partial bankruptcy. Over the past 23% to avoid falling through the 4% oor. core capital falls below 5% of risk-adjusted year there has been much talk about creat- UBS lost 13%, implying that it would have assets. At that point the coupon is can- ing special resolution regimes and liv- required a ratio of 17%. celled and the bond converts into equity, ing wills for failing banks. Many of these In part, cautions Bernard de Longe- boosting the bank’s ability to absorb losses ideas are well-meaning wae, little better vialle of Standard & Poor’s, this reects the while remaining a going concern. Accord- than gloried contingency planning. Also fact that the outlier banks’ calculations of ing to a London banker, people all over of little use are some more macho notions risk-adjusted assets were out of whack. For the City are working on similar ideas. doing the rounds. Simply giving a resolu- example, subprime securities were treated Goldman Sachs has indicated it would tion authority the right to beat up all credi- as fairly safe. But nonetheless it is probably consider issuing Coco bonds. tors would ensure that any bank at risk of true that even with the right denominator, Cocos sound too good to be true, which falling under its auspices would face a run. these rms would have needed capital ra- is precisely what worries some observers. One option is to ring-fence the deposit- tios of far above 8-9% at the start of the cri- The idea has the feeling of being a silver taking parts of banks and oer them a full sis to avoid failure. The Bank of England’s bullet, says a lukewarm American regula- guarantee. This would amount to a research of other crises points to similar tor. Lloyds is paying a fairly high coupon of stealthy reimposition of the Glass-Steagall conclusions: the worst failed bank would 10-11% to attract buyers to this novel securi- act, the Depression-era law that separated have needed a core-capital ratio of 18% to ty. That is almost as expensive as equity. American commercial and investment stay above a 4% minimum. And executives at other banks and some banks, and would be hugely complicated. Clearly, regulators could simply raise all regulators worry that under extreme stress The alternative is to force banks to issue banks’ capital to a level that would keep complex instruments rarely work as in- bonds that would automatically suer even the outliers from failure. But that tended. Triggering the bond itself could partial losses in the event of state interven- would be prohibitively expensive. For cause a run: counterparties could take it as tion, a little like Cocos. Either way, the ob- America’s four giant banks, raising core a signal that the bank was in severe trou- jective would be to guarantee enough of capital to 20% of risk-adjusted assets could ble. Coco’s defenders tend to dismiss this an institution’s balance-sheet to avoid a require them to raise an additional $30 bil- riskwrongly. In a crisis the degree of un- run, while leaving enough of it without a lion-odd of annual income (to provide a re- certainty about worst-case losses and mis- guarantee to protect taxpayers from even turn on that extra capital). If pushed trust of banks’ accounts becomes so high the outlier banks. through to customers, that might raise the that counterparties run after any admis- That is not an easy balance to strike. But weighted average interest rate they charge sion of trouble. the risk now is that regulators retreat into by roughly a percentage point, from 6% There are other niggles. The capital ratio designing cleverer ways to make the aver- now. That would hurt economic growth. at any given moment is highly dependent age bank safer, while ignoring the greater An obvious answer to the problem of on when managers write down bad debts. question. That is not how to make regula- outliers is to impose losses on the riskiest A European bank boss paints a nightmare tion cleverer, but how to protect taxpayers banks further up banks’ capital structures, picture of Coco investors buying insurance from a huge bill when all the precautions so that creditors rather than taxpayers suf- wrappers, ooading the risk to another fail and a bank steps into the void. 7 fer. Most banks already have additional slices of capital above equity. For example, at the end of 2008 Britain’s rms had core capital (tangible common equity) of about £200 billion ($290 billion), and on top of this another £200 billion of quasi-capital consisting of such exotica as hybrid capital and Tier 2 securities. In essence these are junior forms of debt which in a bankruptcy would be hit before senior creditors, depositors and customers. The trouble with these instruments, however, is that if they end up bearing losses, the entire bank is usually judged to be in default, causing a stampede of counterparties, depositors and other senior creditors who fear they will lose too as the bank is wound up, destabilising the system as a whole. In the jargon, these instru-

To hear our correspondents discuss this topic go to economist.com/audiovideo/nanceeconomics

www.storemags.com & www.fantamag.com Finance and economics The Economist January 23rd 2010 69

Also in this section 70 China’s rampant economy 70 Decoding American bank results 71 Buttonwood: Automated trading 72 Europe’s mutual banks 73 Exchange-traded funds blossom 73 Catastrophe insurance 74 Economics focus: Investment in Asia

The world economy ernment is pushing for tax cuts in 2011; France is railing loudly against the idea of Pulling apart cutting its decit any time soon. America’s budget outlook is rather more uncertain, especially in the light of the Republicans’ unexpected Senate victory in Massachusetts. The current stimulus package will stop boosting GDP growth Washington, dc by midyear. Thanks to the requirement The world’s big economies were all hit by the recession. Now the eld is spreading that they balance their budgets, states are YEAR ago almost every economy in the Output growth will slow in 2010the furiously cutting spending. Although the Aworld was being walloped. The degree question is by how much. Optimists argue House of Representatives has passed an of pain varied. In rich countries output that every deep post-war recession has additional $150 billion-worth of job-boost- plunged; in China and some other emerg- been followed by a vigorous recovery and ing stimulus, the Senate has not yet done ing economies growth slowed sharply. But that growth will be well above its trend so. And if Congress does nothing, the the slump was as striking for its synchro- rate in 2010. But a gloomier outcome seems Bush-era tax cuts expire at the end of the nicity as its severity. all too plausible. There are few signs of job year. That seems unlikely, but political The opposite seems true of the recov- growth. Much household-debt reduction gridlock could cause America’s scal boost ery. China’s rebound began earliest and still lies ahead. And there is the risk of a to fade unexpectedly sharply. has been the most spectacular (see next correction in stockmarkets. Policy decisions will also inuence the story). America’s economy began growing But even a sluggish American recovery relative strength of the recoveries in the in the middle of 2009 and seems to have will outpace other big rich economies. The emerging economies versus the rich accelerated sharply in the nal months of euro zone faces two dierent but equally world. Though China’s private demand the year. Initial GDP estimates for the painful problems. Former bubble econo- strengthened a lot in the second half of fourth quarter are due on January 29th, mies such as Spain and Ireland are suer- 2009, growth is still largely driven by a gov- and many analysts expect annualised GDP ing a painful hangover. Germany, like Ja- ernment-directed lending boom. China’s growth to have shot up to 5.5% or more. pan, is bedevilled by chronically weak short-term prospects thus depend on how News from the euro zone and Japan is rath- domestic demand. Consumers are reluc- quickly the government damps down the er gloomier. Germany emerged from reces- tant to spend and, so far, buoyant export lending frenzy. Fears of tighter credit in sion before America, but its number- growth has not incited rms to invest, de- China weighed on stockmarkets this week crunchers recently suggested that growth spite hopes to the contrary. but the signs still point to very gradual fell back to zero in the fourth quarter. The The degree to which America outper- tighteningand scant dampening of Japanese recovery also seems to be fading. forms the others will depend, in large part, growthin China and the rest of the Shifting growth patterns could have big on whether, and how, dierent countries emerging world. consequences for asset prices. Sustained tighten monetary and scal policy. There is Powerful structural factors will contin- strength in emerging economies, for in- a lot of talk about scal discipline within ue to reinforce the relative strength of the stance, could push up commodity prices the euro zone, not least because nancial emerging world. Jonathan Anderson of further, while a rapid rebound in Ameri- markets are punishing Europe’s peripheral UBS points out that even if you exclude ca’s economy relative to Europe’s could economies for their proigacy. Greece this China and India, emerging economies strengthen the dollar more against the month announced an unprecedented s- grew some four percentage points faster euro. So a lot rides on what is driving the cal squeeze over the next three years. But than rich economies during the recession, divergence, and whether it lasts. Greece makes up only 3% of euro-area about the same growth gap that existed be- In America soaring GDP growth is like- GDP, and rapid scal consolidation is fore the crisis. Some emerging economies, ly to be a one-quarter wonder, driven by a much less likely in the big economies. The especially those that relied on foreign debt rebuilding of rms’ shrivelled inventories. junior partner in Germany’s coalition gov- nance, will face prolonged problems. The 1

www.storemags.com & www.fantamag.com 70 Finance and economics The Economist January 23rd 2010

2 World Bank argues in a new report that scal policy suggests loose monetary poli- American banks tighter nancial conditions, thanks to cy for longer and a weaker currency. So rel- tougher regulation and higher risk aver- ative scal discipline in America would Through FICC sion, could reduce developing countries’ push the dollar down, and vice versa. trend growth by 0.2-0.7 percentage points A multi-speed recovery could also af- and thin over the next ve to seven years. Even so, fect imbalances between countries’ cur- the hit to potential growth in the rich rent-account surpluses and decits. Amer- world is likely to be bigger. ica’s current-account decit and China’s NEW YORK Persistent relative strength in emerging current-account surplus have both halved A possible end to the pain for lenders economies, especially China, suggests that from their peaks as a result of the crisis, to commodity prices will stay stable or rm. around 3% and 6% of GDP respectively. OLITICIANS tend to tar all bankers It also means their currencies should rise Whether that reduction continues de- Pwith the same brush. The results un- against the dollar, though the pace will depends rst on oil prices and second on the veiled this week by America’s nancial pend, more than anything, on China’s de- pattern of global demand. Imbalances will giants were, however, far from uniform. cisions about the yuan. Within the rich only stay low as the global economy recov- Citigroup and Bank of America (BofA) world, the growing transatlantic growth ers if surplus economies, especially China posted thumping quarterly losses. Morgan divide has helped buoy the dollar versus but also countries like Germany and Ja- Stanley eked out a modest gain. Wells Far- the euro: it is up by more than 5% from its pan, rely on domestic demand while the go and JPMorgan Chase made healthy pro- lows in November. Will that rally contin- big borrowers, especially America, cut ts. Goldman Sachs was expected to report ue? The answer depends as much on the their budget decits and save more. Econo- a glittering set of numbers as The Econo- likely policy mix as today’s growth dier- mies are now growing at dierent rates. mist went to press. entials. Other things being equal, tighter They must also grow in dierent ways. 7 The dierences were partly down to one-o hits. Citi, for instance, had to swal- low $6.2 billion in after-tax charges related China’s economy to repayment of its federal bail-out funds. Behind the noise, however, some trends Central heating are emerging. Loan losses appear to be sta- bilising. For some, the worst may even be HONG KONG over. At BofA, America’s biggest lender, net Is China growing too fast? write-os fell by 13% in the fourth quarter, EIJING recently suered its lowest The recent rise in ination was caused the rst decrease in nearly four years. B temperature in 59 years, but the econ- mainly by higher food prices as a result Across the industry, credit-card delinquen- omy is sweltering. Figures published on of severe winter weather in northern cies are attening out. January 21st showed that real GDP grew China. In many cities, fresh-vegetable Nevertheless, the mood is cautious. In a by 10.7% year on year in the fourth quar- prices have more than doubled in the call with analysts, Jamie Dimon, JPMorgan ter. Industrial production jumped by past two months. But Helen Qiao and Yu Chase’s boss, hinted at the possibility of a 18.5% in the year to December, while retail Song at Goldman Sachs argue that it is double-dip recession. Even if the recovery sales increased by 17.5%, boosted by not just food prices that risk pushing up continues, loan losses could remain high government subsidies and tax cuts on ination: the economy is starting to for some time. They lingered at peak rates purchases of cars and appliances. In real exceed its speed limit. If, as China bears for six quarters in the 1991-92 downturn, terms, the rise in retail sales last year was contend, the economy had massive says Chris Whalen of Institutional Risk the biggest for over two decades. overcapacity, there would be little to Analytics. One wild card is mortgage mod- A year ago many economists were worry about: excess supply would hold ication: banks may yet be forced to re- fretting about unemployment and dea- down prices. But bottlenecks are already duce the principal owed on some loans. tion. Now, with indecent haste, they have appearing. Some provinces report elec- The outlook is cloudy in investment shifted to worrying that the Chinese tricity shortages, and stocks of coal are banking, too. Merger advice is picking up economy is overheating and ination is low. The labour market is also tightening, smartly, but capital-markets revenues fell taking o. The 12-month rate of consum- forcing rms to pay higher wages. in the fourth quarter, thanks to a big drop er-price ination rose to 1.9% in Decem- If the economy’s slack is shrinking in fees from xed income, currencies and ber, an abrupt change from July when fast, then the extraordinarily rapid commodities (FICC), previously the heart prices were 1.8% lower than a year before. growth in money and credit over the past of the rebound (see chart). 1 year could quickly spill into ination. The growth in bank credit slowed to 32% in Relentless China the year to December, but that is still far Not so fixed GDP, % change on a year earlier G7 too fast. The central bank has started to US banks’ revenues, $bn drain liquidity by lifting banks’ reserve Fixed Equity Investment 15 requirements, and some banks have income banking been told to reduce their lending. The 50 10 bank will probably not raise ocial interest rates until ination breaches 3%, 40 5 but that could be as soon as February. 30 + In 2009 government ocials gave 20 0 three reasons for holding the yuan stable * – against the dollar: falling exports, weak 10 5 GDP growth and negative ination. Now, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 with double-digit growth in both GDP 0 2008 2009 2006 Q1 Q2 Q3 Q4 and exports, and ination rapidly rising, Quarterly 2009 Sources: CEIC; Thomson Reuters; JPMorgan *Estimate it has no excuse. average Source: Goldman Sachs

www.storemags.com & www.fantamag.com The Economist January 23rd 2010 Finance and economics 71

2 This decline was partly seasonal. After Banks face other headwinds. The lack- the Financial Times, Mohamed El-Erian, a great year, many investors reduced activi- lustre economic recovery will keep loan head of Pimco, a fund manager, suggested ty in the fourth quarter to preserve prots. demand weak. Tougher rules on capital that Barack Obama’s plan to recover bail- But it may presage a longer slowdown. The will hurt banks’ return on equity and out costs through an annual levy on large bid-oer spreads that banks earn on trades could yet push them out of protable areas nancial rms marks the beginning of the are falling from articially high levels. An- such as proprietary trading. JPMorgan era of banks being targeted for selective in- alysts at Citigroup expect FICC revenues, Chase expects restrictions on credit-card cremental taxation in advanced econo- an estimated $190 billion in 2009, to be practices to cost it at least $500m in annual mies. The chances of further taxes will 15-20% lower this year. A further 15% of the protthough it may be cheered that plans rise if bonuses continue to iname tem- pie could be lost if most over-the-counter for a new nancial consumer-protection pers. Banks have made what they consider derivatives migrate to exchanges. In abso- agency seem to be in disarray. And painful to be big changes to their pay structures. lute terms, any shrinkage is likely to hit accounting changes are coming. Absorbing JPMorgan will hand its investment bank- hardest at Goldman, the market leader in o-balance-sheet assets will erode Citi’s ers just 11% of the revenue they generated FICC, unless it can continue to expand its core capital by 1.4 percentage points. in the last three months of 2009, a quarter share beyond the current 14% level. Punitive taxes will bite, too. Writing in of the norm; Citi has capped cash bonuses 1 Buttonwood Model behaviour

The drawbacks of automated trading EDGE funds had a pretty good year in cient. These models remorselessly comb H2009. The average fund regained al- the markets for arbitrage opportunities. most all the ground that was lost in 2008. This ceaseless activity, however, has So it came as a bit of a surprise when Man led to a kind of arms race in which trades Group, one of the largest hedge-fund are conducted faster and faster. Comput- groups, reported on January 15th that its ers now try to take advantage of arbitrage AHL operation had suered a disappoint- opportunities that last milliseconds, rath- ing end to the year. er than hours. Servers are sited as close as The one thing Man will not do is re possible to stock exchanges to minimise the manager. AHL is the classic example the time taken for orders to travel down of a black box system in which invest- the wires. ment decisions are generated by comput- This high-frequency trading is at- er models. These systems often work best tracting suspicion. The Securities and Ex- when other approaches are failing. In change Commission is looking into the 2008 managed-futures funds (the class practice, on the grounds that it may fa- into which AHL falls) returned an average vour Wall Street insiders at the expense of of 18.2% while the typical fund of hedge retail investors. The European Commis- funds lost 19.8%, according to Eureka- ily come down. sion is said to be doing the same. hedge, a data provider. The model can range across markets High-frequency trading is as far re- But the faltering performance of man- and go short (bet on falling prices) as well moved from the approach of Warren Buf- aged-futures funds last year shows that as long, so the theory is that there will al- fett as it is possible to get. The investment computer-driven strategies are far from ways be some kind of trend to exploit. A guru’s ideal holding period is forever. If perfect. A previous example occurred in paper by AQR, a hedge-fund group, found the investor’s time horizon is measured in August 2007 when a lot of them got into that a simple trend-following system pro- milliseconds, it does not matter what the trouble at the same time. Back then the duced a 17.8% annual return over the per- company concerned actually does for a problem was that too many managers iod from 1985 to 2009. But such systems are livingall that matters is the price. Mar- were following a similar approach. As the vulnerable to turning-points in the markets may be ecient in a narrow sense credit crunch forced them to cut their po- kets, in which prices suddenly stop rising but not in the sense of allocating capital to sitions, they tried to sell the same shares and start to fall (or vice versa). In late 2009 its most productive use. at once. Prices fell sharply and portfolios the problem for AHL seemed to be that The main argument in favour of such that were assumed to be well-diversied bond markets and currencies, notably the trading is that it provides the markets turned out to be highly correlated. dollar, seemed to change direction. with liquidity. But that liquidity may not The lesson learned was that, if you A second approach is to use a computer be permanent. Hedge funds that exploit feed the same data into computers in to exploit the value eect, by nding the approach can use a lot of borrowed search of anomalies, they are likely to shares that look cheap according to a spe- money, so a squeeze on credit will cause come up with similar answers. This can cic set of criteria such as dividend yields, the liquidity to dry up. That was one pro- lead to some violent market lurches. asset values and so on. The value eect blem markets faced in late 2008. In defence of computers (or, at least, works on a much longer time horizon than Computers may not have the human those who program them), quantitative momentum, so that investors using those frailties (like an aversion to taking losses) approaches to investing come in at least models may be buying what the momen- that traditional fund managers display. three dierent types. AHL uses a trend-fol- tum models are selling. The eect should But turning the markets over to the ma- lowing system in which it is assumed that be to stabilise markets. chines will not necessarily make them markets display momentum. In deance The third, most controversial form of any less volatile. of Newton, this model is based on the no- computer-driven trading is ironically the tion that what goes up need not necessar- one that should make markets more e- Economist.com/blogs/buttonwood

www.storemags.com & www.fantamag.com 72 Finance and economics The Economist January 23rd 2010

2 at $100,000. But this is unlikely to calm net interest margins (the dierence be- Dutch co-operative focused on agricultural public fury, which could are up again tween their interest income and funding lending and the only bank still to boast a when Goldman announces its bonus pool. costs) will come under pressure. These are AAA credit rating, for presentation at the On top of all this, banks face the gradual already being squeezed as some rms re- annual meetings of the IMF and World withdrawal of extraordinary government structure their balance-sheets: Citi’s mar- Bank in October, noted that co-operative support. The industry’s attention is turn- gin fell to 2.65% from 2.95% in the third banks did not need big bail-outs. ing to interest-rate risk. Rate cuts in 2007-08 quarter. Over the past three years, Ameri- In Germany, for instance, co-operative greatly steepened the yield curve, handing ca’s banks have gone from feast to famine banks collectively have some 30m custom- banks a huge boost in prots. As and when and (for some) back again. The future lies ers, 16m members and hold just over 1tril- short-term rates start to rise again, banks’ somewhere in between. 7 lion in assets. The 1,200 local mutual banks that make up the sector in Germany have been given good grades by Standard & Europe’s co-operative banks Poor’s (S&P), a ratings agency, mainly because of a mutual-protection scheme un- Mutual respect der which they all agree to bail out failing members. The safety net has ensured that in the 75 years since its establishment, no mutual banks have led for bankruptcy, S&P notes. A 2009 study by the Bundesbank, Ger- Berlin and Paris many’s central bank, into the connection Taking stock of Europe’s islands of socialist banking between nancial stability and bank own- OU can almost sense faint embarrass- claw. Overall the mutuals didn’t have a ership also found that co-operative banks Yment, perhaps even a hint of regret, worse crisis than the commercial banks, were much less likely to fail than those when Europe’s co-operative banks talk says Mark Weil of Oliver Wyman. And the owned by private shareholders. That ts about earnings. The term dividend is losses they did incur are not necessarily with earlier work done by sta at the IMF certainly taboo; instead, euphemisms because of the mutual structure. in 2007, who argued in a working paper about member benets abound. Dis- Some have stumbled. In France mutual that co-operative banks were more stable dain for notions like prot made mutuals, banks seem to have fared rather badly than their commercial counterparts. which do not have shareholders to please compared with their publicly traded rivals, and are owned by their customers, look although a further 1.4 billion ($2 billion) Neglect, benign and malign boring in the boom. But many have put write-down of toxic assets at Société Gé- Part of the reason may lie in their owner- their more capitalist-minded brethren to nérale in the fourth quarter has helped ship and governance structures. The fact shame during the downturn. even the balance. Two mutuals, Caisse that members of co-operative banks do Over the past decade, dull but safe co- d’Epargne (the country’s third-largest retail not behave like owners may be to their ad- operative banks have steadily increased bank) and Banque Populaire, were forced vantage, because there is less incentive for their share of retail banking in Europe’s together to prop up Natixis, an investment them to take big risks to maximise prots. crowded banking market. A paper by Oli- bank that they jointly own and that racked Going into the crisis, co-operative banks ver Wyman, a banking consultancy, found up heavy losses. In Britain several smaller had bigger capital cushions on average that almost one in ve Europeans is a cus- mutually owned building societies col- than privately owned ones, which are gen- tomer of a co-operative and that, when lapsed under the weight of bad bets and erally under pressure not to hold more cap- comparing the number of complaints they were folded into bigger ones. ital than necessary. generate relative to their market share, Their fans argue, however, that the sins But the crisis has also highlighted the their customers love them far more than of the few should not condemn the lot. A downside of this structure. The co-opera- they do those that are red in tooth and report commissioned by Rabobank, a large tives that have stumbled generally did so when expanding abroad or into new areas, such as investment banking or capital markets, that have little to do with their traditional retail franchises. Critics of mutual banking argue that this reveals fundamental weaknesses in a model which was meant to prize conservatism. Chief among the barbs is that co-operatives are not subject to proper oversight because their ownership is widely dispersed among people with no interest in their protability or in- volvement in their governance. It is certainly hard to see how some of these new initiatives could have served, say, the farmers whose ancestors founded many of Europe’s co-operatives and who remain core customers today. For the banks’ managers, on the other hand, a far- ung nancial empire doubtless seemed much more fun to run than one based on lending against next year’s harvest. That they were allowed to get away with such adventures for so long should be the mutu- CDO with your kale crop, sir? al sector’s real source of embarrassment. 7

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Exchange-traded funds fund than one managing $500m. ETF types in 2009. The biggest gold ETF, Nevertheless, the speed of the indus- run by State Street, now has a higher mar- Trillion-dollar try’s expansion is raising some troubling ket value than Barrick, the world’s biggest questions. First, new launches are focusing gold miner. Some blame the rapid growth babies on specialised asset classes. In the latest ex- of gold ETFs for pushing the bullion price ample, Marshall Wace, a hedge fund, is to record peaks in late 2009. launching its own ETF. The total costs on Third, because it is easy for private in- such funds are higher than on those track- vestors to buy and sell ETFs, they may be ing broad indices like the S&P 500, under- tempted to trade them too often. This will A fast-growing asset class mining the model’s low-cost rationale. erode their cost advantage, since every OT all nancial innovations have Second, although specialised funds are transaction involves a fee. Trading activity Ncome to grief in the credit crunch. The very useful for professional investors, they was down by 38% last year, at $50 billion a explosive growth of exchange-traded may tempt retail investors into taking too day. But if markets keep rising, ETFs may be funds (ETFs), investment pools that are list- much risk. Emerging markets and com- to the next generation of day-traders what ed on stockmarkets around the world, con- modities were among the fastest-growing dotcom stocks were in the late 1990s. 7 tinued throughout the past decade. At the end of 2009 ETF assets under management Catastrophe insurance topped the $1trillion mark for the rst time, according to BlackRock, a fund-management rm. The industry’s assets were just When calamity strikes $40 billion at the end of 1999. The industry has been growing faster Market mechanisms oer little succour to poor countries than hedge funds, but with much less negative publicity. ETFs are usually linked to a ATURAL disasters strike rich coun- stockmarket index or asset class and give Ntries as well as needy ones, but the retail investors a way of diversifying their trail of devastation they leave behind is assets at relatively low cost. The average usually far greater in poor places. Worse, expense ratiothe proportion of assets insurance payouts cover a much larger that gets eaten up by the cost of running a chunk of the costs of recovery in rich fundof an American-based ETF was 31 countries than in poor ones, where few basis points (less than a third of a percent- individuals or companies take out disas- age point) at the end of 2009. By contrast, ter cover. Most of the burden of nancing the average expenses of index-tracking reconstruction falls on foreign govern- mutual funds were 78 basis points, and ac- ments and multilateral agencies. It will tively managed funds had expenses al- be no dierent in Haiti after the earth- most twice as high. quake that struck this month. This allows fund managers like Justin Developing countries have some Urquhart-Stewart of Seven Investment options to help them manage the fallout Management to create private-client port- from natural disasters. The World Bank folios consisting completely of ETFs. We helped the Mexican government raise can have more precise asset allocation at $290m in October by placing catastro- very low cost, he says. phe bonds, which pay investors gener- The industry is dominated by Black- ous yields against the loss of their princi- Rock, which acquired the iShares brand pal in the event that disaster strikes. Until Where insurance is a luxury when it took over Barclays Global Inves- now such bonds have largely been the tors last year. Almost half of all global ETF preserve of rich-country issuers: in 2009 amount of coverage purchased, and are assets are managed by iShares, with State Munich Re estimates that 80% of issu- paid out in two weeks. The money is Street a long way behind in second place ance was to cover risks in America. But intended to ensure that lack of cash does with 15.6% of the market. There are genuine Francis Ghesquiere of the World Bank not hamper basic government functions. economies of scale in ETFs. Given that doubts that a country as poor as Haiti, But Pamela Cox, the World Bank’s most products are designed to track an in- with no experience on international vice-president for Latin America and the dex, it costs little more to run a $2 billion bond markets, will start issuing catastro- Caribbean, points out that it is some- phe bonds. times politically dicult for the govern- Risk-sharing mechanisms can enable ment of a poor country to explain why it Let two thousand ETFs bloom the poorest nations to pool their insur- is spending scarce money on insurance Global exchange-traded funds ance-buying power. Haiti is getting a premiums rather than things that may Total assets, $trn Number payout of around $8m from the Caribbe- seem more pressing in normal times. Not 2.0 2,000 an Catastrophe Risk Insurance Facility every disaster triggers a payout: Haiti (CCRIF), which came into being in 2007. purchased signicantly more hurricane CCRIF 1.5 1,500 The has a fund made up of contri- insurance than earthquake insurance butions from donors and member coun- through the CCRIF. And purchasing tries, which allows it to cover payouts of enough cover to meet the need for funds 1.0 1,000 up to $10m itself and has additional after something like the Haitian quake capacity of $110m obtained through would prove prohibitively expensive. 0.5 500 international reinsurance markets. Countries as poor as Haiti are far more Payouts are based simply on the severity likely to have their premiums paid by 0 0 of the disaster (in Haiti’s case, the mag- donors, who funded its CCRIF premium 1993 95 97 99 2001 03 05 07 09 nitude of the earthquake), and the of $385,000. Source: BlackRock

www.storemags.com & www.fantamag.com 74 Finance and economics The Economist January 23rd 2010 Economics focus Invested interests

China aside, most Asian economies need to invest more, not consume more SIA’S current-account surpluses have been widely (if unfairly) 2008, investment accounted for half of China’s GDP growth and Ablamed for causing the global nancial crisis. Large inows private consumption for less than one-third. But in most other of foreign money helped inate America’s housing bubble, the Asian economies the relative shares were almost exactly the re- argument runs. Many Western economists say that Asians verse, with consumption the dominant source of growth. should squirrel away less of their income and consume much A report by the Asian economics team at Barclays Capital con- more. But a more rigorous analysis suggests that in most Asian cludes that to reduce their excess saving, most Asian economies economies it is investment, not consumption, that is too low. need to invest more rather than consume more. Higher invest- Even economists who believe that most of the blame for the ment, especially in infrastructure, they argue, would not only re- crisis lies in Washington, DC, argue that Asian economies need to duce current-account surpluses but also boost growth and living shift from exports and investment to consumption as their new standards. Better roads and railways would help farmers get their engine of growth. In The Next Asia, a recently published book, produce to cities and enable manufacturers to export their goods Stephen Roach, chairman of Morgan Stanley in Asia, calculates abroad. Clean water and sanitation could raise the quality of hu- that consumption in emerging Asian economies fell from 65% of man capital, thereby lifting labour productivity. GDP in 1980 to 47% in 2008. American consumer spending, by contrast, accounts for more than 70% of GDP. Until export-led Do unto others growth gives way to increased support from private consump- Investment in the smaller Asian economies has certainly fallen tion, he argues, the dream of an Asian century is likely to re- sharply, but does that really mean it is too low? These economies main just that. His prescription certainly applies to China, could simply have been overinvesting in the 1990s. The goal of where private consumption fell to only 35% of GDP in 2008. But economic policy should be to maximise households’ well-being what about the rest of Asia? and hence their consumptionbut over time, not just today. Con- A country’s current-account surplus is, by denition, equal to suming too much today will make the next generation poorer. By its domestic saving minus its domestic investment. So Asian investing (and saving), a country sacrices current consumption economies can reduce their surpluses by saving less (ie, consum- but future output and consumption will be higher. The optimal ing more) or by investing more. Which route is appropriate de- level of investment is the rate that generates the highest sustain- pends in part on why their current-account surpluses widened able level of consumption over time. That, in turn, depends on a during the past decade. In China the blame lies entirely with sav- country’s marginal product of capital, or how much output is ing, which rose faster than its investment rate. (India’s saving rate produced by new investment. The higher this measure, the more climbed just as steeply, but it was matched by an even bigger it should invest. Assuming extra investment increases output by jump in investment, which kept its current account in decit.) progressively smaller amounts as the capital stock expands, then In all the smaller emerging Asian economies, however, saving at some point extra investment will reduce, not increase, the has either fallen or remained broadly unchanged as a share of long-run sustainable level of consumption. GDP. The reason these countries have large current-account sur- Calculating the marginal product of capital is devilishly di- pluses is because investment plunged after the 1997-98 Asian cri- cult. However, it is likely to be higher in emerging economies sis and did not recover (see chart). Malaysia’s investment rate, for than in developed ones, because their capital stock is much example, fell from 44% of GDP in 1995 to an estimated 19% last smaller in relation to their labour force. Estimates by Yuwa year. Thailand’s dropped from 41% to 21%. Hedrick-Wong, an economic adviser at MasterCard, suggest that The widespread belief that Asian households do not spend is in China, India, Indonesia and Thailand capital per person is also awed. According to a study by Eswar Prasad of Cornell Uni- only 2-6% of that in America. This means there is huge scope to versity, private consumption accounts, on average, for 58% of boost productivity by giving workers new machines and better GDP in emerging Asia outside China. That is lower than in Ameri- infrastructure. The optimal rate of investment will therefore be ca, which has been overconsuming for years, but it is slightly much higher than in developed economies, and may even justify higher than in Japan or the European Union. In the eight years to the pace of China’s investment of more than 45% of GDP. Yet in Taiwan, Malaysia, the Philippines and Thailand investment is no higher (and in some cases lower) as a share of GDP than in Japan Plunge pools or the euro area. This helps explain why these countries’ growth rates have slowed over the past decade. Mr Hedrick-Wong nds Emerging Asia ex-China and India Investment as % of GDP saving and investment as % of GDP 1995 2009* that among emerging economies, those that invest a bigger share 0 10 20 30 40 50 of GDP tend to enjoy faster growth. 40 China More developed economies, such as South Korea and Singa- Saving India pore, where both the rate of investment and the capital-to-labour 35 South Korea ratio are relatively high, are probably not underinvesting. But In- Singapore donesia’s investment rate (27% of GDP) looks much too low given 30 Indonesia its tiny capital stock. Barclays Capital argues that it needs to raise Investment Hong Kong it to India’s rate of 38% if it wants to achieve annual GDP growth 25 Thailand of 8%. In the Philippines, which probably has the worst infra- Malaysia structure in the region, investment is running at only 15% of its 20 Taiwan GDP. It is no coincidence that the Philippines has the highest rate of consumption (about 80% of GDP) in emerging Asia but one of 1995 97 99 2001 03 05 07 09* Philippines the lowest growth rates. Higher consumption may suit the West, Sources: Morgan Stanley; HSBC; CEIC *Estimate but more investment is in Asia’s longer-term interests. 7

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Also in this section 76 Himalayan glaciers and the climate 77 Railways and slime moulds

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The psychology of power er volunteers were undoubtedly cheat- ingperhaps taking the term high roller Absolutely rather too literally. Taken together, these results do indeed suggest that power tends to corrupt and to promote a hypocritical tendency to hold other people to a higher standard than oneself. To test the point further, though, Dr Lammers and Dr Galinsky explicitly Power corrupts, but it corrupts only those who think they deserve it contrasted attitudes to self and other peo- EPORTS of politicians who have extra- position. Each group (high power and low ple when the morally questionable activi- Rmarital aairs while complaining power) was then split into two further ty was the same in each case. Having once about the death of family values, or who groups. Half were asked to rate, on a nine- again primed two groups of participants to use public funding for private gain despite point morality scale (with one being high- be either high-power or low-power, they condemning government waste, have be- ly immoral and nine being highly moral), then asked some members of each group come so common in recent years that they how objectionable it would be for other how acceptable it would be for someone hardly seem surprising anymore. Anecdot- people to over-report travel expenses at else to break the speed limit when late for ally, at least, the connection between pow- work. The other half were asked to partici- an appointment and how acceptable it er and hypocrisy looks obvious. pate in a game of dice. would be for the participant himself to do Anecdote is not science, though. And, The dice players were told to roll two so. Others were asked similar questions more subtly, even if anecdote is correct, it ten-sided dice (one for tens and one for about tax declarations. does not answer the question of whether units) in the privacy of an isolated cubi- power tends to corrupt, as Lord Acton’s cle, and report the results to a lab assistant. Only the little people pay taxes dictum has it, or whether it merely attracts The number they rolled, which would be a In both cases participants used the same the corruptible. To investigate this ques- value between one and 100 (two zeros), one-to-nine scale employed in the rst ex- tion Joris Lammers at Tilburg University, in would determine the number of tickets periment. The results showed that the the Netherlands, and Adam Galinsky at that they would be given in a small lottery powerful do, indeed, behave hypocritical- Northwestern University, in Illinois, have that was run at the end of the study. ly. They felt that others speeding because conducted a series of experiments which In the case of the travel expenses they were late warranted a 6.3 on the scale attempted to elicit states of powerfulness when the question hung on the behaviour whereas speeding themselves warranted a and powerlessness in the minds of volun- of othersparticipants in the high-power 7.6. Low-power individuals, by contrast, 1 teers. Having done so, as they report in Psy- group reckoned, on average, that over-re- chological Science, they tested those volun- porting rated as a 5.8 on the nine-point teers’ moral pliability. Lord Acton, they scale. Low-power participants rated it 7.2. Science correspondent’s job The Economist is looking for a Science and Technology found, was right. The powerful, in other words, claimed to correspondent to work at its headquarters in London. In their rst study, Dr Lammers and Dr favour the moral course. In the dice game, Knowledge of the eld, an ability to write informatively, Galinsky asked 61 university students to however, high-power participants report- succinctly and wittily, and an insatiable curiosity are more important attributes than prior journalistic write about a moment in their past when ed, on average, that they had rolled 70 experience. A background in the physical sciences would they were in a position of high or low pow- while low-power individuals reported an be an advantage. Applicants should send a CV, a brief er. Previous research has established that average 59. Though the low-power people letter introducing themselves, and an article which they think would be suitable for publication in the Science this is an eective way to prime people were probably cheating a bit (the expected and Technology section to [email protected]. The into feeling as if they are currently in such a average score would be 50), the high-pow- closing date for applications is February 19th.

www.storemags.com & www.fantamag.com 76 Science and technology The Economist January 23rd 2010

2 saw everyone as equal. They scored them- the morality scale when stealing a bike but selves as 7.2 and others at 7.3a statistically assigned a highly immoral 3.9 if they took insignicant dierence. In the case of tax it themselves. Dr Lammers and Dr Galin- dodging, the results were even more strik- sky call this reversal hypercrisy. ing. High-power individuals felt that when They argue, therefore, that people with others broke tax laws this rated as a 6.6 on power that they think is justied break the morality scale, but that if they did so rules not only because they can get away themselves this rated as a 7.6. In this case with it, but also because they feel at some low-power individuals were actually easi- intuitive level that they are entitled to take er on others and harsher on themselves, what they want. This sense of entitlement with values of 7.7 and 6.8 respectively. is crucial to understanding why people These results, then, suggest that the misbehave in high oce. In its absence, powerful do indeed behave hypocritically, abuses will be less likely. The word privi- condemning the transgressions of others lege translates as private law. If Dr Lam- more than they condemn their own. mers and Dr Galinsky are right, the sense Which comes as no great surprise, al- which some powerful people seem to though it is always nice to have everyday have that dierent rules apply to them is observation conrmed by systematic anal- not just a convenient smoke screen. They ysis. But another everyday observation is genuinely believe it. that powerful people who have been What explains hypercrisy is less obvi- caught out often show little sign of contri- ous. It is known, though, from experiments tion. It is not just that they abuse the sys- on other species that if those at the bottom tem; they also seem to feel entitled to of a dominance hierarchy show signs of abuse it. To investigate this point, Dr Lam- getting uppity, those at the top react both Still there mers and Dr Galinsky devised a third set of quickly and aggressively. Hypercrisy might experiments. These were designed to dis- thus be a signal of submissivenessone Asia in WG-II’s report from 2007. Like all of entangle the concept of power from that of that is exaggerated in creatures that feel the IPCC’s work, this was meant to be an entitlement. To do this, the researchers themselves to be in the wrong place in the expert assessment of relevant research, changed the way they primed people. hierarchy. By applying reverse privileges to resting mostly on peer-reviewed sources themselves, they hope to escape punish- but also, at times, on the grey literature A culture of entitlement ment from the real dominants. Perhaps the reports by governments and other organi- Half of 105 participants were asked to lesson, then, is that corruption and hypoc- sations that are not commercially or aca- write about a past experience in which risy are the price that societies pay for be- demically published. they had legitimately been given a role of ing led by alpha males (and, in some cases, The WG-II case study cites a grey report high or low power. The others were asked alpha females). The alternative, though by the WWF, an environmental group, as to write about an experience of high or cleaner, is leadership by wimps. 7 the source of the date 2035. The WWF in low power where they did not feel their turn cites a study presented in 1999 to the power (or lack of it) was legitimate. All of International Commission on Snow and the volunteers were then asked to rate how Glaciers and the IPCC Ice (ICSI) by Syed Hasnain, chair of ICSI’s immoral it would be for someone to take working group on Himalayan glaciers. an abandoned bicycle rather than report O-base camp But the passage about 2035 that the the bicycle to the police. They were also WWF report quotes comes not from that asked, if they were in real need of a bicycle, ICSI report (which was unpublished) but how likely they would be to take it them- from an article that appeared around the selves and not report it. same time in Down to Earth, an Indian The powerful who had been primed magazine. This article was based in part on A mistaken claim about glaciers raises to believe they were entitled to their pow- an interview with Dr Hasnain, who was questions about the UN’s climate panel er readily engaged in acts of moral hypocri- also quoted by New Scientist as saying it sy. They assigned a value of 5.1to others en- HE idea that the Himalaya could lose was possible the glaciers would be gone in gaging in the theft of the bicycle while Tits glaciers by 2035glaciers which feed 40 years. The article in Down to Earth rating the action at 6.9 if they were to do it rivers across South and East Asiais a dra- claims that the area covered by glaciers themselves. Among participants in all of matic and apocalyptic one. After the Inter- would drop from 500,000km2 to the low-power states, morally hypocritical governmental Panel on Climate Change 100,000km2 by 2035, a claim found in the behaviour inverted itself, as it had in the (IPCC) said such an outcome was very like- IPCC report but not in the WWF report. case of tax fraud. Legitimate low-power ly in the assessment of the state of climate This suggests the Down to Earth article was individuals assigned others a score of 5.1 if science that it made in 2007, onlookers (in- itself a source for the IPCC, though Murari they stole a bicycle and gave themselves a cluding this newspaper) repeated the Lal, a retired Indian academic, now a con- 4.3. Those primed to feel that their lack of claim with alarm. In fact, there is no reason sultant, who was one of the four co-ordi- power was illegitimate behaved similarly, to believe it to be true. This is good news nating lead authors of the chapter, says this assigning values of 4.7 and 4.4 respectively. (within limits) for Indian farmersand bad was not the case. However, an intriguing characteristic news for the IPCC. There are two further problems with emerged among participants in high-pow- The IPCC, like ancient Gaul, is divided the area gure. One is that the research in er states who felt they did not deserve their into three parts. Working Group I looks at question was looking at all the world’s gla- elevated positions. These people showed a the physical science of climate change. ciers, not just the Himalaya’s. The other is similar tendency to that found in low- Working Group II is concerned with im- that the research was looking at the pros- power individualsto be harsh on them- pacts, vulnerability and adaptation. Work- pects for 2350, not 2035. selves and less harsh on othersbut the ef- ing Group III deals with mitigation. The Georg Kaser, a glaciologist at the Uni- fect was considerably more dramatic. They claims about Himalayan glaciers come versity of Innsbruck, explains that a time- felt that others warranted a lenient 6.0 on from a short case study in a chapter on scale of centuries, not decades, is far more 1

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2 plausible for the Himalaya. Politics and lo- Meanwhile, the future of water re- bacteria. It can grow into networks with a gistics make a comprehensive study of sources in the places served by the glaciers diameter of 25cm. Himalayan glaciers dicult, but if those in- remains unclear. Glaciers in monsoonal When P. polycephalum is foraging, it dividual glaciers which have been studied climates, unlike high-latitude glaciers, gain puts out protrusions of protoplasm, recently are representative, then the gla- mass from precipitation during the same creates nodes and branches, and grows in ciers are retreating. This retreat, however, is warm season in which they lose mass the form of an interconnected network of likely to take a long time. To melt a glacier from melting, which makes their behav- tubes. As it explores the forest oor, it must at an altitude above 6,000 metres, where iour complex. And there are other water- constantly trade o the cost, eciency and many of the Himalayan glaciers are found, related questions to be addressed, includ- resilience of its expanding network. requires a lot more warming than can be ing possible changes to the monsoons and Since the purpose of this activity is to expected by 2035a point made forcefully massive depletion of groundwater. There link food sources together and to transport in a letter to Science by Dr Kaser and others, is an urgent need to study these things, and nutrients around the creature, Atsushi Tero published this week. Je Kargel of the Uni- to synthesise the results in a way that can at Hokkaido University in Japan and his versity of Arizona, one of its authors, be relied on. 7 colleagues wondered if slime-mould tran- stresses that its criticism is aimed at this sport networks bore any resemblance to specic claim, not at the IPCC in general, human ones. As they report in Science, and should not be seen as undermining Railways and slime moulds they built a template with 36 oat akes (a the panel’s conclusions. favoured food source) placed to represent On January 20th the IPCC released a A life of slime the locations of cities in the region around statement reiterating its overall conclusion Tokyo. They put P. polycephalum on Tokyo on water from seasonal snow packs and itself, and watched it go. glaciers in a warming world: that it is likely They found that many of the links the to be scarcer and available at dierent slime mould made bore a striking resem- times. The statement also says that in the blance to Tokyo’s existing rail network. For Network-engineering problems can be case study on the Himalaya’s glaciers the P. polycephalum had not simply created the solved by surprisingly simple creatures clear and well-established standards of ev- shortest possible network that could con- idence, required by the IPCC procedures, ROM adhesives that mimic the feet of nect all the cities, but had also included re- were not applied properly. Christopher Fgeckos to swimsuits modelled on shark dundant connections that allow the crea- Field of the Carnegie Institution’s Depart- skin, biologically inspired design has taken ture (and the real rail network) to have ment of Global Ecology, who is now the co- o in recent times. Copying nature’s ideas resilience to the accidental breakage of any chair of WG-II, says the fact that the review allows people to harness the power of evo- part of it. P. polycephalum’s network, in process failed to catch the problem needs lution to come up with clever products. other words, had similar costs, eciencies to be looked into. Now a group of researchers has taken this and resiliencies to the human version. That a review process which included idea a step further by using an entire living How the creature does this is unknown, 40,000 comments did not catch the error organisma slime mouldto solve a com- but Mark Fricker of Oxford University, proves that size is not everythingespe- plex problem. In this case, the challenge who is one of Dr Tero’s colleagues, specu- cially since the error was quite catchable. was to design an ecient rail network for lates that the forces generated by proto- Dr Kaser read the chapter after it was re- the city of Tokyo and its outlying towns. plasm pulsating back-and-forth through viewed but before it was published. As a Slime moulds are unusual crittersnei- the multinuclear cell are interpreted and glaciologisthe was an author of the rele- ther animal, nor plant nor fungus. If they used to determine which routes to rein- vant chapter in the WG-I report, a much resemble anything, it is a colonial amoeba. force, and which connections to trim. more thorough take on the subject which Physarum polycephalum, the species in Tokyo’s is not the rst transport net- makes no grandiose claims about the Hi- question, consists of a membrane-bound work to be modelled in this way. A study malayahe found the passage absurd, and bag of protoplasm and, unusually, multi- published in December by Andrew Ada- alerted the IPCC. Problems he had with a ple nuclei. It can be found migrating across matzky and Je Jones of the University of passage on glaciers in WG-II’s chapter on the oor of dark, damp, northern-temper- the West of England used oat akes to rep- Africa were subsequently addressed. ate woodlands in search of food such as resent Britain’s principal cities. Slime Those in the chapter on Asia were not. moulds modelled the motorway network This poses two questions. One is why of the island quite accurately, with the ex- Dr Kaser, or some other glaciologist, did ception of the M6/M74 into Scotland (the not see the chapter earlier on. Like Gaul’s creatures chose to go through Newcastle three parts, the IPCC’s working groups, rather than past Carlisle). rooted in dierent disciplines, have dier- Of course, neither Dr Tero nor Dr Ada- ent tribal structures; they do not communi- matzky is suggesting that rail and road net- cate as well as they should. Dr Field says he works should be designed by slime is determined to try to do something about moulds. What they are proposing is that this in the process leading up to the next set good and complex solutions can emerge of assessments in 2013. from simple rules, and that this principle The other question is why, when alert- might be applied elsewhere. The next ed by Dr Kaser, the IPCC did nothing. thing is to discover and use these rules to When open criticism began last year, it was enable other networks to self-organise in airily dismissed by Rajendra Pachauri, an intelligent fashion without human in- who chairs the IPCC and runs an institute terventionfor example, to link up a in India where Dr Hasnain now works on swarm of robots exploring a dangerous en- glaciology. If he had not heard the claims vironment, so that they can talk to each were wrong by that stage, he should have other and relay information back to base. done. This mixture of sloppiness, lack of The denizens of Carlisle, meanwhile, may communication and high-handedness wonder what objection slime moulds gives the IPCC’s critics a lot to work with. Show me the way to Shinjuku have towards their ne city. 7

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Also in this section 79 Mahathir Mohamad 79 The music of Carlo Gesualdo 80 The European Union 80 Henning Mankell’s detective ction 81 Indian contemporary art 81 Science and the Royal Society

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Georgia and Russia On July 29th 2008, Russia’s proxies in South Ossetia started shelling pro-Geor- Ungodly suering gian villages there. What was Mr Saakash- vili supposed to do? If he ignored the shelling, leaving his supporters to ee or be killed, the loss of prestige would be cata- strophic. His pleas to the outside world to intervene were ignored. Moreover, Mr Saa- kashvili received intelligence (probably ex- An American take on a war that fed conspiracies throughout Europe aggerated) that large numbers of Russian WO points about the war in Georgia in troops were crossing into South Ossetia, A Little War That Shook the World: 2008 have stuck in outsiders’ memo- perhaps as reinforcements, perhaps as a T Georgia, Russia, and the Future of the ries. One is that it was quite unexpected. prelude to a full-scale invasion. West. By Ronald Asmus. Palgrave The other is that Georgia started it. Both, in Mr Saakashvili decided to act at once, Macmillan; 250 pages; $27 and £20 Ronald Asmus’s view, are wrong. ordering troops into South Ossetia to stop The real cause of the war, he argues, the shelling but not to ght the Russian was Russia’s determination to block Geor- Asmus argues. The Kremlin, therefore, troops there. As Mr Asmus recounts with gia’s American-educated and America- deliberately provoked the Georgian leader painful clarity, that decision was a disaster. loving president, Mikheil Saakashvili. He into starting a war that he was bound to The Georgian army lacked plans, troops, had embarked on a crash course to turn lose. Humiliating Georgia was also a way equipment, training and communications. Georgia from a semi-failed state into a re- of paying back NATO for the recognition All it had was hopes of a quick victory, of form tiger that could become the catalyst of Kosovo, a breakaway province of Ser- Russian hesitancy and of Western support. for creating a democratic pro-Western cor- bia. And it signalled the limits of America’s In fact, huge Russian reinforcements ridor in the southern Caucasusit was a role in Russia’s back yard. poured in, and within a few days were breathtaking vision. Mr Asmus writes with authority. He is a poised to take Tbilisi. Mr Asmus’s metaphors may be breath- former American ocial who master- America stood back, though Mr Asmus takingly mixed, but his big point is right. minded the rst enlargement of NATO to gives an intriguing hint that at least some Situated on the most promising east-west the ex-communist east. In his oce, now at ocials were arguing, albeit tentatively route for oil and gas, Georgia was becom- a Brussels think-tank, souvenirs include a and unsuccessfully, for a military response ing an economic and political success commemorative sword given by the to defend Georgia. That could have ended story under Mr Saakashvili, who took grateful nation of Poland. He has lobbied the war quicklyor led to a terrifying esca- power in the Rose revolution of 2003. Its hard for new candidates, including the Bal- lation. In the end, President Nicolas Sar- pluralism was a profound challenge to the tic states, which joined NATO in 2004, and kozy of France, on behalf of the European authoritarian crony capitalism taking root most recently for Georgia. Union, brokered a messy ceasere. in Russia under Vladimir Putin. His book lays bare the dilemma facing The book’s detailed inside accounts of Mr Saakashvili’s growing sway in two Mr Saakashvili in the summer of 2008. Georgian and Western manoeuvring be- Russian-backed breakaway regions of Russian provocations against Georgia had fore, during and after the war are gripping. Georgia, South Ossetia and Abkhazia, was been escalating for months, with a mixture Mr Asmus is caustic about the outside also an increasing nuisance for the Krem- of economic pressure, subversion and mil- world’s failure to forestall the conict. lin. He had restored Georgian control over itary attacks, chiey by air. The West’s re- Hundreds of people died and many thou- a corner of Abkhazia and set up a loyalist sponse was feeble. It made anodyne pleas sands of people lost their homes because administration inside South Ossetiaan to both sides to refrain from using force. It of that. In particular he highlights the untidy place with villages of varying was not prepared to say unequivocally to weakness of NATO (crippled by feuding ethnic and political make-up. Russia that destabilising Georgia would over the Iraq war) and of the self-centred For Russia, that was intolerable, Mr have serious inevitable consequences. and complacent EU. 1

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2 He is rather kindertoo kind, many minority. Yet Dr Mahathir at times sub- episodes it describes. But Dr Mahathir’s might feelto the Georgians. Many deci- scribed to an almost colonial view of the complaint about it does not centre on its sions and actions may have been mistaken indolent Malay as unenterprising, shiftless cataloguing of his authoritarian streak. and deserve scrutiny, he concedes. But the and, as he put it in an article quoted in the Rather he resents the sceptical take on his author inches from condemning even the book, of a low average intelligence quo- economic legacy. most lamentable mistakes outright. In par- tient. Dr Mahathir, himself born into the Under Dr Mahathir Malaysia’s econ- ticular, the heavy-handed crackdown on family of a struggling small-town head- omy grew at an average annual rate of 6.1%. opposition demonstrators and media in master, is a self-made Malay politician, in Mr Wain points out that in the previous November 2007 played a big role in contrast to the aristocrats who dominated decade, the average had been 8%, but Dr tarnishing Georgia’s image abroad. This after independence from Britain in 1957. Mahathir’s role in the modernisation of deserves more than the couple of sen- To justify the policies they pursued to his country, and its transformation into a tences Mr Asmus devotes to it here. Mr make Malays wealthier, UMNO and its manufacturing hub, remains remarkable. Saakashvili’s exasperating habits were leader cited the need to ease tension after To Dr Mahathir’s fury, the book makes similarly damaging: disorganisation, self- the bloody race riots of May 1969. That in clear that progress has also entailed a suc- indulgence, verbosity, favouritism and vin- turn was part of a bigger vision, the single- cession of grotesque national nancial dictiveness are just a few. Mr Asmus also minded drive to turn Malaysia into a scandals, huge wastage on prestige pro- ignores how far the Georgian leadership’s developed nation by 2020. jects and a political system ooded with American cheerleaders, especially in some To this end, Dr Mahathir, who took dirty money. The setbacks and criticism corners of the Republican Party, may have oce in 1981, resorted to increasingly ruth- have been severe enough at times to drive made it overcondent. less and authoritarian methods. He was an Dr Mahathir, an emotional man, to public Insights from the Russian side are also unabashed advocate of Asian values, tears; though never, of course, to admitting missing (because ocials in Moscow de- favouring discipline over freedom. After he might have been at fault. 7 clined to talk to him, says Mr Asmus). What more than 100 government critics were were the Kremlin’s real war aims? How locked up in 1987 under the colonial-era badly did Russia’s military forces do? What Internal Security Act, laws covering prot- Carlo Gesualdo conclusions did Russian leaders draw? The ests and the press were tightened. Being denitive book on that is still to come, but liberal to those who abused their freedom, Lurid rhythms Mr Asmus’s work sets a high standard. 7 Dr Mahathir said, was like oering a ow- er to a monkey, which would tear it apart. Under him UMNO, it was joked, came Mahathir Mohamad to stand for Under Mahathir No Opposi- tion. He fought all the most important The Gesualdo Hex: Music, Myth, and constraints on his power: the traditional The doctor’s Memory. By Glenn Watkins. W. W. Norton; monarchs, the sultans; the judiciary; the 416 pages; $39.95 and £28 orders press, both foreign and domestic; and successive protégés and anointed successors. HE lives of 16th-century composers of They included not just Anwar Ibrahim, Tunaccompanied madrigals do not by jailed and beaten up, but his actual succes- and large make promising subjects for Malaysian Maverick: Mahathir Mohamad in sor, Abdullah Badawi, against whom he lurid lms and operas. Carlo Gesualdo, Turbulent Times. By Barry Wain. Palgrave railed in his blog, having the satisfaction of prince of Venosa (near Naples), is the ex- Macmillan; 368 pages; $105 and £65 seeing him unseated last year. ception. Descended from Norman rulers OGGED by controversy for most of his The blog has also trashed Mr Wain’s of Sicily and a Medici mother, he took a Dcareer, including the 22 years he spent book, which has been held up at Malay- twice-widowed 24-year-old bride when as Malaysia’s prime minister until 2003, sian customs. The government would he was 20, then bloodily murdered her Mahathir Mohamad has never had trouble probably rather forget many of the and her lover (as local custom required) relaxing. Most days in the oce he would when his uncle, having himself failed to enjoy a 15-minute after-lunch nap. In an seduce her, informed Carlo of his wife’s in- astute and thorough new biography, Barry delity. Things went downhill from there. Wain, a former editor of the Asian Wall The prince abused his next wife, and was Street Journal, explains why Dr Mahathir subject to ts of melancholy that could be could rest easy: He never made mistakes, lifted only by thrice-daily beatings from a or at least none that he admitted. team of young men retained for the pur- Of course, many successful politicians pose. He ended his life tormented by the are similarly bereft of self-doubt. But Dr spells and potions of a rejected former Mahathir, a qualied medical doctor, concubine who turned to witchcraft. seems never once to have questioned the Werner Herzog made a mountain out accuracy of his own diagnoses or the of this in his Death for Five Voices, pur- ecacy of his remedies. The Malaysian portedly a documentary, in 1995. In the body politic is still coping with the same year, Alfred Schnittke’s opera about consequences. Gesualdo added the (false) detail that he The paradox of Dr Mahathir’s career is killed his own child, as if the facts were not that his determination to favour Malay- colourful enough already. Aldous Huxley, sia’s ethnic-Malay majority is matched by who listened to Gesualdo’s music while what seems to be an extraordinarily con- taking mescaline, was so carried away by it descending attitude to that group. His that he once made up stories about him in party, the United Malays National Organi- a lecture. Bernardo Bertolucci has a lm sation (UMNO), was devoted to promoting project about Gesualdo that is in develop- the interests of the Malays so that they ment now. But it is the eerie passion of could catch up with the better-o Chinese Always right Gesualdo’s music, not the drama of his life,1

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2 which led Igor Stravinsky and Arnold interest in Gesualdo among musicologists Watkins gets lost rambling among minor Schoenberg to him. Both composers in the 1950s, and although performance of details, and prefers musing over questions regarded Gesualdo as to some extent a his music continues to thrive, Glenn Wat- to answering them. He makes no attempt model for their own musical innovations. kins, an American scholar of renaissance to explain musical terms: readers who do An 18th-century history of music de- music and the leading authority on Ge- not know what a diatonic, homophonic scribed Gesualdo’s harmonies, which veer sualdo’s works, reports that academic in- pronouncement of a frottola rhythm is in and out of familiar scales, as harsh, terest in him is waning, for now. Mr Wat- will be none the wiser after reading about crude and licentious. In 1956 Time maga- kins published a study of Gesualdo’s life it here. Mr Watkins writes that this book is zine headlined a review of a Gesualdo re- and music, with a preface by Stravinsky, in part historiography, part cultural history, cording as Ahead of his time, a question- 1973; his new book traces the ebb and ow part autobiography, and might well be able idea since it presupposes that the of Gesualdo’s reputation over the centu- called a notebook. This is one notebook history of music is travelling in a single pre- ries, and tries to explain it. which probably should have remained in ordained direction. There was a boom of But it does not try very hard. Mr a drawer. 7

The European Union New detective ction What is it for? Chewing the fat

The New Old World. By Perry Anderson. The Man from Beijing. By Henning Mankell. Verso; 561 pages; $39.95 and £24.99 Knopf; 361 pages; $25.95. Harvill Secker; £17.99 HE failure of the EU to make much of Tan impact at last month’s climate- ENNING MANKELL, the Swedish change summit in Copenhagen caused Hcreator of the Inspector Wallander shock in European capitals. At the mo- mysteries, which have been cast to perfec- ment of adopting a new rule book, the tion for television this year with Kenneth Lisbon treaty, to give the EU global clout, Branagh in the main role, is part August confused Europeans nd themselves Strindberg, part Stieg Larsson. His new asking: what is their union for? work, The Man from Beijing, which fea- In this moment of angst, a masterly tures a middle-aged former Maoist turned historical survey of the European project, honest Swedish judge, Birgitta Roslin, as coupled with a critique of its current the central character, contains much of failings, is just what the EU needs. Perry Larsson’s hysteria about Sweden’s dark Anderson, a British historian at UCLA side with a generous helping of Strind- and a former editor of New Left Review, berg’s wintry musicality. At least that’s oers these valuable aids to reection in how Mr Mankell’s new book starts, which this collection of essays on Europe and is all to the good. the union. Firmly left-wing, his solidarity A lone male wolf crosses the unmarked with the street against the palace Mr Anderson pondering the weakness of border between Sweden and Norway in allows him to see the modern EU for the Chirac government in France, and search of food, Mr Mankell writes. His last what it too often is: a cartel of self-pro- how Germany will change when its meal was a dead moose, devoured several tective elites. He can be crudely dismis- capital moves to Berlin. Even its updates days before. The wolf approaches a vil- sive of pet hates: Britain, New Labour, are out of date. Baingly, the author lage, and smells blood. There is a carcass Winston Churchill (a modest historical decided not to alter the book to take nearby, which he drags back into the trees. gure, who briey inspired his country account of the global nancial crisis. His It is not yet frozen. He is even hungrier now. during a war won by Soviet troops and climactic prediction for the EU is particu- He pulls o a leather shoe and starts gnaw- American wealth). larly weak. ing at an ankle. But much of his sharpness is original, A swooning francophile, Mr An- This frozen panorama is the door to a and clever: the European Commission derson was aghast to see President Nicol- bloody crime, and to a far broader narra- has to secure power through regulation, as Sarkozy taking France back into the tive. It turns out that an entire village has he notes, because it has so little to spend military structures of NATO, and sending been massacred, seemingly by one person. on policy instruments (the EU budget is troops to Afghanistan. With France join- In Swedish history, Mr Mankell comments, less than 2% of the union’s GDP). Regu- ing other big countries in surrender to the such a crime is unprecedented and it at- lation costs Brussels only the salaries of a Atlantic imperium, the EU, he contracts journalists from all over the world. few thousand ocials: the real costs fall cludes, is preparing itself for the role of Reading about the killings in the news- on those regulated. He describes how the deputy empire to the Yanks. papers, Judge Roslin recognises one of the EU has castrated national parliaments This is lazy stu. Among European family names involved as belonging to an by dumping complex legislation on them politicians, American power is suddenly elderly couple, now among the dead, who for swift approval, only after it has been the object of sighing nostalgia, not a had helped raise her mother. Diagnosed haggled over by national diplomats: a source of alarm. All talk now is of a with high blood pressure, Judge Roslin is process that has removed power from post-American century, dominated by conveniently given several weeks’ leave publicly accessible parliaments into the powers like China, which Mr Anderson from the courts which she uses to try and closed world of chancelleries. barely mentions. As a result, he con- solve the crime. Alas, the book is nally a disappoint- demns this vast and sometimes brilliant China, as can be expected from the ment. It includes essays so old they nd book to the realm of irrelevance. book’s title, becomes the focal point of two separate narratives here. One is a 19th-1

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2 century story of forced emigration from History of science found in places other than Earth and Rich- the Middle Kingdom and the other a para- ard Dawkins halts, no doubt temporarily, ble about the future direction of modern Like-minded his bashing of religionists to enthuse about China. Should China adhere to Chairman Darwin and natural selection. Mao’s higher ideals, and work towards fellows Mr Bryson or, more plausibly, Jon Tur- bridging the gap between rich and poor, or ney, who is the contributing editor of the should it be every man for himself? Mr book, did not conne his selection of au- Mankell lives partly in Mozambique, thors to those known for their scientic Seeing Further: The Story of Science and where he spends much of his free time writing. Margaret Atwood, an award-win- the Royal Society. Edited by Bill Bryson. working with AIDS charities, so, inevita- ning Canadian novelist, oers her Harper Press; 490 pages; £25 bly, he also begins to ruminate here on thoughts on the origin of the gure of the China’s role in Africa. Are the Chinese just OME 350 years ago, a dozen men meet- mad scientist, and Neal Stephenson, who new colonialists, or can they really be true Sing in the City of London heard a lec- writes science ction, explores the point at partners with younger, smaller, poorer ture by a young astronomer named Chris- which physics abuts metaphysics through African nations? topher Wren, who would later become the the work of two great intellectuals, Sir Mr Mankell is a master portraitist of architect of St Paul’s Cathedral. They deter- Isaac Newton and Gottfried Leibniz. Sweden’s underside. It is when his novel mined to gather on a regular basis. Inspired Writers noted for their scientic output turns to social commentary abroad that by the writing of Sir Francis Bacon, a 17th- are included, too. James Gleick describes the trouble starts. The picture he paints of century statesman and philosopher who the earliest meetings of the society. Philip Africawith a leopard calmly surveying argued that knowledge could be gained by Ball gives a passionate defence of the im- the world from its grassy hillockis clichéd testing ideas through experiments, the portance of engineering and Oliver Mor- enough, but his China is positively hack- group began to meet every week to discuss ton, a colleague at The Economist, paints neyed. Shadowy men of power and scientic matters and witness experi- the planet as a dynamic orb. Then there is wealth inhabit newly built skyscrapers. ments conducted by its members. Two Mr Bryson himself, amusing as ever, pok- When they do speak, which isn’t often, it is years later, Charles II granted the society its ing through the archives and memorabilia, in long stilted phrases about the wisdom royal charter; the Royal Society gave birth picking out his favourite pieces, which in- of the ancients. The apotheosis of this is a to modern science. clude Newton’s death mask and one of his speech, by a member of the Chinese polit- Seeing Further: The Story of Science handcrafted telescopes. buro, which goes on, unedited, for ten and the Royal Society celebrates the orga- The establishment of the Royal Society whole pages. nisation’s anniversary in a collection of es- arguably gave birth to modern science. The In an afterword, Mr Mankell acknowl- says by academics and writers introduced ancient Babylonians had developed com- edges the need to correctly present impor- by Bill Bryson, a bestselling author. Rich- plex mathematical techniques to record tant details. The problem is that he makes ard Fortey of the Natural History Museum the stars, the Greeks systemised the organi- rather a meal of both the details and the muses on the importance of collections, sation of knowledge based on logic, Islam- presentation. The Man from Beijing is Paul Davies of Arizona State University ic scholars wrote astronomical and medi- half chewed, if not nigh on indigestible. 7 questions the likelihood of life being cal texts and Chinese inventors recorded recipes for gunpowder. But none of these became self-sustaining in the way that science is today. The society invented science through insisting that logic be supported by empirical facts, by establishing that experiment could be described by mathe- matics, and by inventing peer review and scientic publishing to allow the verica- tion, or otherwise, of scientic claims. In so doing, it revolutionised the way in which people think about the world. Knowledge can be tested, climate change identied, stock markets analysed and the very origins of the universe probed. Sci- ence has endowed society with iPhones and the internet, but it also lays bare man- kind’s place on a planet orbiting a run-of- the-mill star in an ordinary galaxy of which there are billions in the universe. And it allows predictions. As Lord Rees, president of the Royal Society, puts it in his concluding chapter, The sun formed 4.5 billion years ago, but it’s got 6 billion more before the fuel runs out. Any creatures wit- nessing the sun’s demise 6 billion years Indian contemporary art hence, here on Earth or beyond, won’t be Modern art from the subcontinent will be on show all over Europe to mark the 60th humanthey’ll be as dierent from us as anniversary of the day India adopted its constitution. The Empire Strikes Back, at the we are from bacteria. Saatchi Gallery, London, until May 7th, brings together an array of Indian artists, many Seeing Further is a handsome of them highly politicised. In Public Notice 2 (pictured above), Jitish Kallat has used bookit is beautifully illustratedcontain- 4,500 bones shaped into letters of the alphabet to recreate an historic speech Mahatma ing thoughtful insights, eloquently ex- Gandhi delivered in early 1930, just before he set out on his epic, 400km (249-mile) pressed. As a celebration of 350 years of march to try to break the brutal Salt Act that had been introduced by the British. modern science, it is a worthy tribute. 7

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bourgeois set-up) and the laboured eti- quette of Question Hour, but soon saw the point of representative democracy. From the 1950s onwards he rened his manifesto of land reform, decentralisation, a minimum wage, free trade unions, xed food prices. It was a time of hunger and unrest, with thousands of farmers and labourers besieging the assembly in Calcutta with cries of Give us starch! The ruling Con- gress party kept the crowds at a distance, or got the police to disperse them with tear gas and rie re. But Mr Basu went out to Esplanade East, talked to the people and brought their grievances inside.

Lenin in marigolds His upbringing had been comfortably middle-class: a Calcutta doctor’s son, St Xavi- er’s, Presidency College, studies for the bar in London. His family blamed that stint, during the anti-fascist ferment of the 1930s, for turning him communist, and certainly he went back to India a determined Red. Several times he was arrested, once while simply taking a cup of tea in the Kamala- laya Stores. From 1948-51, when the party was banned, he went underground for a while, shifting from house to house, all the Jyoti Basu time keeping up his pro-people agita- tion. In 1964, when the Communist Party split over India’s war with China (his side, the Communist Party of India (Marxist), having favoured talks, rather than ght- Jyoti Basu, almost India’s rst Communist prime minister, died on January 17th, ing), he saw the divide as one of real aged 95 communism against the revisionists. He NDIAN politics since independence has in more investment or scared it o, ruined was accused of being anti-national, and Inot been short of milk-and-water social- West Bengal or made it a beacon for the had his oces raidedoces where pic- ism, such as that on oer in the Congress country. Businessmen who had tangled tures of Lenin and Stalin were decked with party. But it has lacked charismatic gures with the state’s militant unions had little marigolds, like gods. on the left. The exceptionin a diminutive, good to say of him. Opponents queried his Despite all this, however, his pragma- elegant, determined shapewas Jyoti unprecedented re-elections, attributing tism increased. As chief minister of West Basu. For 20 years, with a few breaks, Mr them to a cult of thuggishness in his party. Bengal, he realised that economic liberal- Basu was the leader of West Bengal’s oppo- But landless farmers, beneciaries of his isation and the rise of China were making sition; for 23 years he was the state’s chief million-acre land-distribution pro- old orthodoxies redundant. We want cap- minister. He was also a communist, and a gramme, worshipped him; villagers em- ital, he said once. Socialism is not possi- charming one. powered through his improved version of ble now. Such remarks astonished his col- His memoirs, written at the end of his local councils, the panchayati raj, voted for leagues in the party. Nor did they relish his life, proclaimed a fervent and orthodox him eagerly; and commuters in Kolkata harping on what he called their historic Marxism-Leninism. His career was often could thank him for cheap trams. blunder: the moment in 1996 when, at the dierent. Though he longed for the masses His straddling act was tricky at times. head of a third front alliance of left-wing, of India to emerge victorious in a society When West Bengal in 2006, under his suc- regional and caste-based parties, he al- without caste, class or exploitation, Mr cessor, won the hotly contested contract to most became India’s prime minister, only Basu was above all a pragmatist. If private build the Tata Nano, he was delighted at to be stymied by his own politburo’s ideo- rms could bring jobs to West Bengal, he the thought of the investment, jobs and logical squeamishness. sought them out. He was unabashedly growth. But he found himself at odds with That might have allowed Mr Basu and friendly to capitalist cadres such as The his chief supporterspoor farmers, em- the left a vital role in national politics. He Economist, presenting the editor in 2000 powered by himself, whose land would be still had much to do. He wanted to see the with a small silver carriage adorned with seized for the new car plantand could not people’s political consciousness awak- bright pink, very un-Marxist, feathers. persuade them to accept compensation. ened, and India’s colossal inequalities of Kolkata (once Calcutta) was his show- Tata eventually left for Gujarat. wealth and caste fading inexorably away. piece, the only big Indian city in which, This thoughtful, exible politician But in fact he had left West Bengal an eco- from 1977 to 2000, red ags ew, and ham- hardly resembled the young hothead who nomic backwater, largely shunned by for- mers and sickles graced the walls. It re- rst stood for election, in 1946. Mr Basu was eign investors and a byword for obstreper- mains dirty, sprawling and chaotic, though then deep in organising the railway work- ous unionism. Marxist-Leninist revolution bustling with IT jobs and with many more ers, planning strikes and organising safe- remained his dream; but, as he knew bet- glass towers. After his death, opinion di- houses for communist comrades. He pre- ter than anyone, capitalism and private en- verged over whether Mr Basu had brought ferred direct action to the ballot (such a terprise remained a surer bet. 7

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Appointments

The Ofﬁ ce of the Inspector General (OIG) at the Global Fund to Fight AIDS, Tuberculosis and Malaria, is looking for: Two experienced Audit Team Leaders The positions are Geneva based with extensive travelling.

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United Nations Nations Unies IFC, a member of the World Bank Group, creates opportunities for people to escape poverty and improve their lives. In addition to its investment work, IFC executes a large program of Advisory Services Assistant Secretary-General for Human Rights focused on private sector development. Offi ce of the High Commissioner for Human Rights Program Manager Ukraine Residential Energy Effi ciency Program The Offi ce of the High Commissioner for Human Rights works to make human rights a based in Kyiv, Ukraine reality for people around the world. The Program Manager will be responsible for leading our program, which aims to create an The Offi ce of the United Nations High Commissioner for Human Rights (OHCHR) is effective legal and institutional platform to support local condominium associations and housing seeking qualifi ed candidates for the position of Assistant Secretary-General at United management companies in getting access to fi nance for the purpose of improving energy effi ciency of the country’s existing housing stock. Nations Headquarters in New York. Requirements: Under the direction of the High Commissioner, the Assistant Secretary-General will • Master's degree and a minimum of 5-10 years relevant experience. head the OHCHR New York Offi ce with the responsibility to integrate human rights • Practical experience in developing or advising on residential energy effi ciency projects/ policy. into key policy and management decisions, and the work of intergovernmental bodies • Strong understanding of residential energy effi ciency project economics, planning, based in New York, and to ensure that the New York Offi ce activities are closely technical and design aspects. coordinated with OHCHR headquarters in Geneva. • Relevant experience working in the Central and Eastern Europe and Baltic region is desirable. The Assistant Secretary-General will assist the High Commissioner in building relations • Demonstrated professional leadership and ability to lead a team of professionals in the with Member States, other United Nations organizations, international organizations, execution of major project components. regional and national institutions, non-governmental organizations, the private sector • Fluency in English; profi ciency in Ukrainian and/or Russian is desirable. and academia. For corporate information please visit www.ifc.org Interested candidates with at least twenty years of professional experience in senior Please apply and get more details on a position at IFC Careers – Job reference # 092065. leadership positions in human rights or a related fi eld; an advanced university degree in Closing date for applications is February 12, 2010. human rights, law or relevant fi eld; negotiation and diplomatic skills; strong leadership and management abilities; and fl uency in English and knowledge of another United Nations language should e-mail a letter of interest and a curriculum vitae before 15 Business & Personal February 2010 to the High Commissioner at [email protected]. The United Nations believes that staff diversity contributes to excellence. Women and nationals from developing countries are particularly encouraged to apply.

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Notice of Request For Qualiﬁ cations TO ADVERTISE WITHIN REQUEST FOR QUALIFICATIONS (RFQ) THE CLASSIFIED SECTION, CONTACT: FOR PROVIDING DESIGN AND BUILD SERVICES FOR THE DESIGN AND CONSTRUCTION London OF SIX SPORT FACILITIES Oliver Slater IN TRINIDAD AND TOBAGO Tel: (44-20) 7576 8408 FOR THE MINISTRY OF SPORT AND YOUTH AFFAIRS [email protected] OF TRINIDAD AND TOBAGO New York The Sport Company of Trinidad and Tobago (“SporTT”) has been mandated Beth Huber by the Government of Trinidad & Tobago to undertake the development of: Tel: (212) 541-0500 i) a national velodrome; ii) a national aquatic centre; iii) a national tennis centre; Fax: (212) 445-0629 and iv) three (3) youth indoor facilities. [email protected] Notice is hereby given that the Sport Company of Trinidad and Tobago, Ltd. (“SporTT”) is seeking qualiﬁ cations / proposals for DesignBuild Services for three (3) national facilities and three (3) youth indoor facilities. To obtain further information on this RFQ # SCTTRFQDB101209 and a copy of Readers the RFQ document please contact: are Recommended Mr. Kenneth Charles, SporTT Executive Chairman, or to make appropriate enquiries and take Mr. Darren A. Millien, SporTT Executive Director, or appropriate advice before sending Mr. Didier Choukroun, SporTT Project Consultant money, incurring any expense or entering into a binding commitment The Sport Company of Trinidad & Tobago, Ltd. in relation to an advertisement. The 111-117 Henry Street Economist Newspaper Limited shall Port of Spain not be liable to any person for loss Trinidad & Tobago or damage incurred or suffered as a Phone: (868)6231954 Ext. 224 result of his / her accepting or offering Fax: (868)6254589 to accept an invitation contained in Email: [email protected] any advertisement published in The Economist. The Economist January 23rd 2010

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Overview Output, prices and jobs % change on year ago There was mixed news from the American Industrial housing market. The number of new housing Gross domestic product production Consumer prices Unemployment starts fell in December to an annualised rate latest qtr* 2009† 2010† latest latest year ago 2009† rate‡, % of 557,000, 4% below the rate in November United States –2.6 Q3 +2.2 –2.5 +2.8 –2.0 Dec +2.7 Dec +0.1 –0.3 10.0 Dec but nevertheless 0.2% above the rate in Japan –5.1 Q3 +1.3 –5.3 +1.5 –4.2 Nov –1.9 Nov +1.0 –1.3 5.2 Nov China +10.7 Q4 na +8.3 +9.3 +18.5 Dec +1.9 Dec +1.2 –0.8 10.2 2009 December 2008. Construction began on Output, prices and jobs Britain –5.1 Q3 –1.2 –4.7 +1.5 –6.0 Oct +2.9 Dec§ +3.1 +2.1 7.8 Nov†† 553,800 new houses during 2009, 38.8% Canada –3.2 Q3 +0.4 –2.5 +2.4 –12.0 Oct +1.3 Dec +1.2 +0.3 8.5 Dec below the 2008 total. But applications for Euro area –4.1 Q3 +1.5 –3.9 +1.4 –7.1 Nov +0.9 Dec +1.6 +0.3 10.0 Nov building permits, an indicator of future Austria –3.7 Q3 +2.1 –3.4 +1.2 –8.0 Oct +1.1 Dec +1.4 +0.4 5.5 Nov house-building, rose by 10.9% in December Belgium –3.4 Q3 +2.0 –3.1 +1.4 –12.7 Sep +0.3 Dec +2.6 nil 12.1 Dec‡‡ and were 15.8% higher than a year earlier. France –2.3 Q3 +1.0 –2.2 +1.6 –3.8 Nov +0.9 Dec +1.0 +0.1 10.0 Nov Germany –4.8 Q3 +2.9 –4.7 +1.9 –8.0 Nov +0.9 Dec +1.1 +0.3 8.1 Dec Wholesale prices in America rose by 0.2% Greece –1.7 Q3 –1.7 –2.7 –0.1 –6.0 Nov +2.6 Dec +2.0 +1.0 9.8 Oct during the month of December, marking a Italy –4.6 Q3 +2.3 –4.7 +1.1 –7.9 Nov +1.1 Dec +2.2 +0.8 7.8 Q3 slowing of producer-price ination from Netherlands –3.7 Q3 +1.8 –4.0 +1.3 –2.1 Nov +1.1 Dec +1.9 +1.1 5.5 Dec†† November, when prices rose by 1.8%. Spain –4.0 Q3 –1.2 –3.6 –0.1 –4.1 Nov +0.8 Dec +1.4 –0.3 19.4 Nov Czech Republic –4.1 Q3 +3.3 –4.3 +0.9 –0.1 Nov +1.0 Dec +3.6 +1.1 9.2 Dec Denmark –5.2 Q3 +2.6 –5.0 +1.1 –14.7 Nov +1.4 Dec +2.4 +1.3 4.4 Nov China’s rapid economic growth continued in Hungary –7.1 Q3 –6.9 –6.7 –1.0 –9.3 Nov +5.6 Dec +3.5 +4.3 10.5 Nov†† the three months to December, with GDP Norway –0.7 Q3 +3.5 –1.0 +1.8 –4.3 Nov +2.0 Dec +2.1 +2.1 3.2 Oct§§ 10.7% higher than a year earlier. Industrial Poland +1.7 Q3 na +1.4 +2.0 +9.8 Nov +3.5 Dec +3.3 +3.4 11.9 Dec‡‡ production in December rose by 18.5% year Russia –8.9 Q3 na –8.0 +3.0 +1.5 Nov +8.8 Dec +13.3 +11.7 8.1 Nov‡‡ on year. The World Bank expects the economy Sweden –5.0 Q3 +0.7 –4.4 +2.1 –12.6 Nov +0.9 Dec +0.9 –0.3 8.0 Nov‡‡ to grow by 9% in both 2010 and 2011. Switzerland –1.5 Q3 +1.2 –1.5 +1.2 –6.7 Q3 +0.3 Dec +0.7 –0.5 4.2 Dec Turkey –3.3 Q3 na –6.0 +3.2 –2.2 Nov +6.5 Dec +10.1 +6.3 13.0 Oct‡‡ Consumer prices in Canada rose by 1.3% in Australia +0.5 Q3 +0.8 +0.9 +2.8 –3.8 Q3 +1.3 Q3 +5.0 +1.9 5.5 Dec the twelve months to December, following a Hong Kong –2.4 Q3 +1.6 –3.2 +4.6 –8.6 Q3 +1.3 Dec +2.1 +0.5 4.9 Dec†† 1% increase in November. December’s gure India +7.9 Q3 na +6.5 +7.1 +11.7 Nov +13.3 Nov +10.6 +10.5 10.7 2009 was the largest since February last year, and Indonesia +4.2 Q3 na +4.5 +5.3 +1.8 Nov +2.8 Dec +11.1 +4.8 8.1 Feb was driven by a 25.6% increase in the price Malaysia –1.2 Q3 na –1.7 +3.5 –1.3 Nov +1.1 Dec +4.4 +0.5 3.6 Q3 Pakistan +2.0 2009** na +3.7 +1.9 +5.0 Oct +10.5 Dec +23.3 +13.8 5.2 2008 of petroleum from a year earlier. Singapore +3.5 Q4 –6.8 –2.1 +4.8 –8.2 Nov –0.2 Nov +5.5 +0.3 3.4 Q3 South Korea +0.9 Q3 +13.6 +0.5 +4.9 +17.8 Nov +2.8 Dec +4.1 +2.7 3.5 Dec The number of unemployed in Britain fell by Taiwan –1.3 Q3 na –3.6 +4.2 +31.5 Nov –0.2 Dec +1.3 –0.7 6.0 Nov 7,000 in the three months to November Thailand –2.8 Q3 +5.5 –3.2 +3.2 +8.9 Nov +3.5 Dec +0.4 –0.9 1.2 Sep compared with the previous quarter. The Argentina –0.3 Q3 +0.2 +0.6 +2.8 +9.7 Nov +7.7 Dec +7.2 +6.3 9.1 Q3‡‡ unemployment rate was unchanged, at 7.8%. Brazil –1.2 Q3 +5.1 –0.3 +4.8 +5.1 Nov +4.3 Dec +5.9 +4.9 7.4 Nov‡‡ A further 79,000 dropped out of the labour Chile –1.6 Q3 +4.6 –1.0 +4.2 +1.0 Nov –1.4 Dec +7.1 +1.5 9.1 Nov††‡‡ force. The number of people claiming un- Colombia –0.2 Q3 +0.9 +0.2 +2.5 +2.0 Nov +2.0 Dec +7.7 +4.3 11.1 Nov‡‡ employment benets also fell, by 15,200 to Mexico –6.2 Q3 +12.2 –6.9 +2.9 –1.0 Nov +3.6 Dec +6.5 +5.3 5.3 Nov‡‡ 1.61m in December. Venezuela –4.5 Q3 na –2.9 –3.9 –19.8 Oct +26.9 Dec +31.9 +27.2 8.3 Q3‡‡ Egypt +4.9 Q3 na +4.7 +5.4 +6.7 Q3 +13.3 Dec +18.3 +11.8 9.3 Q3‡‡ Israel –0.3 Q3 +3.0 +0.6 +2.7 –1.2 Oct +3.9 Dec +3.8 +3.4 7.8 Q3 Saudi Arabia +4.4 2008 na –1.0 +3.2 na +4.0 Nov +9.5 +4.3 na Indicators for more countries, as well as South Africa –2.1 Q3 +0.9 –1.8 +2.8 –4.7 Nov +5.8 Nov +11.8 +7.1 24.5 Sep‡‡ additional series, can be found at *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. ‡National definitions. §RPI inflation Economist.com/indicators rate 2.4 in December. **Year ending June. ††Latest three months. ‡‡Not seasonally adjusted. §§Centred 3-month average

Israel The Economist commodity-price index 2000=100 GDP, % change on a year earlier Consumer prices†, % increase on a year earlier % change on one one 6 5 Israel Israel Jan 12th Jan 19th* month year 4 4 Dollar index 2 3 + All items 217.8 217.4 +2.9 +36.9 0 2 Food 212.8 210.6 +0.2 +12.2 OECD – OECD 2 1 Industrials 4 0 All 224.3 226.2 +6.3 +86.4 2007 08 09 10* 11* 2007 08 09 10* 11* Nfa† 185.4 189.9 +7.4 +66.6 Current-account surplus as % of GDP Unemployment as % of labour force Metals 245.5 246.0 +5.9 +96.1 Sterling index 3 10 OECD All items 204.0 201.3 +0.1 +16.8 9 Euro index 2 8 Israel 7 All items 138.5 140.8 +2.5 +23.8 1 6 Gold 5 $ per oz 1148.00 1133.00 +5.0 +31.4 0 West Texas Intermediate 2007 08 09 10* 11* 2007 08 09 10* 11* $ per barrel 80.74 78.25 +0.6 +103.1 Source: OECD *Forecast †Private-consumption deflator *Provisional †Non-food agriculturals.

www.storemags.com & www.fantamag.com 90 Economic and nancial indicators The Economist January 23rd 2010

Trade, exchange rates, budget balances and interest rates Markets Budget % change on Trade balance* Current-account balance balance Interest rates, % Dec 31st 2008 latest 12 latest 12 % of GDP Currency units, per $ % of GDP 3-month 10-year gov’t Index one in local in $ months, $bn months, $bn 2009† Jan 20th year ago 2009† latest bonds, latest Markets Jan 20th week currency terms United States –518.4 Nov –465.3 Q3 –3.0 – – –10.0 0.14 3.66 United States (DJIA) 10,725.4 +26.9 +22.2 +22.2 Japan +34.4 Nov +133.4 Nov +2.7 91.2 87.6 –7.4 0.32 1.33 United States (S&P 500) 1,150.2 +31.9 +27.3 +27.3 China +196.1 Dec +364.4 Q2 +6.3 6.83 6.84 –3.8 1.88 3.79 United States (NAScomp) 2,320.4 +50.0 +47.1 +47.1 Britain –126.0 Nov –28.2 Q3 –1.9 0.61 0.73 –14.2 0.66 4.10 Japan (Nikkei 225) 10,737.5 +27.6 +21.2 +20.4 Canada –4.3 Nov –34.8 Q3 –2.7 1.05 1.27 –3.2 0.16 3.57 Japan (Topix) 944.7 +16.0 +9.9 +9.2 Euro area +25.3 Nov –109.6 Oct –0.7 0.71 0.78 –6.9 0.67 3.23 China (SSEA) 3,304.9 +68.9 +72.9 +72.8 Austria –6.2 Oct +7.5 Q3 +0.9 0.71 0.78 –4.8 0.72 3.69 China (SSEB, $ terms) 260.1 +123.1 +134.6 +134.5 Belgium +19.2 Nov –3.2 Sep –0.9 0.71 0.78 –6.0 0.73 3.59 Britain (FTSE 100) 5,420.8 +23.2 +22.3 +38.3 France –56.1 Nov –56.7 Nov –2.0 0.71 0.78 –8.4 0.72 3.47 Canada (S&P TSX) 11,763.4 +31.3 +30.9 +56.1 Germany +181.7 Nov +158.0 Nov +4.2 0.71 0.78 –3.2 0.72 3.21 Euro area (FTSE Euro 100) 903.3 +22.8 +21.0 +26.3 Greece –43.2 Oct –37.1 Oct –12.2 0.71 0.78 –13.0 0.72 6.17 Euro area (DJ STOXX 50) 2,914.6 +20.9 +19.1 +24.3 Italy –5.8 Nov –72.6 Oct –2.9 0.71 0.78 –5.1 0.72 4.01 Austria (ATX) 2,647.8 +51.2 +51.2 +57.8 Netherlands +48.0 Nov +34.8 Q3 +5.4 0.71 0.78 –5.1 0.72 3.43 Belgium (Bel 20) 2,516.7 +28.2 +31.9 +37.6 Spain –73.3 Nov –82.1 Oct –5.7 0.71 0.78 –11.8 0.72 4.00 France (CAC 40) 3,929.0 +22.9 +22.1 +27.4 Czech Republic +7.5 Nov –1.9 Nov –1.9 18.4 21.4 –6.4 1.55 4.36 Germany (DAX)* 5,851.5 +26.2 +21.6 +27.0 Denmark +9.0 Nov +11.9 Dec +2.4 5.27 5.79 –2.8 1.46 3.50 Greece (Athex Comp) 2,030.3 +10.1 +13.6 +18.6 Hungary +5.8 Nov –2.1 Q3 –2.6 192 221 –4.0 6.15 7.71 Italy (FTSE/MIB) 23,126.0 +18.9 +18.8 +24.0 Norway +51.8 Dec +58.4 Q3 +15.9 5.77 6.99 7.9 2.04 4.02 Netherlands (AEX) 336.3 +29.0 +36.7 +42.7 Poland –5.7 Nov –6.7 Nov –0.6 2.87 3.37 –2.3 4.22 6.09 Spain (Madrid SE) 1,220.0 +26.9 +25.0 +30.5 Russia +104.1 Nov +47.5 Q4 +3.8 29.7 32.8 –7.2 8.75 7.40 Czech Republic (PX) 1,220.3 +42.0 +42.2 +52.1 Sweden +12.3 Nov +33.0 Q3 +7.4 7.19 8.37 –2.5 0.13 3.32 Denmark (OMXCB) 333.8 +35.8 +47.6 +54.1 Switzerland +17.9 Nov +42.4 Q3 +7.7 1.04 1.15 –0.4 0.25 1.87 Hungary (BUX) 22,541.1 +79.7 +84.1 +91.1 Turkey –37.0 Nov –13.0 Nov –2.3 1.47 1.66 –6.3 7.12 4.85‡ Norway (OSEAX) 417.0 +51.1 +54.3 +91.5 Australia –5.3 Nov –32.7 Q3 –3.7 1.10 1.54 –3.9 4.19 5.59 Poland (WIG) 41,617.2 +54.0 +52.8 +61.7 Hong Kong –26.1 Nov +26.2 Q3 +13.7 7.77 7.76 –2.4 0.13 2.63 Russia (RTS, $ terms) 1,557.0 +150.7 +138.5 +146.4 India –74.5 Nov –31.5 Q3 –0.7 45.9 49.1 –8.0 3.80 7.71 Sweden (OMXS30) 976.0 +48.6 +47.4 +65.6 Indonesia +17.9 Nov +6.9 Q3 +2.0 9,295 11,200 –1.5 7.01 5.67‡ Switzerland (SMI) 6,633.9 +19.9 +19.9 +25.2 Malaysia +33.3 Dec +32.3 Q3 +15.9 3.36 3.62 –7.7 2.17 1.62‡ Turkey (ISE) 55,469.2 +112.5 +106.5 +119.4 Pakistan –14.1 Dec –5.5 Q3 –1.4 84.6 79.7 –5.2 12.22 10.52‡ Australia (All Ord.) 4,895.1 +36.2 +33.8 +75.4 Singapore +24.1 Dec +20.9 Q3 +12.7 1.40 1.51 –1.1 0.50 2.44 Hong Kong (Hang Seng) 21,286.2 +55.7 +47.9 +47.8 South Korea +41.0 Dec +41.9 Nov +5.2 1,138 1,374 –4.0 2.88 5.24 India (BSE) 17,474.5 +92.6 +81.1 +93.5 Taiwan +20.1 Dec +38.6 Q3 +8.8 31.8 33.6 –5.1 0.86 1.20 Indonesia (JSX) 2,667.3 +90.6 +96.8 +133.8 Thailand +20.1 Nov +19.9 Nov +6.6 32.9 34.9 –5.6 1.35 3.25 Malaysia (KLSE) 1,306.6 +43.0 +49.0 +54.0 Argentina +16.4 Nov +8.5 Q3 +3.7 3.80 3.47 –1.3 11.94 na Pakistan (KSE) 9,904.7 +63.5 +68.9 +57.5 Brazil +24.6 Dec –24.3 Dec –1.0 1.79 2.36 –3.2 8.65 6.16‡ Singapore (STI) 2,893.1 +64.2 +64.2 +70.4 Chile +13.3 Dec +0.8 Q3 +1.4 496 626 –3.8 0.60 1.75‡ South Korea (KOSPI) 1,714.4 +46.8 +52.5 +70.6 Colombia +0.5 Oct –6.1 Q3 –2.6 1,967 2,246 –2.8 3.98 5.22‡ Taiwan (TWI) 8,220.9 +81.4 +79.1 +84.8 Mexico –6.5 Nov –11.2 Q3 –0.6 12.7 14.0 –2.9 4.49 7.76 Thailand (SET) 731.8 +68.7 +62.6 +71.2 Venezuela +6.7 Q3 –2.1 Q3 +2.7 5.98§ 5.40§ –7.6 14.52 6.55‡ Argentina (MERV) 2,388.3 +111.0 +121.2 +101.2 Egypt –25.4 Q3 –4.9 Q3 –1.7 5.44 5.55 –6.9 9.98 1.76‡ Brazil (BVSP) 69,908.0 +76.8 +86.2 +148.5 Israel –5.1 Dec +5.2 Q3 +2.4 3.72 3.93 –4.6 1.22 3.78 Chile (IGPA) 17,572.2 +49.6 +55.2 +100.7 Saudi Arabia +212.0 2008 +134.0 2008 +3.0 3.75 3.75 0.7 0.77 na Colombia (IGBC) 11,780.7 +52.1 +55.8 +77.9 South Africa –2.5 Nov –12.0 Q3 –5.3 7.56 10.2 –6.0 7.23 9.21 Mexico (IPC) 32,473.1 +54.3 +45.1 +57.3 *Merchandise trade only. †The Economist poll or Economist Intelligence Unit forecast. ‡Dollar-denominated bonds. §Unofficial exchange rate. Venezuela (IBC) 59,699.3 +70.8 +70.1 +83.2 Egypt (Case 30) 6,888.5 +53.0 +49.9 +52.0 Israel (TA-100) 1,088.5 +80.2 +93.0 +98.2 Gold production Saudi Arabia (Tadawul) 6,382.0 +1.9 +32.9 +33.0 Top 15, 2009 estimate, tonnes The world’s gold mines increased South Africa (JSE AS) 27,901.7 +29.4 +29.7 +61.7 production by 144 tonnes last year, Europe (FTSEurofirst 300) 1,052.5 +25.2 +26.5 +32.0 0 100 200 300 400 World, dev’d (MSCI) 1,203.3 +35.3 +30.8 +30.8 according to a new report by GFMS, a China 13 Emerging markets (MSCI) 1,013.4 +84.0 +78.7 +78.7 consultancy. That more than oset the Australia 4 World, all (MSCI) 308.2 +40.0 +35.3 +35.3 drop in output in 2008, caused in part by a South Africa -5 World bonds (Citigroup) 838.2 +5.7 +3.5 +3.5 temporary slump in production in United States -9 EMBI+ (JPMorgan) 497.5 +26.5 +27.1 +27.1 Indonesia. China remains the largest gold Hedge funds (HFRX)† 1,172.5 nil +14.9 +14.9 Russia 13 producer, accounting for 13% of the Volatility, US (VIX) 17.6 43.3 40.0 (levels) Peru 1 world’s supply in 2009. It produced almost CDSs, Eur (iTRAXX)‡ 71.4 –57.6 –64.7 –63.1 Indonesia 55 half as much gold again as Australia, the CDSs, N Am (CDX)‡ 115.0 –50.8 –50.7 –50.7 Canada nil next largest supplier, and has raised its Carbon trading (EU ETS) ¤ 13.4 +4.2 –19.4 –15.9 Ghana 8 output by 100 tonnes in the past four *Total return index. †Jan 19th. ‡Credit-default-swap spreads, basis Uzbekistan 2 years. South Africa was once the world’s points. Sources: National statistics offices, central banks and stock Papua New Guinea -3 exchanges; Thomson Reuters; WM/Reuters; JPMorgan Chase; Bank Leumi leading gold miner, but its output fell le-Israel; CBOE; CMIE; Danske Bank; EEX; HKMA; Markit; Standard Bank Brazil 10 again last year. The decline in supply from Group; UBS; Westpac Mexico 6 America was even steeper. Output rose in Mali 3 Indicators for more countries, as well as all of the other main gold-mining % change on Argentina a year earlier 7 additional series, can be found at countries, bar Papua New Guinea. Source: GFMS Economist.com/indicators

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