Gun laws after Las Vegas

Stand-off in Catalonia

Goldman: vampire squid to damp squib

Are women underpaid? OCTOBER 7TH–13TH 2017 Thebullmarket in everything

Are asset prices too high?

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9 The world this week Asia 41 Indonesian politics Leaders Jokowi at bay 13 Asset prices 42 Japan’s election The bull market in Mannequins cast no everything ballots 14 Guns in America 43 Radio in North Korea Deathly silence Making waves 14 Liberia 43 Economic policy in India The legacy of Ma Ellen Fifth columnists Las Vegas Do not despair, 16 Families and work 44 Immigration to Australia change is possible: leader, Having it all Almost one in three page14. The shooting has 18 Separatism in Catalonia 46 Banyan Homage to Formosa reinvigorated calls for gun On the cover How to save Spain control and highlighted its Prices are high across a limitations, page 27. range of assets. Is it time to Letters China Superstition helps explain worry? Leader, page13. Low why many Republicans think 20 On cancer, Syria, China, 47 Ageing in Hong Kong interest rates have made loose gun laws keep them safe: Brazil, corn, spies, free Wrangling over pensions more or less all investments Lexington, page 36 speech 48 Chiang Kai-shek expensive, page 23. Reassuring the late Crypto-coin mania dictator illustrates the crazy and Briefing not-so-crazy sides of 23 Asset prices bubbles: Free exchange, The bubble without Special report: Emerging page 78. After a rocky few any fizz markets years, emerging markets Out of the traps have become more mature After page 48 and resilient, says Simon United States Cox. But along with the 27 Guns drama, some of their What happened in Vegas Middle East and Africa dynamism has gone. See our 28 Mainland Puerto Ricans 49 Liberia’s election special report, after page 48 Nuyorican souls Into a vague future 50 Ethnic tension in Ethiopia Britain’s Conservatives 30 Hurricane Maria The party has lost faith in its A real catastrophe Unity v diversity The Economist online leader but not yet found an 32 Diplomacy 50 Chinese aid in Africa alternative, page 58. One of Daily analysis and opinion to Tillerson’s torment No place like home the great puzzles of politics is supplement the print edition, plus 34 Gerrymandering 51 Palestinian politics how Boris Johnson keeps his audio and video, and a daily chart Hamas extends a hand Economist.com Choosing voters job, page 59. The Tories need 52 Lebanon’s railway to promote the next E-mail: newsletters and 36 Lexington Magical thinking Back on track? generation of leaders—and mobile edition fast: Bagehot, page 60 Economist.com/email 52 Jalal Talabani A lamented Kurd Print edition: available online by The Americas 7pm London time each Thursday 37 Crime in Brazil Economist.com/print Rio’s post-Olympic blues Europe Audio edition: available online 38 Bello 53 Spain to download each Friday Deciphering Trump Outrage in Catalonia Economist.com/audioedition 40 Canada 54 Ukraine and Russia Meet Jagmeet Singh Back to the table 40 Tropical ice 55 The EU’s Eastern Death of a glacier Partnership Disappointed suitors

Volume 425 Number 9061 55 German theatre Who owns the stage? Careering towards crisis Published since September1843 56 Poland Catalonia is on the brink of to take part in "a severe contest between intelligence, which presses forward, and Saving the trees declaring independence, but an unworthy, timid ignorance obstructing it is not too late to step back our progress." 57 Charlemagne The EU and Japan from calamity: leader, page 18. Editorial offices in London and also: The government mishandles Beijing, Berlin, Brussels, Cairo, Chicago, Madrid, Mexico City, Moscow, Mumbai, Nairobi, New Delhi, Catalan defiance, page 53 New York, Paris, San Francisco, São Paulo, Seoul, Shanghai, Singapore, Tokyo, Washington DC

1 Contents continues overleaf 6 Contents The Economist October 7th 2017

Britain Science and technology 58 The Conservatives 81 The 2017 Nobel prizes Spluttering Jet lagged in Stockholm 59 Monarch’s collapse 82 The virtue of uprightness Crash-landing Atten-shun! 59 The cabinet 83 Scientific productivity All about Boris Open borders, better 60 Bagehot science The new Tory torchbearers 83 Animal behaviour J’y suis. J’y reste Women and work The gender Nobel prizes This year’s International 84 Meteorology gap that still needs to be Brimstone and fire science awards are for body closed: leader, page16. 61 Men, women and work clocks, gravitational waves Women still earn a lot less The gender gap and a cool way to study protein than men, despite decades of 62 Sharing chores at home Books and arts structure, page 81 equal-pay laws. Why? Page 61. Divided perceptions 85 Ulysses S. Grant Pensions have a gender gap, History has its eyes on him too, page 75 Subscription service Business 86 Victorian Britain A hard-won century For our latest subscription offers, visit 65 Tech’s toughest job Economist.com/offers From Uber to kinder 86 Peak Britannia For subscription service, please contact by Beneath the surface telephone, fax, web or mail at the details 66 Tax avoidance provided below: Raining on Amazon 87 Hong Kong North America The resistance The Economist Subscription Center 67 Fixing Ford P.O. Box 46978, St. Louis, MO 63146-6978 Waiting for parts 87 Architecture Telephone: +1 800 456 6086 Crooked timber Facsimile: +1 866 856 8075 67 Internet infrastructure E-mail: [email protected] Pipe dreams 88 Johnson Latin America & Mexico Give evolution time The Economist Subscription Center 68 Indian telecoms P.O. Box 46979, St. Louis, MO 63146-6979 Jioseismic Telephone: +1 636 449 5702 Facsimile: +1 636 449 5703 69 Pernod Ricard and 92 Economic and financial E-mail: [email protected] Uber The new chief executive Danone indicators Subscription for 1 year (51 issues) is off to a strong start but he Be a sinner, be a saint Statistics on 42 United States US $158.25 (plus tax) economies, plus our still has miles to go, page 65 70 Schumpeter Canada CA $158.25 (plus tax) monthly poll of forecasters Latin America US $289 (plus tax) Goldman Sags

Obituary Finance and economics Principal commercial offices: 94 Hugh Hefner The Adelphi Building, 1-11John Adam Street, 73 Pensions in America London WC2N 6HT Living the dream The big squeeze Tel: +44 (0) 20 7830 7000 74 Buttonwood Rue de l’Athénée 32 1206 Geneva, Switzerland The trouble with mergers Tel: +4122 566 2470 75 Women’s pensions 750 3rd Avenue, 5th Floor, New York, NY 10017 The gender gap Tel: +1212 5410500 76 American shipping 1301Cityplaza Four, 12 Taikoo Wan Road, Taikoo Shing, Hong Kong The Jones Act Tel: +852 2585 3888 Goldman Sachs Unusually, the 76 Food and taxation Other commercial offices: famous investment bank has Fat is a fiscal-policy issue Chicago, Dubai, Frankfurt, Los Angeles, more of a business problem 77 Tax havens Paris, San Francisco and Singapore than an image problem: Buried treasure Schumpeter, page 70 77 Chinese acquisitions Freezers to finance PEFC certified This copy of The Economist 78 Free exchange is printed on paper sourced from sustainably managed Manias, panics and ICOs forests certified to PEFC PEFC/29-31-58 www.pefc.org

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can diplomats and their fam- Regulators gave TEPCO, a Three American special-forces Politics ilies that seem to have caused Japanese power company, troops were killed and two tinnitus and other afflictions. approval to restart two nuclear injured in Niger when they Just what device and group are reactors. All TEPCO’s reactors came under fire. The men were responsible is unexplained. were shut down following the taking part in training oper- The Cuban government says it meltdown at its nuclear plant ations with the Nigerien army has nothing to do with the in Fukushima in 2011. near the border with Mali, attacks, which also affected where jihadists have launched some Canadian diplomats. raids across the border. The US State Department warned Americans not to America’s defence secretary, travel to Cuba and its embassy Jim Mattis, said Donald Trump stopped processing visa appli- should stay in the nuclear deal cations forCuban travellers. signed with Iran in 2015. Mr Trump must soon decide Catalonia voted overwhelm- Canada’s New Democratic whether to stickwith the pact. ingly to secede from Spain. But Party, a left-leaning opposition Meanwhile, Rex Tillerson, the turnout forwhat the party, chose Jagmeet Singh, a America’s secretary ofstate, Spanish government called an Sikh, to be its leader. He is the contradicted a report that he illegal referendum was only first member ofa “visible had considered resigning. He 43%, since those opposed to minority” group to lead a Bangladeshi officials said that refused to answer questions the poll mostly stayed away. Canadian party at the federal Myanmar had offered to about whether he had called Hundreds ofpeople were level. readmit the 500,000 Rohingya Mr Trump a moron. injured by riot police attempt- refugees who have fled over ing to disrupt voting, causing The ELN, the largest guerrilla the border with Bangladesh Death rained down outrage and furtherprotests. group still active in Colombia, after the Burmese army at- Catalonia’s parliament may started a truce with the govern- tacked their villages in August. well now declare indepen- ment that will last until mid- dence; Madrid could decide to January. President Juan Ma- Mu Sochua, a deputy head of impose direct rule on the nuel Santos said he hoped the Cambodia’s main opposition region. ceasefire would be a first step party, fled the country for fear towards reaching a peace deal. that she would be arrested, as The lower house ofparliament Colombia ended its 52-year- the leader ofthe party was last in France approved tough new long war with the FARC, a month. She called forforeign anti-terrorism laws, making larger guerrilla group, last year. governments to impose sanc- searches easier, among other tions on the regime forits measures, in the hope ofend- Sun no longer shines assault on democracy. ing a state ofemergency that Sun Zhengcai, once widely A gunman killed at least 58 has lasted since the attack on regarded as a possible succes- The English revolution people and injured nearly 500 Paris almost two years ago. The sor to Xi Jinping as China’s At least17 protesters calling for in Las Vegas when he fired laws were passed two days leader, was expelled from the independence forthe Anglo- from a hotel room into the after an Islamist stabbed two ruling Politburo and stripped phone region ofCameroon crowd at a country-music women to death in Marseille. ofhis membership ofthe were killed by government festival. In a methodical attack, Communist Party. Investiga- soldiers, according to Amnesty Stephen Paddock, a 64-year- Theresa May’s big speech to tors found that he had “aban- International. Internet services old local retiree, had more than the Conservative Party didn’t doned the party’s aims”. His were subsequently closed and 20 weapons in the room. It was go according to plan. It was the case was referred to the judi- the region’s biggest city, America’s worst mass shoot- first big gathering ofthe party cial authorities, meaning he Bamenda, was locked down. ing in modern times. since a disastrous election in will probably be put on trial. June. The British prime min- Rami Hamdallah, the Palestin- Two weeks after Hurricane ister wanted to use the occa- In line with sanctions imposed ian prime minister, chaired the Maria hit the island, Donald sion to reassert her authority by the UN in response to first cabinet meeting in Gaza Trump visited Puerto Rico to and focus on policy issues. But North Korea’s nuclear pro- forthree years. The move was assess the damage from the the headlines were dominated gramme, the Chinese govern- aimed at ending the schism storm. Residents in the Ameri- by her persistent coughing ment ordered North Korean between Hamas, the militant can territory have criticised the throughout the speech, a stunt firms, as well as joint Chinese Islamist group, and Fatah, its slow response ofthe federal by a prankster who handed and North Korean ventures, to nationalist secular rival, which government, prompting a spat her a formal dismissal of close their operations in China has paralysed Palestinian between Mr Trump and the employment notice, and a within 120 days. Most ofNorth politics. mayor ofSan Juan. malfunctioning backdrop. Korea’s trade is with China. Iraqi forces captured the town Tom Price resigned as health Ailing diplomacy Two women accused ofmur- ofHawija, the last stronghold secretary after running up America expelled 15 Cuban dering the half-brother ofKim ofIslamic State in northern hundreds ofthousands of diplomats and withdrew Jong Un, North Korea’s Iraq. The only part ofthe dollars in charter flights at many ofits own diplomats dictator, were put on trial in country that remains under taxpayers’ expense. One ticket from Cuba. The actions are a Malaysia. Prosecutors say jihadist control is a stretch of forthe 140-mile trip between response to reports ofsonic they were acting on behalfof land along the western border Washington, DC, and Philadel- attacks in Havana on Ameri- North Korean agents. with Syria. phia reportedly cost $25,000. 1 10 The world this week The Economist October 7th 2017

growth in personal loans from by the Red Sea that has been Donald Trump’svictory. Face- Business credit cards and car finance are hit by terrorism. Britain’s fifth- bookpromised to do more to running five times above the biggest airline failed to secure a identify the source ofadvertis- The European Commission growth in earnings. There is deal with creditors to keep it ing and is employing another ordered Luxembourg to £200bn ($265bn) outstanding airborne. Its chiefexecutive 1,000 people to remove ads, collect €250m ($300m), plus in such debt, the most since the laid blame forthe collapse on though it gave scant detail interest, in backtaxes from financial crisis in 2008. terror attacks that have driven about how it will do this. Amazon, the latest broadside passengers away from popular from the regulator that penal- Thawing out destinations. The number ofuser accounts ises sweetheart tax deals be- breached at Yahoo in 2013 is tween EU countries and multi- Iceland Jeff Immelt stepped down as now thought to be 3bn, three nationals. Amazon’s main Interest rates, % chairman ofGeneral Electric. times the original estimate of European hub is in Luxem- 6 He had planned to retire at the 1bn, which was already the bourg. The commission claims end ofthe year, having already biggest data hackon record.

that a tax-reducing deal struck 5 handed over the reins as chief in 2003 between the online executive to John Flannery in The Wall Street Journal stopped retailer and the government in August. But the transition publishing its European and Luxembourg, led at the time by 4 process has reportedly gone so Asian print editions after a Jean-Claude Juncker, who is smoothly that Mr Flannery is steep decline in sales precipi- 2014 15 16 17 now the commission’s presi- now able to take on the dual tated by a big take up ofdigital Source: Central Bank of Iceland dent, amounted to illegal aid. role ofchairman. subscriptions. The American Iceland’s central bankreduced print issue will be available in Showing that it means busi- its benchmarkinterest rate South Korea agreed in princi- some cities instead. ness in its clampdown on again, from 4.5% to 4.25%. The ple to amend its free-trade illegal tax benefits, the com- country has fallen into reces- agreement with America. Time to accelerate mission referred Ireland to the sion, in part because tourism, Donald Trump had threatened Tesla Motors produced just European Court ofJustice for which contributes about 9% to to withdraw from the deal 260 ofits new Model 3 in the failing to recover €13bn GDP, has cooled off. The bank unless changes were made to third quarter, well below its ($15.3bn) in backtaxes from insists that the economy is curb America’s growing trade target of1,500. The company Apple, a requirement imposed robust, and is more worried by deficit with the country. blamed “production bottle- by the regulator on Ireland. falling inflation, which necks”, which is not unusual dropped to 1.4% in September, These are not friends forthe launch ofnew vehicles In a move that could muddle from 1.7% in August. Inflation Facebook handed Congress and which pleased investors, America’s electricity markets, has not hit the bank’s target of 3,000 ads produced by Russian driving up its share price. Still, RickPerry, the energy secre- 2.5% since early 2014. provocateurs that it had Tesla is aiming for5,000 Model tary, proposed a system to unwittingly hosted. The ads 3 cars to roll offthe production reward power plants for stock- The bankruptcy ofMonarch were designed to stir political line each weekby the end of piling 90 days supply offuel in Airlines brought calls from divisions; some were reported- the year. order to cope with “the threat MPs forthe British government ly targeted on the battleground ofenergy outages”. The to lift a ban on flights to Sharm states ofMichigan and Wis- Other economic data and news scheme would provide what is el-Sheikh, an Egyptian resort consin, which were crucial to can be found on pages 92-93 in effect a giant subsidy to coal and nuclear plants, which are the only type to hoard their fuel, at the expense ofnatural gas and renewables.

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Prices are high across a range ofassets. Is it time to worry? N HIS classic, “The Intelligent close to historic lows. And that underpins all sorts of other as- IInvestor”, first published in set prices (see page 23). A widespread concern is that the Fed 1949, Benjamin Graham, a Wall and its peers have grossly distorted bond markets and, by ex- Street sage, distilled what he tension, the price ofall assets. Warren Buffett, the most famous called his secret ofsound invest- disciple of Ben Graham, said this week that stocks would look ment into three words: “margin cheap in three years’ time ifinterest rates were one percentage- of safety”. The price paid for a point higher, but not ifthey were three percentage points high- stockor a bond should allow for er. But if interest rates and bond yields were unjustifiably low, human error, bad luck or, indeed, many things going wrong at inflation would take off—and puzzlingly it hasn’t. This suggests once. In a troubled world of trade tiffs and nuclear braggado- that factors beyond the realm of monetary policy have been a cio, such advice should be especially worth heeding. Yet rarely bigger cause of low long-term rates. The most important is an have so many asset classes—from stocks to bonds to property increase in the desire to save, as ageing populations set aside a to bitcoins—exhibited such a sense ofinvulnerability. larger share of income forretirement. Just as the supply of sav- Dear assets are hardly the product of euphoria. No one ing has risen, demand for it has fallen. Stagnant wages and the would mistake the bloodless run-up in global stockmarkets, lower price of investment goods mean companies are flush credit and property over the past eight years fora reprise ofthe with cash. All this suggests that interest rates will stay low by “roaring 20s”, or even an echo of the dotcom mania of the late historical standards. 1990s. Yet only at the peakofthose two bubbles has America’s S&P 500 been higherasa multiple ofearningsmeasured overa Beware of the bull ten-year cycle. Rarely have creditors demanded so little insur- Still the most dangerous, anti-Graham motto of investing is ance against default, even on the riskiest “junk” bonds. And “this time is different”. It would be daft to assume that asset rarely have property prices around the world towered so high. prices must remain high come what may. Many hazards could American house prices have bounced back since the financial derail the economy and financial markets, from a debt crisis in crisis and are above their long-term average relative to rents. China to an American-led trade war or an outbreak of fighting Those in Britain are well above it. And in Canada and Austra- on the Korean peninsula. And when the next recession comes, lia, theyare in the stratosphere. Add to thisthe craze forexotica, policymakers have less fiscal and monetary ammunition to such as cryptocurrencies (see Free exchange), and the world is fight it than they had in previous downturns. Prudence there- in the throes ofa bull market in everything. fore suggests caution. One option is for central bankers to raise rates more enthu- Where’s the beef? siastically and less predictably, to jolt financial markets and re- Asset-price boomsare a source ofcheer, butalso anxiety. There mind investors that the world is volatile. Yet there are obvious are two immediate reasons to worry. First, markets have been perils with this course. The tightening might prove excessive, steadily rising against a backdrop of extraordinarily loose tipping economies into recession. And with inflation in most monetary policy. Central banks have kept short-term interest big economies below central bankers’ target, sharply higher rates close to zero since the financial crisis of2007-08 and have rates are hard to square with their mandate. helped depress long-term rates by purchasing $11trn-worth of Instead, caution calls for gradualism. To minimise disrup- government bonds through quantitative easing. Only now are tion, the reversal of quantitative easing should be stretched theystartingto unwind these policies. The Federal Reserve has out. The Federal Reserve has set a good precedent by propos- raised rates twice this year and will soon start to sell its bond- ing to reduce its bondholdings at a leisurely pace and flagging holdings. Othercentral banks will eventually follow. Iftoday’s the change well in advance. When the time comes, its peers asset prices have been propped up by central-banklargesse, its should follow suit. Of these, the European Central Bank faces end could prompta bigcorrection. Second, signsare appearing the trickiest challenge, because it has acted as, in effect, the that fund managers, desperate for higher yields, are becoming backstop to euro-zone bond markets, a mechanism that other- increasingly incautious. Consider, for instance, investors’ re- wise the currency bloc still lacks. cent willingness to buy Eurobonds issued by Iraq, Ukraine and But the main safety valve lies elsewhere, with banks and in- Egypt at yields ofaround 7%. vestors. Bitter experience has shown that debt-funded assets But look carefully at the broader picture, and there is some can magnify losses, causing financial crises. For this reason logicto the ongoingrise in assetprices. In partit isa response to banks must be able to withstand any reversal of today’s high an improving world economy. In the second quarter of this asset prices and low defaults. That means raising bank capital yearglobal GDP grew at its fastest pace since 2010, as a recovery in places where it is too low, especially the euro zone, and not in emerging markets added impetus to longer-standing up- backsliding on strenuous “stress tests” as America’s Treasury swings in Europe and America. As our special report this week proposes. In the end, however, there may be no escape for in- argues, emerging-market economies have come out of testing vestors from the low future returns and even losses that high times in farmore resilient shape. assetpricesimply. Theyand regulatorsshould take a leafoutof More significant still is the behaviour of long-term interest “The intelligent Investor”, and make sure that they have a mar- rates. They have fallen steadily since the 1980s and remain gin ofsafety. 7 14 Leaders The Economist October 7th 2017

Guns in America Deathly silence

Do not despair: change is possible FTER the worst mass shoot- Granted, Americahaschosen permissive gun lawsfor itself. Aing in recent American his- But the body count does not have to be as high as it is today.Re- tory, in which 58 people were search into murder and suicide suggests that making it just killed and 489 wounded, both slightly harder to get hold ofa weapon can reduce the number the president and the majority ofkillings, many ofwhich are spontaneous and unplanned. leaders in Congress sought to It ought to be possible to write laws that respect the right to keep talk about new gun laws to bear arms while banning weapons and modifications that a minimum. In Vegas that kind make it astonishingly easy to kill a lot of people quickly. Most of reticence is called a tell. Had Stephen Paddock used a new Americans favour such laws and would like universal back- technology—an armed drone, say—to kill from the 32nd floor ground checks on gun purchases, too (though support for gun of the Mandalay Bay hotel, or had he been an immigrant from control is less fervent than forgun rights). Such a regime would the Middle East, lawmakers would be rushing to legislate or still leave America with an unusually high number of mur- tighten borders. But he was a retired white man who used ders, suicides and fatal accidents involving guns, but the dis- some ofthe 49 guns he owned, so it is the price offreedom. parity with other countries would be less glaring. There is a weariness to America’s gun debate and the famil- iar ritual after mass shootings, which are more frequent than The road from Mandalay in any other rich country.One study counted 166 of them in 14 Tired of waiting for Congress, some cities have introduced countries in 2000-14; 133 were in America. Yet, nothing hap- their own laws. In upstate New York, where plenty of people pens, partly because the National Rifle Association (NRA), hunt, gun laws are permissive. In New YorkCity those laws do which has evolved from an armed version of the Boy Scout not apply. Anyone who wants to carry a gun down Fifth Ave- movement into the foremost mouthpiece fora view of Ameri- nue must first obtain the permission of the NYPD. New York ca in which everyone must be armed for their own protection, state tightened its laws after Sandy Hook, in effect banning as- has a veto in Washington—including over banning “bump sault weapons. Four other states did the same, though a fur- stocks” which make semi-automatic guns more lethal. ther16 responded by making guns easier to buy or carry. If America could not overhaul its gun laws after Sandy Las Vegas, which sits in a state with some of the loosest Hook, when 20 children aged six and seven were shot at rules in the country,should rewrite its own gun laws, too. Real school, then what chance is there now? And even if tighter conservatives, who champion local fixes for local problems, laws on new guns were introduced tomorrow, there would ought to cheer that. Of course it would not completely solve still be a stockof300m firearms to reckon with. the problem. Cities like Chicago, near states with permissive Such despair is unworthy of this week’s victims. There are laws, would still be flooded with guns. But in a country with plenty ofdown-is-up arguments about guns, but the Las Vegas 30,000 gun deaths a year, even small improvements would shooting, in addition to being the most deadly, has shown up save a lot of lives. A rough calculation suggests that in the time the old NRA line that the only thing that stops a bad guy with a between the Las Vegas shooting and the publication of this ar- gun is a good guy with a gun as the most deceitful of the lot. ticle, a further320 Americans lost their life to a bullet. 7

Liberia The legacy of Ma Ellen

Praise forthe woman who put Liberia backon its feet Y THE time its stop-start civil presaging its first transfer of power from one elected president B war ended in 2003, Liberia to another since 1944. Ms Sirleaf will step down next year. Her had all but collapsed. Fourteen tenure hasbeen imperfect, asLiberianswill complain. Hersuc- years of barbaric fighting had cessor will have his hands full. Even so Ma Ellen, as she is killed some 250,000 people, or called, deserves praise forputting Liberia backon its feet. roughly 8% of the population. She has achieved this, forthe most part, by being unlike her Many more Liberians were dis- peers. Start with the obvious. In 2005 she became the first placed by the violence. The woman elected president of an African country. Merely by economy had shrunk by 90%. Schools, hospitals and govern- stepping down on time, she is bucking the trend of African ment buildings lay in ruins. Children ate tree bark to survive. presidents forlife. She has spoken up forhuman rights and tol- This was the catastrophe that Ellen Johnson Sirleaf inherited erated dissent. Most important, she has been a champion of when she was elected president in 2005. improved governance. The top layer of the state is stocked Liberia will hold an election on October10th (see page 49), with first-rate technocrats, brought in by the president, who1 Why did she borrow $67,928 for tuition?

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2 has used her fluency in aid jargon (from time spent at the UN upper layer, ministries are teeming with unqualified workers and World Bank) to make Liberia a darling ofWestern donors. (often former fighters). Her renegotiation of contracts with in- The upshot has been new infrastructure and schools. The ternational companies that mine the country’s iron and har- government has undertaken bold experiments, for instance in vest its rubber won her some plaudits. But too few Liberians piloting charter schools. In 2010 Ms Sirleaf won a massive have benefited, and some rural dwellers have lost their land. write-down of Liberia’s debts. A year later she was awarded a Liberia’s next leader will have to workout how to wean the Nobel prize forsecuring the peace. The calm allowed the econ- country off foreign aid, which accounts for over half of gross omy to grow at an average annual rate of 7% between 2006 national income, and to spread the benefits of development. and 2014, when it was hit by Ebola and a fall in commodity To start with, the next president should make it easier for for- prices. Any fairassessment ofLiberia’s economic and political eigners to invest in the country. That means cutting red tape progress under Ms Sirleaf would have to conclude that the and corruption. He or she should encourage ministers to fol- country has made great strides, albeit from a low base. low the lead of George Werner, the outgoing education minis- ter, who pared nearly 1,900 dead or retired teachers from the Displeasure as a sign of progress government’s payroll. So far, though, the main contenders Even so, Liberians are no longer satisfied. The country remains have shunned substance and played regional politics. among the world’s ten poorest. Voters complain that services The fact that Liberians now complain of failing students in- are lacking and corruption rampant. Ma Ellen herselfis hardly stead of child soldiers, and of massive corruption instead of blameless. She appointed three ofher sons to important posts, mass rape, is progress. But more will be expected of the next and dispensed patronage in return for support. Beneath the president. Liberia still has a long way to go. 7

Families and work Having it all

The gendergap that still needs to be closed HEY “do the same work, are Many want to play a big part in their children’s upbringing. Gender pay gap Texempt from no rules or du- Helping both sexes fulfil their aspirations is more compli- Median wage, % ties, and most of them have fa- cated than passingan equal-paylaw. Fortunately, itdoes notre- 40 Britain 30 thers, mothers, sisters or broth- quire social engineering or the sort of costly special treatment 20 ers dependent upon them. Why, for working mothers that put some employers off hiring or US Germany 10 then, should women not receive promoting young women in the first place. 0 the same salaries?” This ques- The first step is well-designed parental leave. In America, 1990 95 2000 05 10 16 tion was asked in a circular sent the only rich country with no such entitlement for new moth- by equal-pay suffragettes to female teachers in New York’s ers, many of them drop out of the labour force. Unless some public schools in 1905. At the time, teachers’ starting annual leave is reserved for fathers, as in Norway and Sweden, cou- salaries were set at $900 formen and $600 forwomen. ples tend to opt forthe mother, who has stayed home after the In most rich countries such outright discrimination is his- birth, to take all of it—especially if the father is older, and thus tory. A woman doing the same job for the same employer more senior and highly paid. That seemingly small, common- earns 98 cents to the dollar paid to a man. Yet the gender pay sense decision sets a pattern that can last a lifetime. gap persists. In the OECD, a club of mostly rich countries, the Next comes high-quality pre-school care. Then the school median full-time wage forwomen is 85% ofthat formen. day and the timing of school holidays should be adapted to Women earn less than men because their careers differ in suit working parents and extended with after-school and holi- two ways (see page 61). The occupations that many opt for, day activities (no silly rules such as sending children home for such as teaching and nursing, are less lucrative than those cho- lunch, as in Switzerland). sen by men, perhaps because ofthe longhistory ofputting less Many of these policies cost money. But they offer high re- value on women’s work. And women pay a high price for turns. Paternity leave has been shown to make a father more motherhood. They often miss a first promotion because they engaged throughout his children’s upbringing, helping them are on maternity leave. Later they take less demanding jobs to thrive. Early-years education sets toddlers up to do well at with poor prospects. Often they are overqualified for their school. And women whose careers have not been derailed by new role, but somebody has to pickthe kids up from school. motherhood will pay higher taxes later. They will also be less It is not the place ofgovernments to tell young people what likely to need state support in old age, or if they divorce. careers to pursue, nor to tell parents how to divide their re- sponsibilities. But the underuse of women’s skills is a waste Balancing act forindividual women and societyalike. The consequences are For their own sakes, employers should stop writing off moth- particularly painful ifa couple later breaks up. ers who have spent time out ofthe workforce, on the outdated The careers men and women want are more similar than assumption that a career break signals a lack of ambition. the careers they end up in. Women are as ambitious as men. Above all, they would benefit from offering more flexibility to They are more likely than men to go to university, and equally all their employees. Where staff have the right to ask for this, likely to ask for promotion. Young men are much less likely men are rejected more often than women. But only ifmen can than their fathers to see themselves solely as breadwinners. combine family and workwill women be able to do so, too. 7

18 Leaders The Economist October 7th 2017

Separatism in Catalonia How to save Spain

Catalonia is on the brinkofdeclaring independence, but it is not too late to step backfrom calamity HEN a democracy sends jority and without proper debate. Those laws have no formal Wriot police to beat old la- legal standing. Before his referendum, opinion polls suggested dies over the head with batons that only 40-45% of Catalans wanted to break away. The 90% and stop them voting, some- vote to leave was 90% ofan unregistered turnout ofwell under thing has gone badly wrong. half, because Catalonia’s Remainers mostly declined to take Catalans say that almost 900 part. As with populists elsewhere, Mr Puigdemont has offered people were hurt by police in a simplistic vision, without explaining the costs of indepen- the referendum for indepen- dence or how it might come about. dence on October1st. Whatever the provocation from Catalan But that is not the end of the story. Democracy rests on the leadersin stagingan unconstitutional poll, the reaction ofMar- consent of the governed. Even some who disagree with Mr iano Rajoy, the prime minister, has thrown Spain into its worst Puigdemont’s methods believe Catalonia has a case for na- constitutional crisis since an attempted coup in 1981. tionhood. It could survive economically. A lot of its people IfMr Rajoy thought that cracking heads would put a stop to think it constitutes a nation. Under autonomy, Catalan leaders secessionism, he could not have been more wrong. He has have promoted their language and their nationalist creed. only created a stand-off that has energised his enemies and shocked his friends (see page 53). On October 3rd Catalonia, The pain in Spain one of Spain’s richest regions, was paralysed by a protest Whatever the legality of separatism, once the desire for inde- strike. Hundreds of thousands of demonstrators have pendence reachesa critical point, governments mustdeal with marched to express their outrage. it in three ways: crush it, bow to it, or negotiate in good faith, Secession would be a disasterforSpain. The country would knowing that separation may still be the outcome. lose its second city and risk the further loss of the Basque re- Mr Rajoy has failed to grasp the nature of this choice. First gion. Secession would also hurt Catalans, which is why a ma- he blocked the nationalists in the courts and, last weekend, he jority of them probably oppose it. And Catalan independence resorted to force. Hisdeploymentofpolicemen to suppress the might stir up separatism elsewhere in Europe—in Scotland Catalan vote was not only a propaganda gift to them but, more again, no doubt, but also in northern Italy, in Corsica, perhaps important, crossed a line. Aggression against crowds of peace- even in Bavaria. To prevent the crisis deepening, both sides ful citizens may work in Tibet but cannot be sustained in a need to seeka new constitutional settlement. Instead, they are Western democracy. In the contest between formal justice and digging in and Catalonia is on the brink of unilaterally—and il- natural justice, natural justice wins eventually every time. legally—declaring independence. Constitutions exist to serve citizens, not the other way around. Rather than uphold the rule of law as he intended, Mr Rajoy After Franco ended up tarnishing the legitimacy ofthe Spanish state. Spain has a historical fear of dismemberment. Catalan seces- Will Mr Puigdemont declare independence? That would be sionism was one of the factors that brought about the Spanish reckless and irresponsible but, if he does, Mr Rajoy should re- civil war of the 1930s. Many Spaniards no doubt share the an- sist the temptation to arrest Catalan leaders and, for the time ger of King Felipe who, in a rare televised speech, denounced being, avoid using his power to suspend regional rule. Just Catalonia’s leaders for irresponsibly and disloyally tearing up now, either measure would only compound his mistakes. the constitution of 1978. After all, Catalans overwhelmingly Only a negotiation can restore calm and it should start im- endorsed that settlement, which entrenched democracy, mediately. Even now most Catalans can probably still be won brought prosperity and granted a large dose of autonomy to over with the offer of greater autonomy, including the power Spanish regions, including Catalonia. to raise and keep more of their own taxes, more protection for A well-run democracy must abide by the rule oflaw. That is the Catalan language and some kind of recognition of the Cat- whatprotectsdemocraticliberties, notleastthe freedom ofmi- alans as a “nation”. Mr Rajoy might even take up the opposi- norities to express discontent. Until referendum day, nobody tion Socialists’ idea ofturning Spain into a federal state. who experienced the vibrancy of Barcelona could seriously Any settlement, though, must include the option of a refer- claim that Catalonia was oppressed. With few exceptions, no- endum on independence. Separation would be a wrenching tably when empires collapse, the world generally favours na- change for Catalonia and the rest of Spain, so should not be tional unity over self-determination by subnational groups. done lightly. Amajority of Catalans eligible to vote should be Many of the states liberated by the break-up of the Soviet em- the minimum threshold for independence. A follow-up vote pire joined the European Union, but these days the EU is wary, on the terms ofa separation might be wise, too. warning would-be secessionists that new states have no auto- For all his deficiencies, David Cameron, the former British matic right to join. Without Spain’s support, Catalonia would prime minister, was right about allowing a referendum on find itselfon the wrong side ofa new customs wall. Scottish independence in 2014. He made the case for Scotland Forall these reasonsthe Catalan leader, CarlesPuigdemont, to stay, and won the vote convincingly. MrRajoy should do the does not have a strong case for independence. Nor can he same. The case for the unity of Spain is strong. But it must be claim a real mandate. He rammed the laws authorising the ref- won byforce ofargument. Byusingforce alone, MrRajoy isnot erendum through the Catalan parliament with a narrow ma- preventing the break-up ofSpain, but hastening it. 7 GoBoldly.com ©2017 America’s Biopharmaceutical Companies. Biopharmaceutical ©2017 America’s

IF AT FIRST YOU DON’T SUCCEED AT FINDING A TREATMENT FOR ALZHEIMER’S DISEASE, TRY 10,000 MORE TIMES.

The unabatedsearchforinnovativewaystobattleAlzheimer’sdiseasehasled scientiststoacombinationoftherapiesthatmaybethemostpromisingyet. Welcometothefutureofmedicine.Forallofus. 20 Letters The Economist October 7th 2017

Fighting cancer men and weapons by land efforts may not be hailed by more and cheaper sugar would present ideal targets for some in the Western media, during an obesity epidemic is The oncology drug pipeline is Islamic State, forexample. but China certainly does not the most unhealthy agricultur- full ofpromising immuno- In reality,the main driver of deserve the unfairblame for al policy you could possibly therapies and targeted treat- the eastern campaign in Syria international or regional devise. ments (Technology Quarterly is the Syrian regime itself, tensions that have heightened JACK WINKLER on cancer, September16th). which wants to reopen trade under the watch ofthe West. Emeritus professor of Unfortunately,no one knows routes with Iraq and regain ZENG RONG nutrition policy the optimal way to use them. control ofthe country’s most Spokesperson of the Chinese London Metropolitan University Doctors and patients alike valuable oilfields in order to embassy struggle with conflicting expert secure reconstruction pros- London Espionage act opinions and the information pects and thus a more viable overload. Moreover, a cure will economic and political future. Lula’s lawyers respond probably involve intelligent For instance, the regime would combinations ofremedies, haveamuchweakerhandif Anyone with a basic knowl- and there are far more plausi- the Kurdish-dominated Syrian edge ofBrazilian law under- ble regimens than there are Democratic Forces had control stands that a conviction by a patients available to test them ofthose fields. lower court does not equate to in clinical trials. Treatments, In this light, the Iranians are guilt and it is wrong to refer to outcomes and quality oflife merely helping a vital ally.One Luiz Inácio Lula da Silva as a vary widely across institu- can justifiably criticise the “felon” (“Parting shots”, tions, falling offsharply from Iranians’ methods, but this September 23rd). The former elite cancer centres to rural, explanation is far more con- president is a victim oflawfare: disadvantaged and third-world vincing than the narrative of the misuse oflaw forpolitical communities. securing a land route from ends. There is clearly a pro- In the absence ofdefinitive Tehran to the Mediterranean. blem with corruption in Brazil. Yourreview ofJohn le Carré’s clinical studies, the fastestway AYMENN JAWAD AL-TAMIMI Brazil has to prosecute it fairly latest bookdescribed the to improve outcomes is by Cardiff within the rule oflaw.It is a mission that was the subject of aggregating the insights, basic requirement ofany “The Spy Who Came in from experiences and intuitions of China’s new diplomacy democracy that the public can the Cold” as “botched” our best clinicians, and contin- trust the impartiality ofthe (“George Smiley returns. Real- uously validating and refining I am afraid The Economist’s judiciary.Rather than champi- ly?”, September 9th). To the them based on real-world data. latest interpretation ofChina’s oning a dodgy and flawed contrary, it was a huge success Every day,patients who diplomacy is based on the investigation, one would hope in that it saved Britain’s “mole” have exhausted the standard old-fashioned rule in inter- The Economist would recog- in the Stasi from exposure and ofcare are treated with off- national relations that a strong nise that Brazil needs an destroyed his rival. The death label drugs and rational cock- country is bound to seekhege- independent, non-political ofthe two British operatives tails. Unfortunately,these mony and bully the weak and non-biased investigation. was unfortunate but irrelevant individualised (“N-of-1”) ex- (“God’s gift”, September16th). CRISTIANO ZANIN MARTINS to the outcome ofthe mission. periments are not co-ordi- According to that theory, rela- VALESKA TEIXEIRA ZANIN MARTINS PATRICK MACRORY nated, and their results seldom tions among countries are Lawyers for Luiz Inácio Lula Washington, DC reported, so little is learned. If zero-sum games. But this is da Silva we can capture these results outdated and does not workin São Paulo Abstract thought and rapidly share them with the 21st century. community oncologists on the China is committed to Corny Britain The left-wing student enforcers front line, I am confident many avoiding the Thucydides Trap, ofspeech at Reed College lives can be saved—or at least in which an established power Youwere too pessimistic (“Blue on blue”, September meaningfully extended—with feels under threat by the emer- about the prospects formaize 9th) bring to mind the red no new drugs required. gence ofa rising power. We (corn) in Britain (“Electric guards ofthe Cultural Revolu- MARTY TENENBAUM want international relations to fields”, September16th). The tion, who humiliated and Founder be based on win-win co-oper- European Union has just intimidated faculty and ad- Cancer Commons ation; a new concept ofbuild- removed quotas on the ministration with impunity. Palo Alto, California ing a shared future forman- production ofisoglucose One Chinese official, strug- kind that improves global (Euro-speakfor high-fructose gling to stay up with ever finer Iran in Syria governance and shared bene- corn syrup), the cheaper form distinctions ofwhat was politi- fits. To understand China’s ofsugar made from maize that cally acceptable, despaired, “Endgame angst” (September foreign policy and peaceful accounts for90% ofthe Ameri- “My God, it’s all metaphysics.” 16th) overstated the signif- development, one needs to can soft-drinks market. Cargill MYRL MANLEY icance ofa supposed land lookbeyond the old concepts is already expanding its factory New York 7 route forIran running from in order to come to a more in Manchester to produce Tehran through Syria to the objective analysis. more isoglucose and it will Mediterranean. It has always China’s steady growth probably offer bonuses to Letters are welcome and should be been easier and less dangerous continues to bring opportuni- farmers to grow the new addressed to the Editor at The Economist, The Adelphi Building, forIran to supply weapons to ties to the world. China has British variants ofmaize. 1-11John Adam Street, Hizbullah by air. A land route played an irreplaceable role in In economic terms, there is London WC2N 6HT is much longer and vulnerable maintaining world peace and a flourishing future formaize E-mail: [email protected] to insurgent attacks. Iranian security as well as addressing in Britain. But from the public- More letters are available at: Economist.com/letters convoys transporting militia- global challenges. These health perspective, producing Executive Focus 21

Six Chaired Professorships

Under the leadership of President Julio Frenk, the University of Miami is a global research university for the 21st century. The Miami Business School’s mission is to educate principled leaders who transform global business and society.

Accordingly, Miami Business School announces global searches for six chaired, tenured professorships at the full or associate levels. Applications and nominations are welcome in the following areas: • Accounting • Business Law, Ethics, Compliance, and Sustainability • Business Analytics • Global Business Strategy • Finance • Global Leadership • Global Economics • Innovation and Entrepreneurship • Marketing Candidates and nominees must have an extensive and recent publications record in the top tier scholarly journals in their fields. They must have an international perspective plus strong teaching and course development skills. Spanish proficiency and some exposure to Latin America are preferred but not required.

Miami Business School is the leading private business school in the southeast United States, graduating around 400 postgraduates and 550 undergraduates in business each year. Miami is the eighth largest metropolitan area in the USA and is known for its unique style and cultural diversity, and as the gateway to Latin America.

Please submit letters of application or nomination in confidence together with a current curriculum vitae to [email protected]. Search Committees will start reviewing applications and nominations in November 2017 and searches will continue until chairs are filled. The University of Miami is an equal opportunity employer and recruits regardless of gender, ethnicity, and orientation.

The Economist October 7th 2017 22 Executive Focus

DIRECTOR, UWC DILIJAN and ENVISIONED EDUCATION INNOVATION CENTER, DILIJAN, ARMENIA

United World College Dilijan seeks a Director to head the College and spearhead the establishment of an Education Innovation Center with the aim of setting new directions in education practice.

Established in 2014, UWC Dilijan has 213 IB diploma students and 80 staff of diverse backgrounds. The envisioned Education Innovation Center (to include a teachers college) is the beginning of a cluster of local schools, a performing arts college and other initiatives of the RVVZ Foundation. The work of the Director, who will run several cross-functional teams, will be rooted in the operation and nourishment of the liberal, highly-collaborative and lively residential community of UWC Dilijan.

Located at the crossroads of Europe and Asia, this post offers a unique opportunity for a visionary educational entrepreneur to make an enduring contribution to world education.

Deadline for application: 25th October 2017 For further information http://bit.ly/directoruwcd and please contact [email protected]

METRO EXPRESS LTD REPUBLIC OF MAURITIUS

CHIEF EXECUTIVE OFFICER The OPEC Fund for International Development (OFID)

The OPEC Fund for International Development (OFID), based in Vienna – Austria, Metro Express Ltd is a newly registered Mauritian company is the development fi nance institution established by the Member States of OPEC wholly owned by the Government of Mauritius. Metro Express in 1976 as a collective channel of aid to the developing countries. OFID works Ltd is responsible to develop, fi nance, construct, operate and in cooperation with developing country partners and the international donor manage the Metro Express light rail system in Mauritius. community to stimulate economic growth and alleviate poverty in all disadvantaged regions of the world. To date, OFID has made fi nancial commitments of more than Metro Express Ltd is seeking a highly talented and experienced US$ 21.2 billion to over 3,720 operations across 134 countries worldwide. Chief Executive Offi cer (CEO) to take on an active role at the In pursuit of its Organizational Strengthening Program, OFID has openings and helm of the Metro Express Limited in Mauritius and to steer seeks to fi ll the following vacancies: the fi rst metro project in Mauritius. The CEO will report to the board of Metro Express Limited. i. Head, Internal Audit Function – (Open to all nationalities) ii. Computer System Offi cer – SAP Specialist (Preference will be given to Accordingly, the Company now invites application from OFID Member Countries’ Nationals) suitable candidates for the post on contract basis for an initial OFID offers an internationally competitive remuneration and benefi ts package, period of two years. which includes tax- exempt salary, dependent children education grant, relocation grant, home leave allowance, medical and accident insurance schemes, dependency For further details on responsibilities and qualifi cations allowance, annual leave, staff retirement benefi t, diplomatic immunity and kindly visit website at http://pmo.govmu.org privileges, as applicable.

Please submit your resume in confi dence to the Metro Interested applicants are invited to visit OFID’s website at www.ofi d.org for Express Ltd, Ms. K. Kautick, Secretary, Prime Minister’s Offi ce, detailed descriptions of duties and required qualifi cations, as well as procedure for Treasury Building, Port Louis, Republic of Mauritius or at applications for the above mentioned positions and other vacant positions listed on [email protected] by 15 November 2017 at 1400 hours OFID’s website. (local time) at latest. The deadline for receipt of applications is October 16, 2017.

Late submission will not be considered. Due to the expected volume of applications, OFID would only enter into further correspondence with short-listed candidates.

The Economist October 7th 2017 Briefing Asset prices The Economist October 7th 2017 23

profits is currently uncommonly expen- The bubble without any fizz sive (see chart1). This year’s rise in American equities— the S&P 500 is13% higherthan itwason Jan- uary 1st—has been almost matched by stockmarkets in Europe and Japan, and outpaced by those in emerging markets. When measured against a benchmarksim- Low interest rates have made more orless all investments expensive ilar to CAPE, European and emerging-mar- SUALLY,when asset prices boom, peo- vestments and which they may not fully ket stockmarkets are not as strikingly Uple get excited. As America’s stock- understand, any more than they under- priced as American ones. But they are markets scaled wild peaks in 1929 and 1999 stood the risks of mortgage-backed securi- handily above their long-run average. they did so amid feverish enthusiasm. ties and other instruments in the run up to They can no longer be regarded as cheap, Search for such euphoria on Wall Street to- the financial crisis ten years ago. And the even if they are not as expensive-looking day and you will come back empty-hand- underlying driver of this oddly broad bull as American stocks. ed. Look at underlying numbers, though, market, low long-term real interest rates, Or take property. In countries that were and it is at first hard to see why. Over the has conflicting explanations—some com- unscathed by the global financial crisis, past 136 years the cyclically adjusted price- paratively benign, others less so. such as Canada and Australia, house earnings ratio (CAPE), a useful measure of Start with the evidence that stocks are prices are farabove their long-run average, how expensive stocks have become, has dear. Investors find CAPE a useful measure relative to the cost of renting. In America, reached its current heights only twice be- because the price of stocks reflects the val- where house prices plunged in the crisis, fore: during the dotcom bubble; and just ue investors assign to profits. Since 1881 the they have now surpassed their peak of before the Crash of‘29. average CAPE for the S&P index of the 500 2008 in nominal terms, and they are back Why does this remarkable surge not biggest stocks listed in America has been 17. above their long-run average relative to spur frantic enthusiasm—or for that matter Today it has risen to 30; buying a stream of rents. In Britain, propertypricesare close to deep trepidation? One reason is that in their peak against both average earnings most market bubbles you can point to a and rents (see chart 2 on next page). particular type of asset which is seeing its CAPE crusader 1 In bond markets credit spreads have price rise inexorably: tech stocks in the US, cyclically adjusted* price-earnings ratio narrowed dramatically. These spreads, RECESSIONS 1990s; houses in the mid-2000s. Today, 50 which are the gaps between the interest though, America and much of the rest of rate offered by safe bonds, such as US Trea- the world are amid a bull market in almost 40 suries, and by riskier ones, such as those is- everything: stocks, bonds and property are sued by companies or other countries, are 30 all strikingly expensive compared to long- a measure of how much compensation in- term averages, and getting more so. When 20 vestors require to bear the extra risk. When everything is going up, things are less excit- the price ofa riskybond risesrelative to the ing, and perhaps less worrying. 10 price of a safe benchmark, the credit But it is still a time to take care. The hun- 0 spread narrows. gerforassets that is drivingup prices is also 1900 20 40 60 80 2000 17 In the early weeks of 2016, when fears leading investors to take more risks—risks Sources: Yale University; *Based on inflation-adjusted for China’s economy surged and the oil which may not be fully priced into their in- Bloomberg; NBER earnings from previous ten years price sank below $30, the credit spread for 1 24 Briefing Asset prices The Economist October 7th 2017

2 investment-grade bonds was 2.2 percent- age points. It has since narrowed to around From backyard to junkyard one percentage point, only a little higher House price to rents, long-run average=100 23United States, corporate-bond spreads than it was during the credit boom of Percentage points 2004-06. For high-yield or junk bonds, 250 25 those rated below investment grade, the High-yield Canada 20 story is more or less the same (see chart 3). 200 15 Raised on promises 150 Investment-grade Venturesome investors looking for higher Australia Britain 10 yields can buy bonds denominated in dol- 100 lars but issued by countries other than United 5 America. The spread between dollar States bonds in the emerging-market bond index 50 0 1980 85 90 95 2000 05 10 17 1997 2000 05 10 15 17 collated by J.P. Morgan and Treasuries has Sources: Federal Reserve Bank of St Louis; national statistics offices; OECD; S&P; narrowed sharply this year to 3.1 percent- The Economist age points. Investors have been willing to buy bonds that look remarkably risky. In er the interest rate required to get them to more to the swollen supply ofsavings. June, Argentina received a flood of bids for do so. And in past decades various factors The third factor is the role of central a bond maturing in 2117. In the past century, have been driving up the propensity to banks. The reason long-term interest rates Argentina has defaulted six times. It did so save. Ageing rich-world populations came are low, the argument goes, is because most recently in 2014. into their prime earning years, and set short-term interest rates have been kept Put off by the high prices of bonds and aside more of their income for retirement. low for a long time. Central banks have stocks (particularly those of tech giants, Bank of England economists reckon that held them close to zero foralmost a decade whose prices explain a lot of the S&P’s this effect has lowered the real interest rate (longer, in Japan). They have also pushed stratospheric CAPE), investors are showing worldwide by 1.4 percentage points since down long-term interest rates more di- ever more interest in private markets—thus 1990. China’s integration into the world rectly by buying $11trn-worth of govern- pushing prices up there, too. The borrow- economy added a lot of thrifty people to ment bonds and other assets since ing costs for private-equity firms have the world’s pool of savers. In 2005, Ben 2009—in part as an attempt to push inves- reached an all-time low. There is a keen ap- Bernanke, then a governor of America’s tors into riskier assets, thus ginning up the petite forinvestment funds with a technol- Federal Reserve and later its chairman, at- economy. Little wonder long-term interest ogy bent. SoftBank, a Japanese telecoms tributed much of the worldwide “savings rates are low. company with a sideline in venture capital glut” driving down interest rates to China. It is not quite as simple as that, comes (it was an early investor in Alibaba, now The influence of asset prices is still evident the response. Central banks are as much one of China’s e-commerce giants), has in the frothiness ofproperty markets in cit- shaped by economic trends as shapers of raised $93bn from asset managers, includ- ies like London and Vancouver, where the them. The increased desire to save has ing sovereign-wealth funds, to put to work eagerness of Chinese buyers drives a changed the terms of monetary policy- in young technology firms. wedge between house prices and local making. Just as the real rate of interest that The key asset price, the one that sets the fundamentals, such as rents and income. balances the demand for long-term saving tone in other markets, is the long-term in- At the same time as the supply of sav- with supply has fallen, so has the “neutral” terest rate. Long-term real interest rates ings has risen, the demand for investment rate ofinterest which keeps inflation stable have been falling steadily since the early has fallen. The trend growth rate of rich- when the economy is at full capacity. Ifthe 1980s, and are now at historic lows (see world economies has been dropping. The central banks were really keeping interest chart 4). The yield on a ten-year Treasury real cost of plant and machinery has fallen rates and bond yields too low, the econ- bond fell close to 2% in the summer, and the value of firms, particularly in the omy would overheat and inflation would though it has risen to 2.3% since. Allow for technology industry, has shifted increas- take off. There is not much evidence of this. the effects of future inflation, even if it is ingly to intangible assets rather than physi- In the absence of inflation it is reason- modest, and the real return will be lower cal assets; both those things mean the able to expect low interest rates to persist, still. The interest rate on ten-year inflation- amount of investment needed for a given and thus unsurprising that the prices of protected bonds in America is 0.5%. In Eu- output has fallen. So the corporate sector stocks, corporate bonds and property go rope real bond yields are negative. ends up swimming in cash, adding yet up. If the yields on risk-free bonds stay de- An interest rate is the reward for forgo- pressed, then the expected returns on all ing spending today, to consume tomorrow. other assets—the earnings yields on equi- When the desire to spend today’s income Lack of interest 4 ties, say, or the rental yield on houses— tomorrowincreases, interestratesfall. That “World” real interest rate must fall into line. makes people keen to find other ways of Average ten-year inflation-indexed bond yield, % In some ways this makes high asset G7 countries, excluding Italy storing their spending power—and thus * prices less worrying. Take stock prices. To more willing to pay more forother assets. 5 value the future earnings you can expect The reasons for the decades of decline 4 from owning a piece of a company, they in real interest rates are not fully under- 3 must be discounted using an interest rate. stood, and certainly not agreed on. Differ- If the real interest rate is lower and looks entpeople give more orlessweightto three 2 likely to stay that way, discount rates will different factors: an increased appetite for 1 fall, too. That makes future earnings more + saving; a structural change in the econ- 0 valuable, and goes some way to justifying omy; and the actions of central banks. – paying a high price forthem. Thus in a low- 1 CAPE What, if anything, needs to be done de- 1985 90 95 2000 05 10 17 interest-rate world those high num- pends in large part on which factor you Source: “Measuring the ’world’ real bers make a lot more sense. choose to give most weight to. interest rate”, by M. King and D. Low, *The Economist As logical as all this seems, though, The more people want to save, the low- NBER working paper, February 2014 estimates there is nevertheless a nagging sense that1

26 Briefing Asset prices The Economist October 7th 2017

2 something is amiss with such high-priced before it is too late. It is often said that cen- assets. What if, for instance, inflation is Shy and retiring 5 tral banks, notably the Fed, mollycoddle sending a false signal about where real in- Working-age* population as % of total markets by delaying interest-rate rises terest rates should be? Ifthat were the case, FORECAST while they are unsettled. If the Fed were 70 central banks might indeed be keeping High-income less considerate, asset prices would be rates lower than they ought to. This is the countries jumpier, making investors more attuned to case made recently by Claudio Borio, who 65 the inherent riskiness oftheir portfolios. works at the Bank for International Settle- For some tastes, this comes close to ar- 60 ments (BIS), a clearing house for central World guing that the Fed has to destroy the recov- banks and a font ofcontrarian thinking. Middle- and ery in order to save it; the steep rise in the Central banks steer by the inflation rate low-income 55 federal funds rate required to bring Ameri- as mariners steer by their compasses. If it countries can share pricesto earth mighttip the econ- rises, the economy is overheating and the 50 omy into recession. And central banks still ship must adjust its trim. Ifit falls, the econ- have some purchase on inflation: if they 1950 60 70 80 90 2000 10 20 30 40 omy needs a dose of monetary stimulus; raise rates too much, they might entrench Source: UN World Population Prospects *Aged 15-64 the sails must be unfurled. The problem, today’s low inflation, or riskdeflation. Mr Borio says, is that the compass no lon- There is a better case for a less astrin- ger reads true. Fed is starting to unwind its share in this. gent form of intervention. It says, broadly, Globalisation, the decline of union Though the European Central Bank and that the stockmarket is a sideshow. Hardly power and technological change mean the Bank of Japan are, for now, still buying, any capital is allocated with reference to that inflation does not perk up when the they will in time follow suit. stockvalues, since IPOs are so scarce. What jobless rate falls in quite the way it used to; The Fed’s economists estimate that its matters to the economy are banks and (in the short-term trade-off between inflation asset purchases have reduced the interest America, at least) credit markets. Research and the unemployment rate, known as the rates on ten-year bonds by one percentage by Jeremy Stein ofHarvard University and Phillips Curve, has weakened to the point point, and that getting its bond holdings two co-authors at the Fed (where Mr Stein of breakdown. Inflation has been de- backto a normal level might have a similar was once a governor) has found that when pressed by real factors, says Mr Borio. By effect in the opposite direction. The Fed the mood in credit markets is bullish (ie, keeping interest rates low in a vain attempt will sell bonds much more slowly than it corporate-bond spreads are unusually nar- to fine-tune it, central banks are instead bought them to try and ensure a smooth row and the share of junk-bond issuance amplifyinga cycle ofboom and bust. adjustment to the market. But that cannot high), the economy will soon suffer, with If central banks’ influence on inflation be guaranteed. Hyun Song Shin of the BIS an abrupt tightening of credit and slower hasbeen overstated, itmayalso be the case recently warned of the perils of a possible growth. Given this finding, says Mr Stein, that their influence on the long-term real “snapback” in global bond yields if, for in- “I’m wary of targeting inflation so aggres- rate of interest, and thus on asset markets stance, some investors start dumping sively that you are not mindful of the risks in general, has been underestimated. Con- bonds as yields rise, just as they snapped from bullish sentiment.” sider again the decades-long drop in inter- them up as yields fell. The prices of other It is the nature of investment that some est rates since the 1980s; but this time, in- assets, such as stocks, might also lose sup- risky bets will not pay off. Ifportfolio man- stead ofasking why they fell, askwhy they port. Indeed, the prices of other assets agers wake up in two years regretting the started off so high. One explanation is the might be more destabilised than those in high price they paid for shares in one tech savage tightening of monetary policy un- the bond markets themselves. giant or another, or wishing they didn’t der Paul Volcker, chairman ofthe Fed, who own a 98-year dollar bond issued by Ar- pushed short-term interest rates as high as Into the great wide open gentina, so be it. The least—and perhaps 19% to crush America’s double-digit infla- And what of central-bank interest-rate the best—that can be done is to ensure that tion. The high real interest rate of the 1980s policies? The banks’ choice of what to aim the real economy is protected should and 1990scarried the imprint ofthe aggres- for as they cautiously start to tighten will prices suddenly fall. That means guarding sive monetary policy that went before. be made more vexed by indications that against purchases made with too much This episode suggests that central banks the increased propensityforsaving, is itself borrowed money of illiquid assets, espe- can indeed have a lasting influence on real in the process of turning round. China’s cially property. It also means ensuring interest rates. Ifso, a decade ofaggressively current-account surplus (a measure of its banks have enough capital to withstand a loose monetary policy may well have excess saving) narrowed from 10% of GDP correction in asset prices. The policy tools weighed down bond-market rates—and in 2007 to under 2% of GDP in 2016. In a re- already exist to do this. Now is a good time thus, for a while at least, people’s idea of cent paper, Charles Goodhart of the Lon- to put them to work. 7 the neutral real rate. Indeed higher bond don School ofEconomics and Manoj Prad- prices may have induced some investors, han of Talking Heads Macro, a research such as insurance funds, to themselves firm, argue that the rich world’s demogra- buy more bonds, driving down interest phyisata turningpoint, too, with the share rates in a self-reinforcing spiral. of working-age people in the population What does this mean for the future? about to fall (see chart 5). That implies less One possibility is that the spiral may go saving for retirement and more spending into reverse as central banks, led by the in retirement. In a recent lecture at the IMF, Fed, start to unwind the bond holdings Mark Carney, the governor of the Bank of they have built up. In the past five years the England, said that the neutral interest rate bonds issued by governments in America, may be rising worldwide, “meaning that the euro zone, Japan and Britain to finance monetary policy has to move in order to budget deficits have been broadly stand still”. matched by the big-four central banks’ Who should worry about this? One bond purchases. Believing that the world view is that, because stockmarket booms economy now has sufficient momentum tend to end badly, policymakers should to slough offthe legacy ofits past debts, the take deliberate action now to deflate prices United States The Economist October 7th 2017 27

Also in this section 28 Mainland Puerto Ricans 30 After Hurricane Maria 32 Rex Tillerson’s agonies 34 Gerrymandering 36 Lexington: Magical thinking

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

Guns Twelve were semi-automatic rifles that had been modified with bump stocks, What happened in Vegas small piecesofequipmentthatallowsemi- automatic guns to fire nearly as rapidly as automatic weapons—or roughly nine rounds a second. In addition to the arsenal found at the hotel, they found 19 guns at Mr LAS VEGAS Paddock’s home in Mesquite, a dusty re- tirement community 85 miles from the Las The shooting has reinvigorated calls forgun control and highlighted its limitations Vegas Strip, and seven at his residence in N THE parking lot below the Mandalay his room, he had turned a gun on himself. Reno. Nothing about the massive collec- IBay hotel in Las Vegas, a man with an Since December 2012, when a gunman tion of weaponry—the types of guns American-flag baseball cap slumps on a killed 20 children and six adults at Sandy found, the quantity or the modifications— bench next to his wife, whose dark sun- Hook elementary school in Connecticut, was immediately deemed illegal. Short- glasses cover puffy eyes, as they wait for a there have been over 1,500 shootings barrelled shotguns, short-barrelled rifles taxi to the airport. Two cowboy hats lie be- where fouror more people were shot dead and fully automatic weapons manufac- tween them, a reminder of what hap- or wounded in the same place at the same tured after1986 are among the only catego- pened a few nights before. It was Sunday time, one definition ofa massshooting. Us- ries that are prohibited outright. Bump and the three-day Route 91 country-music ing a different definition of mass shoot- stocks are legal and largely unregulated. festival was wrapping up. Jason Aldean, a ings, with a higher threshold, Jaclyn Some Republican senators are now calling famous crooner from Georgia, had just be- Schildkraut of the State University of New for the law covering them to be changed, gun strumming the guitar chords for his Yorkand H. Jaymi Elsass ofTexas State Uni- setting up a trial of strength with the Na- number“When She Says Baby”, when bul- versity counted 166 mass shootings in 14 tional Rifle Association. lets started to rain down from the sky. countries between 2000 and 2014. Of Along with about 22,000 other people, the these, 133 were in America. I won’t back down couple looked for cover anywhere they Police recovered 23 firearms in the Mass shootings account for far fewer casu- could find it, eventually crawling under a shooter’s suite at the Mandalay Bay. alties than incidents of everyday gun vio- stand. “We’re afraid to gamble; we’re the lence in America. An average of 93 people luckiest people alive,” the husband said as are killed by guns each day, mostly in sui- he reflected on what had happened. Loading up cides and homicides. But because of their Fifty-eight people were killed and 489 US, FBI criminal background checks for firearms scale and the way they inject terror into ac- injured in the attack. Although police have Monthly total, seasonally adjusted, m tivities as mundane as sending children to yet to determine his motive, they have Donald Trump elected president school, attending church, dancing at a club San Bernardino shooting identified the perpetrator as Stephen Pad- 3 or singing along at a concert, mass shoot- dock, a reclusive 64-year-old Nevada resi- Obama issues new gun-control regulation ings tend to provoke more strident calls to Sandy Hook elementary dent with a penchant for betting. Mr Pad- school shooting overhaul gun policy. 2 dock smuggled a trove of guns to a luxury Barack Obama Following the Las Vegas attack, some of suite on the 32nd floor of the Mandalay elected president these appeals have come from people who 9/11 Baywith unobstructed viewsofthe uncov- 1 previously opposed limits on gun owner- ered fairground where the Route 91festival ship. The morning after the massacre, Ca- was held. He smashed through two of the leb Keeter, a guitarist for the Josh Abbott gold-glazed windows and shot at the 0 Band, a country group that performed at crowd continuously forabout ten minutes. 2000 02 04 06 08 10 12 14 17 the Route 91festival, tweeted a diatribe that Before a SWAT team was able to break into Sources: FBI; The Economist began: “I’ve been a proponent of the Sec-1 28 United States The Economist October 7th 2017

Glock Owning Party Mainland Puerto Ricans United States What do you think is more important: Nuyorican souls protect the right of Americans to own guns, or control gun ownership? NEW YORK

% replying 100 How many refugees from Hurricane Maria will make theirway west? More important to OBAMA protect right to own guns PRESIDENCY ANY Americans are hazy about the and other necessities at El Maestro, a 75 Mlegal status ofthe 3.5m Puerto Ri- boxing gym and community centre in the 50 cans who live on the island. A survey in Bronx. Founded by a reformed gang boss, Republicans late September by Morning Consult, a Fernando “Ponce” Laspina, to keep local 25 pollster, found that just 54% ofAmericans kids offthe streets, the gym borrowed the Democrats know that people born there are fellow nickname ofa pro-independence leader. 0 citizens. There is greater awareness of A large mural portrays the Puerto Rican 1993 2000 05 10 15 17 islanders as one ofAmerica’s largest nationalists who mounted an armed Sources: Pew Research Centre; The Economist immigrant groups, above all in New York, attackon the House ofRepresentatives in home to a million Puerto Ricans, some- 1954, and a cockerel attacking an Ameri- 2 ond Amendment my entire life. Until the times dubbed “Nuyoricans”. That image can eagle. Iris Dipini, an engineer who events oflast night… A small group (or one ofmigrant workers in gritty urban barri- has lived on the mainland for19 years, man) laid waste to a city with dedicated, os—think“West Side Story”—is itselfout calls Hurricane Maria a politically reveal- fearlesspoliceofficersdesperatelytryingto ofdate. Since1990 legions ofPuerto ing disaster. “Ifwe were a state, I believe help, because of access to an insane Ricans living in northern states have the US would be more worried because amount of firepower…We need gun con- migrated or retired to Florida, drawn by we’d have representatives in Congress trol right now.” Other gun enthusiasts are sunshine, cheap homes and jobs. In the and could vote. Ifwe were a sovereign not convinced. Nephi Oliva, who owns a past decade they have been joined by republic we’d own our own ports and hookah lounge and gunfight-simulation islanders fleeing economic stagnation airspace. So it’s a political disaster as well centre a few miles from the Mandalay Bay, and high crime, who have dispersed as a natural disaster,” Ms Dipini says, admits that even an armed crowd would widely,creating communities as farafield drawing on a thin cigar as an uptown not have been able to fight back against Mr as Texas and Ohio. There are about 5m train passing overhead shakes the gym. Paddock. But he insists guns are necessary Puerto Ricans on the mainland now,a Though New York’s Puerto Rican for self-defence in other situations. Pulling fifth ofthem in Florida—more than re- population has been shrinking foryears, up his black, skull-emblazoned T-shirt to main on the island. They will cheer the city is still braced foran influx after reveal a loaded handgun, he explains: “Say President Donald Trump’spromise of the hurricane. Rubén Díaz junior, the a guy starts smashing your head in. You debt relief.Ifit actually happens. elected Bronx borough-president, notes can call the police and tell on him after the The eve ofMr Trump’svisit to the predictions that hundreds ofthousands fact, but you still got yourhead smashed in. island found volunteers taping up car- ofislanders might leave, and hopes they That’s not going to happen if you can de- tons ofbaby supplies, soap, toothpaste are wrong. Even a tenth ofthat number fend yourselfto begin with.” would put a “real strain” on schools and A growing body of evidence suggests housing, he says. Mr Díaz, a Democrat, certain restrictions can in fact reduce gun expresses fears ofan indebted, depopu- violence. Federal law mandates that only lated island fallingprey to “vultures” retail gun stores have to conduct criminal from Wall Street and the world ofhigh background checks when selling firearms. finance, bent on privatising its assets. Transactions between two individuals are Among Puerto Rican politicians in not regulated, allowing those without rap states like New York, such hard-left argu- sheets to pass guns on easily to those with ments are both common currency and less savoury backgrounds. Certain states largely without consequence fornational have introduced their own laws to close politics. Puerto Ricans on the mainland that loophole. Everytown For Gun Safety, have traditionally voted in low numbers, an advocacy group, found that in the 19 and those who were politically active states (and Washington, DC) that mandate lacked clout as long as they lived in safely background checks for every handgun Democratic states. Any big Puerto Rican sale, 47% fewer women are shot to death migration to Florida, the country’s largest by their romantic partners, 53% fewer law swing state, could matter much more, enforcementofficersare killed while work- however—especially ifnewcomers arrive ing, and there are 47% fewer suicides by Living like a refugee with a grudge against Mr Trump. firearm. Laura Cutilletta of the Law Centre to Prevent Gun Violence, another advoca- cy group, also stresses the benefits of wait- shootings. Mr Paddock and Omar Mateen, would not have deterred someone with ing-period laws, which require a certain who killed 49 people at a gay nightclub in such a coldly calculated plan. number of days to elapse between when a Orlando, passed background checks al- Mr Paddock’s gun collection illustrates gun is purchased and when a buyer can lowingthem to buy theirweapons. MrMa- another intractable difficulty: the quantity take it into his possession. Research pub- teen had to wait three days for one of the ofguns already in circulation. According to lished in the American Journal of Public two guns he purchased. Mr Paddock care- the Congressional Research Service, in Health suggested that, adjusted for popula- fully selected a room with a perfect view 2009 there were approximately 310m guns tion, states with such laws had 51% fewer of the country festival; ostensibly to alert available to civilians in America—twice as firearm suicides than states without them. him to police approaching, he had set up many guns per person as there were in Such policies, while still advisable, cameras in his suite and in the hall outside. 1968, and nearly enough for every man, might not do much to forestall future mass Waiting a few days to receive a weapon woman and child to have their own. 7 E is for Easy. Nest Thermostat E

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supermarket chains. His brother Jesús drives a truckfora corn mill. They live next door to one another. Hurricane Maria ripped offtheir sheet-metal roofs and shat- tered theirwindows. Forty-sixpeople stay- ing in an elementary school down the hill are worse affected. (Some 8,000 Puerto Ri- cans are currently sleeping in shelters.) Landslides washed away their homes and they have spent much of the past two weeks luggingwaterfrom the riverto wash the few pieces ofclothing they saved. The mayor of Toa Alta, Clemente Agosto, says government supply ship- ments have been few and far between: four pallets of bottled water and one of meals consisting of sausage, a granola bar and Skittles. “We need food and water,” he tells a chaplain, who is driving town-to- town writing requests on a sheet of paper to bring back to San Juan. (“This is the easy part,” the chaplain says. “Then I have to take on the bureaucracy.”) A small pile of After Maria donations from NGOs sits at the local post office waiting to be distributed by munici- A real catastrophe pal employees. Toa Alta’s services to its 75,000 inhabitants were limited even be- fore the storm. In February, the mayor cut his staff in half and reduced their working week to 20 hours to address his dwindling SAN JUAN budget and mounting debt. After making funeral arrangements for A ride with a truckdriveraround Puerto Rico explains why disasterreliefis so hard his uncle, who died of a heart attack while HE day after Hurricane Maria clob- looting. But aid delivery and the restora- listening to radio news a week after the Tbered Puerto Rico, Governor Ricardo tion of the island’s infrastructure have storm, Mr Chárriez drives out on one of his Rosselló put out a call for truck drivers to been slow. Less than half of the water sys- routes, past the coastal town of Arecibo— deliver emergency supplies. Aníbal Chár- tem has been restored, along with 20% of known for an astronomical observatory riezwasone ofseveral hundred who drove phone towers and 5% of the power grid. once used to search for extra-terrestrial life through knee-high water and dodged fall- Only ten out of69 hospitals are fully opera- but now empty, mud-caked and resem- en power lines only to be told he was not tional. Various government and charity or- bling another planet itself—and on into the needed. Ten days later, after thousands of ganisations have delivered hundreds of interior of the island, where tree trunks containers had accumulated in the port, he thousands of meals and water bottles, but and branches are strewn along the side of tried again. This time, he filled out a form notto all areasofthe island. An overall lack the road. In Utuado, an agricultural town and was told to wait for a phone call. That of preparedness on the part of the Puerto in the middle of Puerto Rico, hundreds of presented a problem. In addition to strip- Rican government, which is deep in debt, soldiers from local army and National ping the island of vegetation and flooding has exacerbated logistical issues. “It’s not Guard bases are clearing debris and deliv- hundreds of thousands of homes, the hur- that there wasn’t a Plan B,” Mr Chárriez ering food, water and medical supplies to ricane wiped out Puerto Rico’s electrical says. “There’s wasn’t even a Plan A.” houses cut off by floods and broken grid and many ofits mobile-phone towers, bridges. (Three sisters from Utuado were leaving 3.5m already isolated American Breakdown killed by a landslide during the storm.) citizens even more in the dark. To get a sense of the scope of Maria’s dam- As the sun begins to set above Utuado, “The power lines fell like dominoes,” age requires leaving San Juan, which has a US Border Patrol helicopter whirrs to a said Robert Kadlec of the US Department benefited from proximity to the port and stop on a soccer field and 13 National of Health and Human Services. Like domi- an influx of aid workers and journalists Guardsmen form a chain to unload water noes, the lack of electricity and communi- with cash in their pockets. Head west on and a pallet of boxed meals. “We spent cation set off a chain reaction that hin- the Kennedy Highway, where traffic slows, three days looking forthese supplies at the dered the entire disaster-response effort, the landscape thins and queues for fuel, San Juan airport, but we kept getting complicating everything from delivering cash and supermarkets stretch for blocks. turned around and told they didn’t have food to burying bodies. The federal gov- Dozens of cars—some with windscreens them,” says an agent stationed at Aguadi- ernment’s sluggishness made things still smashed by flying debris—are parked lla, in the north-west of the island. Mr worse. Eight days after the storm, after a on the shoulder near phone towers, their Chárriez frowns at the pallet. “I can fit12 of weekend at his golf club, President Donald drivers trying to catch a signal before head- those in my truck,” he tells the agent. Trump appointed a three-star general to ing home to more remote areas. Bureaucratic wrinkles have made pro- oversee the military response. There are Toa Alta, where Mr Chárriez, the truck viding relief more difficult. Mr Chárriez now 9,000 people from the Department of driver, lives, is tucked into steep hills be- has to have five separate licences to work Defence on the island, along with 57 heli- side the La Plata river around 20 miles as a truck driver. The island’s economic copters and a hospital boat. south-west of San Juan. Truckers favour it woes—unemployment is more than twice Their presence in recent days has because it is central and has cheap hous- the American average and 45% live below helped preventepidemicsand widespread ing. Mr Chárriez hauls packaged food for the federal poverty line—have led to poor 1 E is for Everywhere. Nest Thermostat E

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2 planning and short-term thinking. “The More on diplomacy sages are conveyed through the Swedish hurricane isn’t named Maria, it’s named embassy in Pyongyang, which provides a Prepa,” says Rodrigo Masses of the Puerto The tormenting of consular service for US citizens. Another Rico Manufacturers Association, referring channel is the North Korean mission to the to the Puerto Rico Electric PowerAuthority, Tillerson UN in New York. There are also so-called which oversees the country’s dilapidated, Track II meetings (involving academic ex- and now defunct, electrical grid and owes perts and former officials), which can be roughly $9bn of Puerto Rico’s $73bn debt. used to gauge whether there is any basis The president rejects talks with North He hopes the hurricane will spur the fiscal formore formal diplomatic approaches. Korea, making a bad situation worse control board, which governs the territo- Nor was Mr Tillerson saying anything ry’s finances, to push forward a decade-old T IS not unheard offorsecretaries ofstate new when suggesting that he would be in- proposal to privatise the power industry. Ito chafe over their relations with their terested in starting a dialogue with Pyong- In the meantime, the downed grid is the boss. Colin Powell never had the ear of yang: he made similar remarks a few root of much of the suffering of the past George W.Bush, and often felt bruised and weeks ago. Ignoring the president’s tweets, two weeks. “We never prepared to operate frustrated as a consequence. John Kerry,to James Mattis, the defence secretary, reiter- 100% of the country on electric genera- his dismay,was often leftout ofthe loop by ated his support for Mr Tillerson’s “efforts tors,” says Manuel Reyes of MIDA, the is- Barack Obama’s micromanaging White to find a diplomatic solution” in a state- land’s food-industry association. Most House. But there is nothing normal about ment to the Senate Armed Services Com- large generatorsoperate on diesel. Its distri- the way Donald Trump has publicly mittee on October 3rd. bution is an almost wild industry of 100- scorned his secretary of state, Rex Tiller- Given that North Korea itself shows no 150 independent diesel-truck owners who son, for holding out the possibility of talks inclination to begin denuclearisation talks suddenly found themselves in high de- with North Korea over its missile and nuc- with America and will probably consider mand. Though the government ordered lear programmes. Writing on Twitter, Mr a testing freeze only once it has a demon- drivers to serve hospitals and supermar- Trump declared that he had told Mr Tiller- strable capability to threaten mainland kets first, a black market developed. Super- son that he was “wasting his time trying to America with thermonuclear attack, it markets refrained from stocking their negotiate with Little Rocket Man [North might seem reasonable to concede that Mr shelves without a guarantee that they Korea’s leader, Kim Jong Un]…Save your Trump had a point. Some, perhaps includ- would have power to keep the food cold energy Rex, we’ll do what has to be done.” ing Mr Trump, may even believe that the and the lights on. Hospitals struggled in the What prompted this outburst was a president was skilfully pursuing Richard first few days after the storm to treat pa- conversation between Mr Tillerson and re- Nixon’s “madman theory”: the idea that if tients and keep bodies—500 people die on porters who were travelling with him to you convince your adversaries that you average each week in Puerto Rico—cold in Beijingformeetings with the Chinese lead- are sufficiently unhinged to do almost any- the morgue. The problem has eased some- ership. Mr Tillerson had said he was “prob- thing, including starting a nuclear war, what with the arrival ofmore diesel trucks ing” the possibility ofstartingup talks with they are more likely to bend to your will. on boats sent by the Federal Emergency North Korea about its programmes. “We Unfortunately, history suggests that Mr Management Agency. Carlos Gómez, the have a couple, three channels open to Nixon’s application of the theory in rela- emergency-room director of the Caribbe- Pyongyang,” he added. “We can talk to tion to Vietnam exposed the world to the an Medical Centre, says he expects the them, we do talkto them.” risk of a nuclear catastrophe without death toll from the hurricane to be much There was nothing surprising about achieving much in return. As far as North higher than the 34 reported. His hospital is this. While America lacks formal dip- Korea is concerned, Mr Trump is sending a seeing twice as many patients as usual, lomatic relations with North Korea, mes- message to Mr Kim, to the Chinese, whose mostly with fractures, lacerations and help Mr Tillerson is trying to enlist, and to head trauma from cleaning up after the America’s regional allies that investing storm. He is encouraged that he has not any hope in attempting to de-escalate the come across widespread water- or food- crisis is pointless. If Mr Kim believes that borne illnesses. he will be attacked come what may, effec- Back in San Juan, Miguel Peréz, a car- tive deterrence is undermined, while noth- penter from Barrio Obrero (“Workers’ ing Mr Tillerson says or does need be taken Neighbourhood”) is standing with around seriously by anybody, friend or foe. 200 people in a queue outside an ice plant, hoping to buy a dollar’s worth to keep his Crawling back to you food cold. They have been there for hours. Mr Tillerson deserves only slight sympa- Fetid water has pooled in the intersections thy. He has shown little interest in repre- and mounds of garbage line the streets. A senting American ideals, such as the pro- tree tangled up in power lines blocks a motion of human rights, while carrying nearbyroad. Residentssayfiremen and po- out a botched reorganisation of the State lice refused to move itbecause ofa beehive Department that has left it hollowed out in one of the branches. This was the De- and dysfunctional. Many important posts partment of Natural Resources’s responsi- remain unfilled—including those of assis- bility, reply the police. Then, at 11:45am, a tant secretary of state for East Asia and am- plane roars overhead. Children waiting in bassador to Seoul. He would not be much the queue with their parents point up at missed if he decided to quit. But on Octo- the sky, where Air Force One is descending ber 4th, Mr Tillerson declared that he to the nearby airfield. Mr Pérez remembers would soldier on in his thankless job. That when Mr Trump came to Puerto Rico to may not be a bad thing. Such is the damage judge beauty contests. “He should use being done to the effectiveness of Ameri- those businessman skills of his to help the can diplomacy at Mr Trump’s hands, it is economy of this island,” he says, inching doubtful whetheranyone ofstature would ahead in the ice-line. 7 You don’t know how it feels be willing to take his place. 7 E is for Everyone. Nest Thermostat E

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Electoral mapmaking “partisan symmetry”—the intuitive notion that political parties should derive roughly When politicians choose their voters the same legislative representation from equivalent popular support. One way to measure symmetry, or its absence, is through the “efficiency gap”, a measure developed by Eric McGhee, a po- WASHINGTON, DC litical scientist, and Nicholas Stephano- poulous, a lawprofessor. Thisdeemsevery The Supreme Court ponders whetherpartisan gerrymandering has gone too far vote cast for a losing candidate, as well as HE 2010 elections gave Republicans of the statewide vote. North Carolina’s votes cast fora winner in excess ofwhat he Tunified control over Wisconsin for the map gives Republicans ten seats and needs to win, to be wasted. A partisan ger- first time in 12 years. Voters chose them re- Democrats three, despite close statewide rymander tries to maximise the oppo- soundingly; when they took office in early votes. When asked why, a Republican law- nent’s wasted votes by “packing” and 2011, they set out to return the favour. maker who headed the redistricting pro- “cracking”—creating a few safe districts Armed with census data, Republican law- cess said, “Because I do not believe it’s pos- that they win overwhelmingly, while makers drew districts to maximise their sible to draw a map with 11 Republicans spreading the rest of their voters as thinly political advantage. In the 2012 elections, and two Democrats.” And in Maryland, as possible. Adding up all a party’s wasted Republicans won 48.6% of the vote but Republicans claim the state’s Democratic votes, and dividing that sum by the total took 60 of the state assembly’s 99 seats. In legislature gerrymandered their rights number of votes cast, yields an efficiency 2014 and 2016, their 52% of the vote got away in the rural sixth congressional dis- gap. An efficiency gap larger than 7% may them 63 and 64 seats. trict. Voters in all three states have chal- show that one party holds an unconstitu- Some Wisconsinites decided this lenged the maps in court. tional “systemic advantage” overthe other. crossed the line from routine partisan ac- Between the 1970s and 1990s, Wiscon- tivity to something more sinister. They sin’s state-assembly maps averaged an effi- sued the state, arguing that its partisan A ripe smell ciency gap of 1.5% in Republicans’ favour. gerrymander was so extreme that it violat- US, Wisconsin presidential election results In the three elections since 2010, that figure ed their First Amendment rights to associa- By Assembly district rose to 12.3%—meaning that winning half tion and free speech and the “one person, Republicans Democrats the popular vote would have given Repub- one vote” principle enshrined in the Four- State total, % licans more than 60% of the seats in Wis- teenth Amendment’s equal-protection 49.3 49.7 47.2 46.5 consin’s state assembly. clause. A federal district court upheld their 2004 2016 The conservative judges seemed unim- case in a divided ruling; the state appealed pressed. John Roberts, the chief justice, to the United States Supreme Court, which hoarily dismissed this maths as “sociologi- heard arguments on October 3rd. cal gobbledygook”. Samuel Alito also Gerrymandering is hardly new: the sneered, suggesting that a single paper by a name dates back to an unwieldy district “young researcher” hardly provides an ad- created in 1812 by Elbridge Gerry, then go- equate basis for the justices to meddle in vernor of Massachusetts. In most states, elections across the country. And Neil Gor- the legislature controls redistricting. Six Sources: Wisconsin state legislature; such, the newest justice, used a hokey riff states use independent commissions, and Wisconsin Elections Commission on his steak seasoning to deride the plaint- limit orbarelected officials, legislative staff iffs’ approach as “a pinch of this, a pinch of or lobbyists from serving on them. Unsur- Wisconsin’s case is unusual because it that”, with too little guidance for how to prisingly, these states seem to draw more could result in a ruling that applies nation- apply the test in practice. Mr Kennedy did competitive districts. Elsewhere, new soft- wide. At the Supreme Court, both sides not join his colleagues’ attack on the social ware and reams of voter data now allow aimed their arguments—as so often hap- sciences. Earlier in the hearing he asked politiciansto drawsurgicallyprecise maps, pens these days—at Anthony Kennedy, the Wisconsin’s lawyers a series of critical while increasing polarisation has upped perpetual swing vote, poised between a questions, which might indicate that he fa- the stakes. As the plaintiff’s lawyer quartet of liberals, who are probably more vours the plaintiffs. quipped, “Gerrymanders now are not eager to invalidate Wisconsin’s map than your father’s gerrymander.” the court’s fourconservative justicesare. In Runnin’ down a dream Contemporary gerrymanders can com- Vieth v Jubelirer, a gerrymandering case The court now faces an unenviable deci- pound Democrats’ geography-driven dis- from 2004, fourjustices rejected the notion sion. Letting the map stand could, as the advantages. Democrats tend to live clus- that courts were equipped to monitor par- plaintiff’s lawyer warned, give states “a tered in cities, while Republicans sprawl tisan gerrymandering at all. Four others free pass” to create maps that, in effect, across more heterogenous districts. This floated a quartet of standards to do just “nullify democracy”. But intervening probably contributes more to polarisation that. Mr Kennedy, as usual, split the differ- could, as Mr Roberts fears, push the court than gerrymandering does. Jowei Chen, a ence. None of the standards offered avoid- directly into the political fray, risking what political scientist at the University ofMich- ed “substantial intrusion into the nation’s he described as “serious harm to the status igan, has found that in many states, even political life”, he wrote in a concurrence. and integrity” ofhis court. without intentional gerrymandering, But curbs on gerrymandering may be im- Of course, the court could always rule Democrats would still win fewer than 50% posed “if some limited and precise ratio- on narrower grounds, as it often prefers to of seats with 50% of the vote. But he also nale” one day emerges. do. It could find that the appellants lack found that Wisconsin’s map gerryman- The plaintiffs claim that day has ar- standing to sue, or rule that Wisconsin’s dered farbeyond expectations. rived. “Social-science tools now allow map was uniquely awful, but abstain from Nor is Wisconsin the only state where courts to diagnose partisan gerrymanders deciding a universal standard. Usually it Republicans drew grossly contorted maps. with accuracy and precision,” according to prefers leaving political questions to vot- In Pennsylvania five years ago, Republi- a brief from two political scientists who ers. If only elected officials showed such cans won 13 of18 House seats with just 49% have helped draw district maps. At issue is concern forthe popular will. 7 ON A CLEAR DAY, YOU CAN SEE THE FUTURE.

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Superstition helps explain why many Republicans thinkloose gun laws keep them safe nald Trump’s insurgency in itself suggests that any explanation of Republican attitudes rooted in conservative ideology should be treated with caution. A forthcoming book by the political scientists Eric Oliver and Thomas Wood, “Enchanted America”, offers an alternative ex- planation. It argues that people who believe guns make America safer, among other fallacies, display a strain of superstition that has always existed in American politics, on the right and the left, but which in recent decades has concentrated on the right, and nowthreatensto subsume it. Itsproponents, who the authors call “intuitionists”, understand the world on the basis of feelings and gut instinct, not doctrine or empirical facts, even when confront- ed with them. “Much ofwhat looks like an ideological gap in this country”, the authorswrite, “isdue more to the powerofthese in- nate intuitions than abstract principles or values.” Understand that, they argue, and it becomes easier to compre- hend that the judgments such voters reach in times of economic and cultural change, like the present, will be governed by fear. This is both an instinctive response to uncertainty and a self-vali- dating one, as Mr Oliver illustrates by quoting his five-year-old son: “If there’s no monster in the closet, then why am I scared?” HE Onion put it best: “‘No Way To Prevent This,’ Says Only Na- The refusal of millions of people to accept some limits on gun Ttion Where This Regularly Happens.” An accurate summary ownership, even though this would make their families safer, re- of gun-control opponents’ response to America’s periodic gun flects the same white-knuckled logic. massacres, the headline was also familiar. The satirical website How has such a rich, well-governed place come to this? Rich- has run it, with few alterations to an accompanying spoof article, ard Hofstadter’s classic essay, “The Paranoid Style in America Pol- five times: after six people were murdered in California in 2014; itics”, offers another clue. Written in 1964, it locates the anger and after nine were murdered in South Carolina, nine in Oregon and paranoia that had characterised the Goldwaterinsurgency—in ef- 14 in California in 2015; and after the killing of 58 and maiming of fect, an extreme case ofintuitionism—in a longhistory ofpopulist 489 people by a lone gunman in Las Vegas on October1st. resentment and apocalyptic rhetoric. For Hofstadter, the para- Satire thrives where the usual checks on human folly fail. In noid style was a persistent but marginal “psychic phenomenon”, this case it points to the fact that America, despite having a gun- with a potential to take off in certain circumstances. The most murder rate 25 times higher than that of other developed coun- propitious, he mused, would be “a confrontation of opposed in- tries, has no serious debate on how to reduce the killing, because terests which are (or are felt to be) totally irreconcilable”. It is pos- Republican lawmakers refuse to countenance the only thing that sible to read America’s subsequent political history, dominated easily would. By making it even a bit harder for killers to get by the civil-rights struggle, the culture wars and the intractable guns—as action taken in Australia, Britain and Canada shows— partisanship they spawned, as proofofthat conjecture. America would have fewer gun deaths. Yet only a quarter of Re- publican voters accept that demonstrable truth. Most say Ameri- Freefalling ca would have less crime ifonly more Americans were armed. There has since been plenty of irrational behaviour on the left, The usual explanation for this delusion is brilliantly effective too, including hostility to genetically modified food and the cur- lobbying by gun clubs. Since the 1970s the National Rifle Associa- rent tendency of left-wing bloggers to see a Russian under every tion, supported by gun makers, has recast what was once a pub- rock. Yetthe factthatthe losersin America’scultural struggles—in- lic- safety issue into an argument about liberty: ifyou believe gun cluding fundamentalist Christians, rural whites and other tradi- ownership is a thin red line against government tyranny, as the tional folk—were on the right has made it the domain of unrea- NRA claims, it scarcely matters whether it also leads to more kill- son. The election of Mr Trump sealed that. As an irreligious ing. At the same time, the lobbyists have bullied Republican law- sometime pro-choice proponent of gun control, he was an im- makers so thoroughly that none dares speakagainst them. Asked plausible Republican champion. Still, his supporters backed him forhisposition on gun control thisweek, Paul Ryan said he’d rath- because, in their guts, where intuitive choices are made, they felt er talkabout cutting taxes. The Onion could not improve on that. he was on their side, so none ofthat mattered. Yet though Republican voters have moved markedly against On guns and much else, this suggests, Republican leaders gun control overthe course ofthe NRA’slobbying, italone cannot have been directing the views of their supporters much less than explain that shift. Many Republican voters are more selective in they thought. They, and their NRA auxiliaries, could not have their support for guns than the ideologues; they tend to be mo- turned Republican voters on to gun ownership so dramatically mentarily keener on gun controls after a massacre, for example. It had the issue not spoken to their pre-existing fears and fantasies. also seems notable that the same people who believe guns make And much good hassuch panderingdone the leaders. Ithas given America safer are also likely to hold a number of other irrational them Mr Trump for a boss and a civil war, between populists and views. Around halfofRepublicans do not believe in evolution or true conservatives, upon which their party could founder. It has anthropogenic climate change. They have also just elected as also left them, in the wake of America’s worst civilian massacre president a man who has suggested vaccines cause autism. Do- in a century, with nothing to say. 7 The Americas The Economist October 7th 2017 37

Also in this section 38 Bello: Deciphering Trump 40 Meet Jagmeet Singh 40 Venezuela’s last glacier

Crime in Brazil a bank, opened branches in the 1990s. The feud within the ADA, which began on Sep- Rio’s post-Olympic blues tember17th, makes life a misery. The police make it a three-way battle. “It can be diffi- cult to work out who is firing at whom,” says Eduardo Carvalho, a local journalist. The Dr Albert Sabin health centre shut RIO DE JANEIRO down briefly forthe first time in 35 years. On September 22nd, after violence had Feuding gangs and empty coffers are pushing up the murderrate spilled over into the prosperous areas of N THE warren ofalleyways that make up zil’s deep economic recession. Despite Gávea and Leblon, Brazil’s defence minis- IRocinha, Brazil’s largest favela, the air is embarrassments like green diving-pool ter sent 950 troops into Rocinha. They re- heavy with foreboding. A feud between water the games were a success. stored calm, but withdrew seven days lat- factions of the Amigos dos Amigos Not so the aftermath. The state govern- er. The mayhem has since risen. “Rogério (Friends of Friends, or ADA), a drug gang ment recorded 2,976 homicides in the first 157”, the leader of an ADA faction, has de- that has controlled the slum since 2004, half of 2017, a rise of 14% on the previous fected to Comando Vermelho, a rival gang, erupts in daily violence. Police in patrol year. Fifteen gun battles a day take place in splittingthe favela into two territories. That cars creep through the lanes, their rifles Rio’s metropolitan region. More than 100 could worsen the violence. “We will be poking out of the windows. Residents policemen have been killed so farthis year here fora while,” saysJosé, tappingthe bar- share news of shoot-outs on WhatsApp. in the state. Some experts fearthat the mur- rel ofhis carbine nervously. “We are scared to walk around,” says Ra- der rate could go back to levels of a decade Rocinha is suffering from a failure of quel, who sells colourful prints to a few ago (see chart). In July the federal govern- policing, compounded by financial mis- brave tourists. At a command post a squad ment sent 8,500 troops backto Rio. management and economic misfortune. of policemen prepares for yet another op- Rocinha, whose 100,000 people are The government of the state of Rio is near- eration. “It’s a never-ending war,” sighs crammed into one square km (250 acres), ly bankrupt. In September Brazil’s presi- José (not his real name), an officer drafted was thought to be relatively safe until re- dent, Michel Temer, approved the second in from a nearby neighbourhood. cently. McDonald’s and Caixa Econômica, federal bail-out in two years. The city ofRio de Janeiro, which hosted In 2008 the state started sending “paci- the Olympic games in 2016, is having a fying police units” (UPPs) to 38 favelas. grim year. Shoot-outs in favelas, or shanty- No more good news Theywere made up of9,500 officers, many towns, have killed dozens of people. A Rio de Janeiro, deaths per 100,000 people trained in non-violentpolicingand human third ofadults aged 18 to 24 are out ofwork. rights. In Rocinha the UPPs reduced the cir- Many Olympic venues are abandoned; a 50 culation of heavy weaponry, says Misha State Glenny, author of a book about the favela. fire in July damaged the velodrome. “Rio is 40 in a real hole,” says Robert Muggah of the Murders The state gave bonuses to officers in areas City Igarapé Institute, a Rio-based think-tank. 30 where crime dropped most. Although the Before the games began, Rio’s then- UPPs did not dismantle the gangs, violence mayor, Eduardo Paes, boasted that the city 20 fell. By 2015 the homicide rate had dropped Killings by police would be the “safest place in the world”. City to its lowest level in 25 years. Thanks to the deployment of 85,000 sol- 10 Optimism did not last. Despite their diers and police officers during the games, State training, some policemen committed the claim did not seem ridiculous. Con- 0 abuses. In 2013 Amarildo de Souza, a brick- 2000 02 04 06 08 10 12 14 16 struction work temporarily protected cari- layer from Rocinha who had gone out to Source: Institute of Public Safety ocas, as Rio’s residents are called, from Bra- buy seasoning forhis dinner, went missing 1 38 The Americas The Economist October 7th 2017

2 after questioning by UPP officers. This pro- The state government depends heavily on the past three years and 40% of patrol cars voked violent protests; 25 officers were ac- income from the oil industry,which fell by are out of service. The federal government cused of torturing him and causing his dis- two-thirds from 2013 to 2016. Corruption gave extra money until the Olympics for appearance. “The credibility that the UPPs makes things worse. On September 20th UPPs. Now the units are in dangerofdisap- had built up suddenly disappeared,” re- this year Sérgio Cabral, the former gover- pearing, says Mr Muggah. members Mr Carvalho. nor of Rio state, was sentenced to 45 years Favelados say that the UPPs, despite The second phase of the community- in prison for embezzlement. their failures, offer the best hope of reduc- policing programme—investment in health, In return for financial aid, the federal ing violence. A poll conducted in August in education and social projects—was a fail- government has demanded deep cuts to 37 favelas found that 44% of residents want ure. That is because the state and munici- spending. The state slashed its security UPPs to be improved, for example with pal governments paid too little attention budget by 30% last year and stopped pay- better training, but not dissolved. A further and were weakened by economic crisis. ing the salaries ofmany public workers, in- 16% want them to continue as they are. The From 2002 to 2016 Rio had the lowest cluding police officers. Ballerinas at the city and state governments need to in- growth rate among Brazil’s 27 states, points municipal theatre became Uber drivers. crease non-security spending, too. out Mauro Osório of UFRJ, a university. Around 2,000 policemen lost their jobs in The region’s leaders do not inspire con-1 Bello Deciphering Trump

The United States has many Latin American policies, and none TIS a mystery that has baffled American action to Mexico’s offer of help after Hur- Iand Cuban officials for months. Who ricane Harvey was gracelessly to ignore it. and what was behind what the State De- His insistence, to please his political base, partment calls the “attacks of an un- on building a wall between the two coun- known nature” that inflicted hearing loss tries and his talk of tearing up the North and headaches on 18 staff and four American Free-Trade Agreement are in- spouses from the United States’ embassy sults to a proud country. Optimists say in Havana? With no sign of an answer, on that the wall will never happen, and that September 29th the State Department an- NAFTA could get a useful updating. Nei- nounced that it was withdrawing all but ther ofthose outcomes is certain. emergency personnel from Havana. Not- As for other parts of Latin America, re- ing that some of the “attacks” took place lations will feature “somewhat bumpy in hotels, it also advised Americans not to continuity”, says Juan Gabriel Valdés, visit Cuba. This week it expelled 15 Cuban Chile’s ambassador in Washington. diplomats from Washington. White House officials still talk of an im- Despite this, the administration of Do- portant relationship based on shared val- nald Trump does not contradict Cuba’s ues of democracy and freedom. The ad- claim that it had nothingto do with the in- has a duty to protect its diplomats. But the ministration is continuing an Obama-era cidents. Cuba has allowed the FBI to in- generalised travel warning looks like an programme aimed at preventing violence vestigate. Even so, the strange episode is overreaction. If insurers withdraw travel in, and emigration from, Central America, helping to reverse the opening to Cuba cover, the blow to Cuba’s tourism industry which John Kelly, Mr Trump’s chief of that was a central element in the Latin and its nascent private sector could be staff, helped to draw up in a previous job. American policy of Barack Obama, Mr great. Latin American leaders are watching Aid to help Colombia fight drugs and im- Trump’spredecessor. developments warily. Any move to sunder plement a peace deal with formerguerril- This adds to the difficulty of decipher- diplomatic relations again would recreate las will continue, but at a reduced level. ingMrTrump’sapproach to the region. In- a long-standing irritant forthe region. Mr Trump has revived disagreements stead of a Latin American policy, the Marco Rubio, a Republican senator over drugs, dropping the mantra of his emerging picture is of an administration from Florida who was Mr Trump’sbitter ri- three immediate predecessors that pro- that, more than most, takes different ap- val forthe presidency, was at his side in Mi- ducing and consuming countries should proaches to different countries at the be- ami. Mr Rubio has been influential, too, on share responsibility for the problem. hest of different players in Washington. policy towards Venezuela. The administra- Missing, say several Latin American Under Mr Obama, especially in his sec- tion has imposed sanctions on a score of leaders, is a sense of ambition in Wash- ond term, relations between the United Venezuelan officials, barred its dictatorial ington. Marta Lucia Ramírez, a conserva- States and Latin America were warmer government from raising funds in the Un- tive presidential candidate in Colombia, than they had been since the mid-1990s. ited States and banned some government sees a “return to a past agenda”, instead of Now the outlookis more uncertain. employees from travellingthere. It has con- plans to advance in “prosperity, educa- Take Cuba first. In June Mr Trump sulted Latin American leaders on these tion, and science and technology”. For went to Miami to promote what was, in measures. But they were horrified when Mexico it is worse. Elsewhere, the story of fact, only a modest rollback of Mr Mr Trump said in August that he was con- the Trump administration may be one of Obama’s policy. He said that Americans sidering a “military option”. opportunity forgone. There is also a more could travel to the island only in groups Then there is Mexico. Mr Trump contin- insidious risk. It is that Mr Trump re-legiti- and barred transactions with army-con- ues to be aggressively unfriendly towards mises the populist nationalism that is in trolled companies. The American reac- the United States’ southern neighbour. Yes, remission in much of Latin America. Talk tion to the mysterious attacks could have he sent rescue teams after last month’s ofshared valuescould be drowned out by bigger consequences. The administration earthquake in Mexico City. But his first re- a chorus of“My country first”. Learning French: A Rendezvous with TIME ED O T FF French-Speaking Cultures I E IM R L Taught by Professor Ann Williams 70% METROPOLITAN STATE UNIVERSITY OF DENVER LECTURE TITLES O 6 off 1 R R 1. Welcome to the French-Speaking World D E E B 2. Ici, on parle français: French Is Spoken Here R O BY OCT 3. French around the World 4. Francophone Towns and Villages 5. Weather, Seasons, and Some Geography 6. La Vie en France: Life in France 7. Vacations and Leisure Activities 8. 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The romance of Je t’aime, the understatement of Ça va, the inspiration of Liberté, Égalité, and Fraternité: French is a beautiful language, and Learning French: A Rendezvous one of the most rewarding you can study. Yet as with learning any new with French-Speaking Cultures language, it can be a frustrating experience, requiring patience and Course no. 2840 | 30 lectures (30 minutes/lecture) understanding. But with the right approach, it should also be a fun and incredibly rewarding endeavor. SAVE UP TO $270 Learning French: A Rendezvous with French-Speaking Cultures includes what most platforms omit: explanation. 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2 fidence. Marcelo Crivella, the city’s mayor Trudeau constantly celebrates. Like the Tropical ice since last year, is a Pentecostal bishop and prime minister, he is adept at social media enthusiastic crooner. His favourite ditty is and single-combat sports. (He practises Humboldt’s death “My Rio”, which asks God to “take over” Brazilian ju-jitsu; Mr Trudeau is a boxer.) the city. He consults the Bible more readily Sikhs have made more headway in pol- than security experts, say critics. Luiz Fer- itics than most minority groups. Mr Tru- nando Pezão, the state’s governor, has deau’s cabinet includes four. Erin Tolley, a more practical plans, including a scheme scholar at the University of Toronto, offers Turmoil is keeping scientists away from to divert oil royalties from an environ- several explanations for that. Sikhism em- Venezuela’s last glacier mental programme to one that combats phasises the value of public service. Sikhs violence. But he is suffering from cancer. have a tradition, born in India, of mobilis- ENEZUELA is a tropical country, with The problems ofthe region’s politicians ing to defend their rights. Most Sikhs come Vrainforest in the south and east, and encourage the federal government to play from well-educated immigrant families. baking savannah stretching towards its a bigger role. In addition to extra aid, it There are currently17Sikh MPs. northern Caribbean coast. The Sierra Ne- plans to send a multi-agency task force, Yet Mr Singh’s biography could also vada de Mérida mountain range in the modelled on initiatives in Colombia, hurthim. A poll publishedin April showed north-west offers relief from the heat. In Northern Ireland and South Africa, to pros- that only 38% of Canadians have a favour- 1991five glaciers occupied nooks near their ecute police and politicians involved in or- able impression of Sikhism (33% view Is- peaks. Now, justone remains, lodged into a ganised crime. Everyone in Rio hopes for a lam favourably). Small but troubling anti- cwm west of Pico Humboldt. Reduced to recovery in the oil price, which would pro- immigrant rallies have taken place over the an area often football pitches, a tenth ofits vide more money for public services. But past year, the latest in Ottawa on Septem- size 30 years ago, it will be gone within a oil prices are uncertain. Peace in neigh- ber 30th. Mr Singh’s religion may prove a decade or two. Venezuela will then be the bourhoods like Rocinha should not be. 7 disadvantage for the NDP in Quebec, first country in the satellite age to have lost which elected 16 of the party’s MPs. The all its glaciers. French-speaking province is hostile to The retreat of the Humboldt glacier, Canada overt religious symbols like the turban and named for Alexander von Humboldt, a the kirpan, a dagger worn by Sikh men. German explorer of the 19th century, is the Meet Jagmeet Mr Singh hopes to win over Canadians final stage of a 20,000-year process, the re- with a political programme that includes cession of an ice sheet that covered 600 reducing inequality, improving pay and square km (about 230 square miles) ofVen- working conditions for people in insecure ezuela in the most recent ice age. Climate OTTAWA jobs and reforming the first-past-the-post change has sped it up. electoral system (a promise that Mr Tru- Scientists want to study the glacier in its The third-largest party is the first to be deau made but then forgot about). He will final years but Venezuela’s tumultuous led by a memberofa “visible” minority begin his quest for power by giving up his politics is making that difficult. Carsten AGMEET SINGH could have done many provincial seat and tryingto win one in the Braun, a glaciologist at Westfield State Uni- Jthings when a heckler accused him at a House of Commons. The odds that he will versity in Massachusetts, thinks his most rally last month of plotting to subject one day become prime minister are slim. recent visit in 2015 was the last by any sci- Canada to sharia law. The turbaned politi- The NDP has governed provinces (it holds entific expedition. Even then, conditions cian could have pointed out that he is a power in Alberta and British Columbia) were “a little dicey”. Men in military uni- Sikh, not a Muslim. He could have skew- but never the country. To wrest Mr Tru- form pulled him offa bus and interrogated ered herwith lawyerly wit (he is a criminal deau’s job from him at the next election in him. Now, Venezuela’s hyperinflation and lawyer) orasked security guards to remove 2019, Mr Singh will have to break more rampant crime make it too dangerous to her. Instead he told the heckler that every- than one barrier. 7 travel with the bundles of dollars needed one loved her and led a chant of“Love and by mountaineering scientists. courage”. She eventually walked out. It is no longer worth hauling heavy ma- Avideo ofthe encounterwentviral and chinery to the glacier to extract samples helped Mr Singh, a member of the Ontario from it; Humboldt is too small and dirt- legislature, win the leadership ofCanada’s caked for that. But Mr Braun would like to left-leaning New Democratic Party (NDP) dot it with sensors to measure water run- on October 1st. He is the first member of a off, and erect weather stations to capture “visible minority” to lead a party at federal data on wind, temperature and barometric level. Canada’s Liberal prime minister, Jus- pressure. That would help him understand tin Trudeau, congratulated his new rival on how weather influences the melting of his “barrier-breaking win”. tropical glaciers. Until Venezuela calms Mr Singh faces a difficult task. The NDP down, Mr Braun will be restricted to mon- lost the election in 2015in humiliatingfash- itoring the Humboldt glacier’s decline re- ion after throwing away an early lead in motely, using satellite imagery, which just the opinion polls. Although it was the reveals how fast it is melting. main opposition party before that vote, it That is a loss not just for science but for has fallen to third in the House of Com- people in other Andean countries who mons, with just 44 of the 338 seats. The rely on meltwater from tropical glaciers. In Conservatives, now the official opposi- springtime that runoff is an important tion, have more than twice as many. Mr source ofwater forresidents ofBogotá, Co- Singh must pull his party back from the lombia’s capital, for example. Closer study brinkofirrelevance. of Humboldt’s decline might provide His background could help. A “hipster knowledge that could help them. Venezue- Sikh”, with a penchant forstrikingturbans, la’s ever-deepening crisis makes it impossi- Mr Singh embodies the diversity that Mr Very visible Singh ble fornow. 7 Asia The Economist October 7th 2017 41

Also in this section 42 Ageing and the election in Japan 43 North Korea’s crowded airwaves 43 Berating economic policy in India 44 Coping with immigration in Australia 46 Banyan: Taiwan deserves better

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

Indonesia ta, in which Jokowi’s ally, Basuki Tjahaja Purnama (or Ahok), lost despite high ap- Jokowi at bay proval ratings and the advantage ofincum- bency, has made Indonesian politics look farmore unpredictable. Part of the problem for Jokowi, who is Muslim but broadly secular in his outlook, JAKARTA is rising religiosity. During his presidential campaign, rumours circulated that he was A weakeconomy and rising religiosity make politics unpredictable actually Christian. When he ran for gover- ITH an eager smile and only a few uploads short clips on YouTube, making nor of Jakarta in 2012, Ahok, who is Chris- Wtufts of hair on his chin, Ibrahim, a him seem far more accessible than most tian, was his running-mate and then depu- 30-year-old protester in Jakarta, does not politicians. A hand-held video of a lunch ty. During Ahok’s campaign for governor, seem like much of a Muslim firebrand. Yet he hosted for King Salman ofSaudi Arabia, Islamist activists pilloried him for his reli- on September 29th he and his four-year- which shows the monarch slurping soup gion. And they claimed, misleadingly, that old son, Alid, who clutched a flag embla- (from a golden spoon) has been watched he had criticised the Koran. Asa result, he is zoned with the opening lines of the Koran, 2m times. now serving a two-year sentence for blas- joined thousands of hard-line Islamists In his first year Jokowi appeared to be phemy. A group called the Islamic Defend- marching in protest against the govern- the reformer that liberals had dreamed of. ers Front, which was behind the rally on ment. Their concern? Communism and He scrapped a wasteful fuel subsidy and September 29th, organised huge protests the “criminalisation” of Islam in the introduced a popular health-insurance against him. They are not the only religious world’s most populous Muslim country, scheme, which soon enrolled 130m mem- agitators. In August in East Java a 30-metre he says. In a feat of doublethink, he rails bers, orhalfthe population. State spending statue of Guan Yu, a Chinese deity, was against capitalism, too: “There’s no distri- on infrastructure shot up by 51% in 2014-15, partially covered with a white sheet after bution ofwealth, so the rich become richer to 209trn rupiah ($15.5bn). He has let the local Muslims threatened to tear it down. and the poor become poorer.” Ibrahim corruption commission do its job, unlike According to the Institute of South-East may have a fuzzy idea ofwhat exactly he is parliament, which has repeatedly attempt- Asian Studies in Singapore, most Muslim protesting against. But his muddled ideolo- ed to neuter it. All of this means he has a Indonesians take a relaxed approach to gy could still present a threat to President huge personal appeal, with approval rat- certain aspects of their religion, such as go- Joko Widodo, commonly known as Jo- ings ofaround 68% in both urban and rural ing on the haj (only11% say that is extreme- kowi, who is likely to seek a second five- areas, and among people with different ly important). In other areas, however, year term in 2019. levels ofeducation. they appear to be more doctrinaire: the Jokowi’s election in 2014 was hailed by majority think that women should wear a enthusiastic observers as a turning-point Ratings and slatings hijab and 67% think that instituting sharia in Indonesian politics. When campaigning Nonetheless, Jokowi’s chances of being re- would “strengthen moral values”. Reli- he emphasised his probity and humility. elected have started to look shaky. A sur- gious violence surged after the overthrow He promised to improve crumbling roads, vey conducted in September by the Centre of Suharto, Indonesia’s long-serving ports and airports, remove graft from poli- for Strategic and International Studies, an strongman, in 1998, but then appeared to tics and boost foreign investment. Com- Indonesian think-tank, found that only dissipate; it is again becoming more com- parisons were made to Barack Obama, on 50% of those polled would vote for him. mon. “It is quite clear that there is a rise of the basis that the two men both had a cer- That suggests that the race in 2019 might be tribalism across the world and we are not tain gawkycharm and both appeared to in- as tight as the one in 2014, which Jokowi immune from it,” says Tom Lembong, the spire an enormous amount of hope. An won with 53% of the vote. An upset in the head ofthe investment-promotion agency. avid user ofsocial media, Jokowi regularly election in April for the governor of Jakar- Yet religion would not be such a handy 1 42 Asia The Economist October 7th 2017

2 tool for Jokowi’s opponents if the econ- selves. Manual labourers sprawl on bags He wants voters’ support for a plan to omy were faring better. Since 2014 annual full ofmerchandise, looking at their smart- spend some of the revenue from a sched- GDP growth has hovered around 5%, phones or sleeping. The workers complain uled rise in the consumption tax to reduce slightly below the levels achieved under that sales have slumped over the past two the cost of nurseries and universities, in- Jokowi’s predecessor and well below the years and that there are not enough jobs stead of paying down the national debt. rates Indonesia registered in the 1970s and foryoung people. But the debt, now at 250% ofGDP, is itself a 1980s. The fall in commodity prices, cou- Rehmad Yogi, a 22-year-old who works burden that will weigh on young people. pled with dauntingly complex regulations, in a shop where the female mannequins “The harm may be almost invisible has caused foreign investment to slump. sport headscarves, thinks the economy is now,butthere are enormousaccumulative The proportion of a company’s shares that the “most important thing”. He says he effectsforthe future generations,” saysIsao can be in foreign hands varies from indus- supports Prabowo Subianto, a former gen- Kubota, the chairman of Nishi-Nippon Fi- try to industry, with different rules for eral who was Jokowi’s adversary in 2014 nancial Holdings. He says the government everything from carmaking to berry culti- and probably will be again in 2019. Nanto, needs to look more closely at expenditure. vation. Infrastructure spending has also who is 19, travels 60km from his home Even some pensioners agree. “It’s so hard slowed down since 2014. Structural re- town ofBogor on a motorbike each day for to survive on our pension that sometimes forms, includingan overhaul ofthe tax sys- work. He, too, prefers Mr Prabowo, though we think the idea is for us not to survive,” tem, are sorely needed. Yet Mr Lembong he worries that he is “too violent”. Sang says Shigenobu Mori, who says he receives says no big reforms are in the works. Phim, who works at a stall selling knock- around ¥100,000 ($888) a month, which is The result can be glimpsed in Tanah offsportswear,isan enthusiasticsupporter less than a third of the median household Abang, a wholesale clothes market in cen- of Jokowi, who is the “best president of In- income. “But we have to or it will be even tral Jakarta. On a weekday morning few donesia”. Yet even he seems cautious. Ev- more ofa struggle forour children.” customers explore its labyrinthine aisles of ery time Indonesians go to the polls they Around Kyushu, an LDP stronghold, fabrics, jeans and patterned dresses. In- appear to be more and more influenced by voters have little faith that the party will stead most shopkeepers chat among them- religion, he says anxiously. 7 tackle the costsofJapan’schangingdemog- raphy. Many suspect the government will put off the tax rise for fear of derailing the Japan’s election campaign economy’s tentative recovery, as hap- pened in 2014. But voters do not have Mannequins do not cast ballots muchtrustinthe newlyconfigured opposi- tion parties, which are still in flux and have yet to come up with clear manifestos. The most formidable opposition force, the Party of Hope, claims to be more con- LDP Fukuoka cerned than the about fiscal discipline, yet wants to postpone the tax rise. Voters want a plan to handle a declining and ageing population Some reckon the solution doesnot lie in HE city of Fukuoka, the biggest on the 35%, compared with 28% today. The medi- national policy. Soichiro Takashima, the Tisland of Kyushu, is buzzing. Hip young an age will rise by almost seven years, to mayor of Fukuoka, says cities need to things at Fukuoka Growth Next, a city-run 54. Although Fukuoka is still growing, create their own opportunities “from the corporate incubator, bash away on their thanks to immigration from smaller towns grassroots up” by fostering small business- laptops. As the sun sets they gather to sup and villages, Kitakyushu, the island’s sec- es. Whoever wins the election could draw in the chi-chi bars beside the river. Fukuo- ond city, saw its population shrink by 1.5% at least one lesson from Fukuoka: the city, ka isJapan’sfastest-growingmetropolis, in- (15,000 people) in the five years to 2015. which is closer to Shanghai and Seoul than cludingfor15-29-year-olds. Itwould be idyl- Some villages are so depopulated that lo- to Tokyo (see map), is more open to immi- lic, but forthe fact that these are the people cals have decorated them with manne- grants than the rest ofJapan. 7 who wonder how they will bear the bur- quins to provide a semblance ofactivity. den ofJapan’s declining and greying popu- Supporting the old already puts a huge lation. The current election campaign, alas, burden on the young. Spending on medi- is doing little to reassure them. cal care, pensions and nursing accounts for Demographers reckon Kyushu, the a third of the national budget. The days southernmost of Japan’s four main is- when graduates could expect a job for life lands, will lose 19% of its people by 2040. are over. That may make the economy Over the same period the share of Japan’s more flexible, but worries younger voters. population over the age of 65 will rise to “I don’t know ifI will be able to afford chil- dren,” says a woman in her 30s. The outgoing government of Shinzo NORTH KOREA Abe, from the long-ruling Liberal Demo- Pyongyang craticParty(LDP), hasmade some movesto Seoul spread the burden more equitably. It is en- SOUTH JAPAN KOREA couraging elderly people to keep working Yellow Tokyo Sea Kitakyushu and is debating raising the retirement age CHINA Fukuoka for civil servants by five years, to 65. This KYUSHU year it increased the amount those over 70 Shanghai must pay for their medical care before the government will chip in. It has opened PACIFIC more public nurseries to clear long waiting OCEAN lists for child care. Taipei Mr Abe’s ostensible reason for calling 500 km TAIWAN the election was another sop to the young. Village life The Economist October 7th 2017 Asia 43

India’s economy Fifth columnists

Delhi The prime ministeris attacked from an unexpected quarter INCE leading his party to a landslide ickhard-right economist who serves as a Svictory in 2014 Narendra Modi, India’s BJP MP in the Rajya Sabha, the upper prime minister, has romped from house ofparliament, has lately described strength to strength. His Bharatiya Janata India’s economy as being in a tailspin. Party (BJP) has captured one state capital Perhaps even more cuttingly,Swami- after another, building daunting mo- nathan Gurumurthy,a prominent Hindu- mentum ahead ofthe next national nationalist thinker whose unorthodox elections in 2019. So it is all the more economic convictions are said to influ- remarkable that a recent squall ofcriti- ence Mr Modi, recently decried the gov- cism has come not from India’s lingering ernment’s policies as “too many dis- left-liberal elite, nor from poor Indians ruptions, too soon”. Radio in North Korea hurt by erratic policies, but from within Replying to his critics, Mr Modi thun- the BJP’s own Hindu-nationalist fold. dered on October 4th that, whereas his Making waves Two BJP grandees, Yashwant Sinha, a was not the first government to suffer formerfinance minister, and Arun Shou- falling growth rates, it is the first to make rie, a formerWorld Bankeconomist and serious efforts at tidying up and reform- cabinet minister, have led the charge. In ing India’s economy. While economists SEOUL an op-ed article titled “I Need ToSpeak continue to debate, political analysts are Up Now”, Mr Sinha lambasted Mr in agreement. Unless India’s opposition Kim Jong Un’s propagandists have a Modi’s government forbotching the pulls itselftogether, it still is no threat to new rival. They’re not happy about it chance offered by low oil prices. GDP Mr Modi’s rule. “In 2014 they underesti- O YOU want to be pretty?” asks a growth has fallenforfive quarters in a mated the man they derisively called a “Dteasing male voice. “Do you want row.In the three months to June it fell to mere chaiwallah, or tea-boy,”says Milan to lose weight?” Such is the enticing intro- 5.7% year on year, down from a heady 9% Vaishnav ofthe Carnegie Endowment for duction to a recent radio show aimed at 18 months ago. Investment has also International Peace, a think-tank. “It North Koreans, “Let’s Learn Market Eco- slowed (see chart). “The prime minister would be perilous forthem to do so nomics”. After a jaunty jingle and a skit claims that he has seen poverty from again, given that Modi has outfoxed them about how falling in love will make the lis- close quarters,” Mr Sinha’s broadside at each and every juncture.” tener healthier and leaner, the remaining concluded. “His finance minister is work- half-hour is devoted to a worthy, but rather ing overtime to make sure that all Indians less gripping, profile of a successful South also see it from equally close quarters.” Slouching tiger Korean businessman. Mr Shourie has been even more acer- India, % change on a year earlier Competition for North Koreans’ atten- bic. Last year’s voiding ofhigh-denom- tion is increasing. The country’s approved ination notes was “idiotic”, he told a 10 media are crammed with fawning reports television interviewer. The core compe- 8 about the latest “field guidance” from its tence ofMr Modi’s government is “event GDP dictator, Kim Jong Un—indispensable tips management”, he sniffed. It claims its 6 on topics such as growing juicy apples or policies have been bold, but “suicide too 4 perfecting a nuclear weapon. But those is a bold step.” 2 who buy illicit short-wave radios can pick Mr Modi’s supporters dismiss the two + Industrial production* up at least ten foreign stations targeting formerministers as disgruntled retirees. 0 North Koreans. The latest, BBC News Kore- Both are in factassociated with an earlier Investment – an, went on air on September 25th. generation ofBJP leaders whom Mr 2 2014 15 16 17 The broadcasters’ motives vary, asdoes Modi’s team has increasingly sidelined. their quality. Some are staffed by defectors But even Subramanian Swamy,a maver- Source: Haver Analytics *Excluding construction who hope to encourage others to flee. Voice of America sometimes plays K-pop, the cheesy tunes that are ubiquitous in the likely to be seen as impartial than Ameri- 3m of them have mobile-phone subscrip- South but sound fresh to northern ears. can or South Korean stations. “The UK is tions. Butradio remainsa rare source ofup- Free North Korea Radio hardly bothers to not really framed as an enemy,” he says. to-the-minute news from outside. maskits agenda. One show, “The Dictator’s Measuring the audience is impossible. Mr Kim’s propagandists do not wel- Doom”, recounts the messy fates of totali- “We’re not going to send anyone with a come rivals. Most stations broadcast late at tarian rulers. (The regime counters with its clipboard there,” says one station boss. Yet night so that listeners can tune in at home own station, Voice of Korea, which is a surveyofdefectorsand otherNorth Kore- in secret. Those who are caught risk being beamed to the South.) ans abroad by the Broadcasting Board of sent to a prison camp if they cannot bribe The BBC saysitwill provide neutral cov- Governors, which oversees Voice ofAmer- theirway out oftrouble. The regime tries to erage, not foment revolution. Its half-hour ica, found 29% had listened to foreign jam foreign networks by playing loud mu- broadcasts, which are also available in the broadcasts before leaving. Their true reach sic on the same frequencies. But the exter- South, include a news bulletin, a weather is probably greater, since news picked up nal broadcasters do not believe it can block forecast and an English lesson. Sokeel Park on the radio soon spreads by word of every foreign station all the time. The BBC, of Liberty in North Korea, a group that mouth. North Koreans can watch foreign for one, is confident that some of its broad- works with defectors, reckons it is more dramas on smuggled flash drives and over casts are audible. Stay tuned. 7 44 Asia The Economist October 7th 2017

Immigration to Australia wages in certain industries. Bob Birrell of the Australian Population Research Insti- Almost one in three tute notes that Australia’s points-based system, which is designed to attract work- ers with skills that are in short supply, has brought a deluge of accountants and IT professionals. Over half of foreign stu- PERTH dents study business and commerce be- cause they believe that will give them ac- A surge in migrants causes biggerstrains to infrastructure than to politics cess to high-paying jobs, he says, but they HE prime reason for the decline in are often left on “the fringes of the labour “Tliving standards formany Australian Up, up and away market because it’s difficult to compete workers is our staggering population Australia, 1986=100 with locals”. Overall, however, Australia’s growth,” thunders Dick Smith, a cam- 1,000 Productivity Commission finds no evi- paigning millionaire, in an apocalyptic * dence that migrants suppress wages or dis- manifesto. He is right about the staggering 800 place locals from jobs. They help raise GDP growth. The number of children the aver- per person, not lower it, in part by making age Australian woman has fell below two 600 Australia’s population more youthful, thus in the 1970s and has stayed there. Yet since House prices offsetting the ageing ofits baby boomers. 400 then Australia’s population has grown by But the surge in immigration has 70%, thanks almost entirely to immigra- GDP per person caused problems, most obviously in terms † 200 tion. Over 28% of today’s residents were of planning. Theoretically, there ought to Population born overseas—a higher share than in Can- 0 be plenty of space for the 230,000-odd ada or New Zealand, let alone Britain or 1986 90 95 2000 05 10 17 yearly arrivals, since Australia is one of America. The number of newcomers con- Sources: Haver Analytics; *Q1-Q2 average world’s least densely populated countries. IMF; UN †Forecast tinues to grow. Net overseas migration (a But the vast majority of its people, and an measure of immigrants minus departing even greater share of its immigrants, clus- Aussies) has nearly doubled since 2000. sion, and that incomes have been growing ter in a few cities near the coast. Despite Mr Smith is also right about the decline faster than the population. In fact, immi- substantial investment, urban infrastruc- in living standards, albeit only recently. grants have had a hand in that: a growing ture is struggling to keep pace. Melbourne Wage growth hasbeen draggingalongat its population consumes more goods and ser- and Sydney, in particular, are pulling at the lowest rate in almost 20 years, and dipped vices. Recent immigrants have provided la- seams. Commuters are subjected to snarl- below inflation earlier this year, meaning bourfora miningboom and, when that pe- ing traffic, the costs of which are predicted that the typical workeris losingpurchasing tered out, demand for housing and to double by 2030. The number of passen- power. Although the unemployment rate, manpower to build it, helping to keep the gers on Sydney’s commuter trains, mean- at5.6%, islowbythe standardsofrecent de- economy ticking over. Some 600,000 for- while, grew by11% in the year to July. cades, underemployment is close to a re- eigners spent A$20bn ($14.6bn) to attend Immigration has also stoked house cord. Philip Lowe, the governor of the Re- Australian schools and universities last prices (see chart). In Sydney the average serve Bank of Australia, the central bank, year, making education the country’s home costs A$1.2m, up almost 20% in a concedes that employees “feel like there is third-biggest export. Many take local jobs year. By one count, the city is the world’s more competition” and are worried about and pay taxes after they graduate. second-most expensive relative to in- “foreigners and robots”. It is true that immigration appears to comes. The once-standard house on a Yet, to the frustration of alarmists like have raised unemployment and lowered quarter-acre lot is beyond the means of Mr Smith, relatively few Australians seem most. Those who do buy a home are heavi- tothinkthewaytoboosttheirincomesisto ly indebted: at134%, the ratio of household stem the influx of immigrants. In 2015 Gal- debt to GDP is also one ofthe highest in the lup, a pollster, found that Australia was the world. A recent analysis found that buyers only bigWestern country where more peo- in Sydney would need to make A$190,000 ple thought immigration should rise (30%) a year—more than triple the average sala- than thought it should fall (25%). Regular ry—to repay their mortgages comfortably. surveys conducted by the Scanlon Foun- The conservative government led by dation, which works to integrate immi- Malcolm Turnbull has promised to free grants, show that the sense that immigra- more land for development and penalise tion is too high has fallen substantially investors who leave properties empty. But since the1990s. Pauline Hanson, a populist it has also pandered a bit to the likes of Mr senator who made her name then, warn- Smith by changing immigration rules. The ing that Australia would be “swamped” by prime minister said he was “putting Aus- Asians, has started fulminatingabout Mus- tralians first” by requiring temporary mi- lims instead, to little avail. When she re- grants to have more work experience and cently tried to stir up public opinion by better language skills. He wants would-be wearing a burqa in parliament, she attract- citizens to pass tougher language tests and ed more ridicule than adulation. prove that they share Australian “values”. In part, that is because Australia has a Previously, new arrivals had to be able to long history of immigration, from Chinese identify Don Bradman, a celebrated crick- joining the gold rushes of the 1850s and eter (contrary to popular belief, they did 1860s to Afghan camel drivers helping to not need to know his batting average). Mr explore the outback in the late nineteenth Turnbull wants to be sure they frown on century.It helps, too, that the economy has domestic violence and sexism. He might been growing for 26 years without a reces- Crowded but welcoming have added xenophobia to the list. 7 THIS SERIES IS SUPPORTED BY

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Despite its admirable democratic evolution, Taiwan receives precious little recognition nism, harking back to the days when Chiang still sought unifica- tion on the KMT’s terms. That fantasy now exists only among a few diehards. These days governments in Taiwan, including KMT ones, claim to rule only forTaiwan, not forall ofChina. Regardless, China’s hounding of Taiwan is relentless. The is- land is down to 20 diplomatic allies, the most significant of which is probably the Vatican. The most recent country to be peeled away by Chinese promises ofjuicy infrastructure projects and soft loans is Panama, which switched allegiance in June. An unspoken diplomatic “truce” had prevailed while the KMT’s Ma Ying-jeou was president in 2008-16. He was viewed in Beijing as sympathetic to eventual reunification. But since the landslide presidential victory last year of Tsai Ing-wen, whose Democratic Progressive Party (DPP) has strong pro-independence elements, Taiwan is back in the doghouse—despite Ms Tsai’s moderation and declining popularity—and the truce appears to be off. Chinese pressure ensuresthatTaiwan isincreasinglyexcluded even from international forums where it has something to offer. The WHO, forinstance, did not invite Taiwan to attend this year’s World Health Assembly, where it had been an observer since 2009. At a multilateral conference hosted by Australia on conflict OR a small island-nation, bobbing about on the opposite side diamonds in May, Chinese diplomats boorishly interrupted an Fof the globe, Taiwan has been paying close attention to the re- Aboriginal welcome ceremony to protest against the presence of cent referendums that have taken place, amid much controversy, a Taiwanese delegation, which had to leave. in Catalonia and Kurdistan. Interest in the Catalonian stand-off is Earlier attempts to join the UN not as the Republic of China perhaps to be expected. After all, the disputed vote on indepen- but simply as “Taiwan”, made by a previous DPP president, Chen dence on October 1st, which the Spanish authorities did their Shui-bian, an independence firebrand, have been quietly damnedest to stop, has shaken Europe. More striking is that, in a dropped by Ms Tsai. She has also fended offcalls to make it easier media landscape more given to trivia and sensationalism, For- to hold a referendum on independence—despite a recent hunger mosa Television, whose viewersfavourformal independence for strike by some pro-independence types. After all, just as any at- Taiwan, sent a film crew to provide in-depth coverage of Kurdis- tempt at a referendum in Tibet or Xinjiang would be met with tan’s vote last month on seceding from Iraq. wholesale repression, so China hints it may counter any referen- Small, plucky peoples seeking independence: Taiwan falls dum in Taiwan with force. into the category. It is a model of self-determination, peace and the promotion of human rights—the core principles of the UN. Sufferwhat you must Formerly a thuggish one-party dictatorship under martial law, And so, as Brian Christopher Jones of the University of Dundee over three decades Taiwan has transformed itself into a vibrant puts it, despite 30 years of democracy, Taiwan remains as vulner- democracy that is notable for being decent, prosperous and civil, able as ever, protected militarily by America but left undefended albeit with wildly rumbustious politics. What is more, by almost diplomatically by most of the world. Regrettably, that will not any measure, Taiwan is already, in effect, a sovereign country. It change soon. It is not just because of China’s growing clout in elects its own president, raises its own army and pursues its own shaping its environment to its liking. America, too, under Donald foreign policy—dream on Catalonia. Yet, like Catalonia and Kur- Trump has turned away from promoting the human rights and distan, it feels short-changed, denied international recognition democratic values of which Taiwan is a beacon. Just this week, and a sense ofits rightful status in the world. Mr Trump welcomed to the White House Thailand’s prime min- The reason, ofcourse, is China. Communist dogma views Tai- ister, Prayuth Chan-ocha, a former general who leads a junta that wan as the home of a regime that was toppled in 1949 and that it seized power from a democratically elected government in 2014. still sees as illegitimate. Taiwan’s return to the fold, by force ifnec- It has suppressed political activity and free speech, and arrested essary, is an integral part of the party’s cherished goal of making hundreds for the most muted expressions ofdissent. China whole again, as it sees it. But the dogma is misleading. For Superpower politics would be exerting pressure on the rela- one thing, Taiwan did not break away from China. Arguably, it is tionship between America and Taiwan whoever was in the the reverse: the Communists rebelled against Kuomintang (KMT) White House. But before his inauguration Mr Trump took a con- led by Chiang Kai-shek, leaving him in charge only of the island, gratulatory telephone call from Ms Tsai, the first time in nearly the one part ofChina they have never ruled. fourdecades that a president orpresident-elect had been in direct Yet since 1971, when the People’s Republic of China (ie, the contact with a Taiwanese leader. It was a great symbolic show of Communists in Beijing) tookover China’s seat at the UN from the support. Nearlya yearon, MrTrump appearsto dwell little on Tai- Republic of China (ie, the KMT in Taipei), China has done its ut- wan. Instead, he will soon travel to Beijing to carry on a love-in most to shrink the international space in which Taiwan may op- with China’s strongman, Xi Jinping, that began at Mar-a-Lago in erate. It does this on the basis of the “one China principle”—that April. As the conquering Athenians said to the cornered Melians since there is only one China, countries seeking relations with in Thucydides’s account of the Peloponnesian war, “The strong China must break off relations with Taiwan. This is an anachro- do what they will and the weaksuffer what they must.” 7 China The Economist October 7th 2017 47

Also in this section 48 Rehabilitating Chiang Kai-shek

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Ageing in Hong Kong come lessbusiness-friendlyifitturns into a welfare state with high taxes. Pension pains Public funds for the elderly are cur- rently aimed at those living in poverty. For such a rich society, the poorare surprising- ly numerous. The most visible are the “cardboard grannies”, old women who HONG KONG collect boxes in poor neighbourhoods to sell for recycling in order to make ends Rapid ageing threatens to strain Hong Kong’s public coffers, and its social contract meet. Yet many more elderly poor are hid- HE chief executive of Hong Kong, Car- double to 2.4m in 2036, or just over 30% of den from view, say charity workers. Offi- Trie Lam, says she wants to heal the terri- the population, the government reckons cial figures show that in 2015, more than tory’s “serious” divisions. On October11th, (see chart). Last year the proportion was 300,000 people aged 65 and over, or30% of in her most important policy-related less than 17%. the total, languished below the official speech since she took office in July, she is As their numbers swell, so do demands poverty line, which is set at a monthly in- expected to announce herplansforachiev- that the government do more to help the come ofHK$3,800 ($490). ing that. One of the most bitter divides is elderly. But Hong Kong has always prided Anyone aged 70 or over can get an al- evident in the membership of the Legisla- itself on its low taxes and fiscal conserva- lowance of at least HK$1,325 a month. In tive Council, orLegco, to which she will de- tism (see page 87). It has consistently en- 2015 144,000 ofthe verypoorestamong the liver her proposals. There is a rift between joyed budget surpluses. Giving pensioners over-65s received higher monthly pay- advocates of democracy and those who more money could break those principles. ments of at least HK$3,240 (as well as support Mrs Lam’s government and its As often in Hong Kong politics, the debate health-care discounts and, in many cases, backers in Beijing. But on political issues over what to do pitches democrats, who subsidised public housing). Others under Mrs Lam’s hands are tied. The Communist generally support the idea of more hand- the povertyline aswell as244,000 above it Party opposes any concessions to demo- outs, against pro-establishment politi- also qualified for higher payments, at a crats. Instead she will focus on other pro- cians, who worry that Hong Kong may be- slightly lower rate than the amount to blems—including, many Hong Kongers which the poorest are entitled. hope, the suffering of the elderly in a city The system involves means-testing, thatisrapidlyageing. Viewson howto deal Greying growth which some Hong Kongers find degrading. with this are nearly as divided as they are Hong Kong, population by selected age group, m Past studies have concluded that over 10% over demands foruniversal suffrage. of those who could claim social security 3.0 Life expectancy in Hong Kong pips that FORECAST do not do so—some of them for fear of los- of Japan. On average, male Hong Kongers 2.5 ing face. But the handouts are a pittance. At live for 81.3 years and women for 87.3, 85+ a vast public-housing complex in Kwun helped by the city’s affluence and low inci- 2.0 Tong district, elderly residents tell of just dence of smoking. That is welcome, but a scraping by. One says she eats the cheapest 75-84 1.5 huge problem when coupled with a dwin- ofnoodles to economise on food. With the dling fertility rate which has resulted in 1.0 power-hungry air-conditioning turned off, ever fewer working-age people to support the heat in her flat is stifling. 65-74 0.5 the elderly, and implacable public opposi- Critics call for a “universal” state pen- tion to looser controls on immigration 0 sion paid out to all, regardless of their in- which would allow more workers to enter. 2016 26 36 46 56 64 come. Radically, some even call for tax in- The numberofpeople aged 65 orolderwill Source: Government statistics creases to pay for this (the majority of1 48 China The Economist October 7th 2017

2 people in Hong Kong pay very little in- China and Taiwan tional day, complete with replicas of the come tax). They also want changes to the Chiangs’ furniture and a living room re- Mandatory Provident Fund (MPF), a com- Mansion stored to Western-style elegance in Soong’s pulsory pension scheme that is privately refined taste. Within a year, it had received managed. It covers about 2.8m people, or makeovers half a million visitors. Several of Chiang’s nearly three-quarters of those in work, but former mansions in China have also be- the jobless fall beyond its reach. For many NANJING AND TAIPEI come tourist sites after similar makeovers. who are covered, payouts are low. In a re- The residence in Nanjing is usually Chiang Kai-shek’s residences in China cent study, PwC, a consultancy, noted that called Mei-ling’s Palace—a sign that the have become unlikely attractions since the MPF was set up in 2000, its annu- name of Chiang’s wife (who died in 2003) al returns had been 2.8% on average. That is ESTLED in a wood outside the eastern is fine to use forsuch purposes but his own above the inflation rate, but still poor com- NChinese city of Nanjing is a mansion is still somewhat sensitive. In the gift shop, pared with similar schemes in other rich used as an official residence in the 1930s however, a cartoon of the beaming couple economies. and 1940s by Generalissimo Chiang Kai- holding ice lollies is cheerily captioned Opponents of change express horror at shek, the Chinese leader who fled to Tai- “The taste of old Nanjing.” On sale is a bio- Western countries’ ballooning welfare wan to escape Mao Zedong’s Communist graphy of Chiang which notes that he was bills. Some even say that families should army. After the civil war, Chiang’s name one of the four main leaders of the Allied shoulder the burden of caring for the old, became synonymous with evil in China. powers during the second world war. The as is traditional in Chinese societies. The No longer. The building (pictured) in what book acknowledges that Chiang helped government is in a quandary. It believes was then China’s capital has become a tou- China become a founding member of the that the anger of the poor has exacerbated rist hotspot. There is no hint that this was UN. “Until the time of his death, he cher- conflict between democrats and the estab- the home ofMao’s mortal enemy. ished the sacred ideal that China could be lishment. To show its concern, it held a Over the past two decades the Gis- reunified,” it says. public consultation last year on how to en- simo—as his American allies once irrever- The Communists hope that by playing sure “retirement protection”. But its re- ently called the dictator, who died in 1975— up this aspect of Chiang they can woo sponse to the suggestions made by partici- has morphed in the minds of Communist members of his party, the Kuomintang pants was clear: universal pensions would officials from arch-villain to patriot. His (KMT), who form Taiwan’s main opposi- be too expensive. Boosting the means-test- glamorous wife, Soong Mei-ling (“Mis- tion. Some of them, at least, still regard ed system would be a better choice. simo”), has become something of an idol. Chiang as a hero. But the ruling Democrat- The Communist Party is signalling that, for ic Progressive Party (DPP) does not. It Damned if you don’t all its misgivings about Chiang, at least he blames Chiangforthe deaths ofthousands The ageing of Hong Kong means the gov- resolutely believed that Taiwan was an in- of people during the crushing of an anti- ernment is having to fork out more on the tegral part of China, even if not of a Com- KMT uprising in Taiwan in 1947 and for his elderly anyway. Spending rose by around munist-ruled one. It wants Taiwan’s cur- dictatorial rule thereafter. half to HK$65.8 billion between the fiscal rent government, which bridles at such a When Taiwan began opening its own years of 2012-13 and 2016-17. A new annuity notion, to take note (see Banyan). Chiang villas in the 1990s, the KMT had scheme will allow pensioners to invest a When the Communists took over in been ruling the island continuously since lump sum and receive a guaranteed return. 1949 they turned the three-storey edifice, the civil war. Chiang remained in favour— Eventually,argue some supporters of state with its roof of glazed green tiles and tip- the country’s main international airport pensions, the government will have to tilted eaves, into a state guesthouse. Its was still named after him—but even the raise taxes to pay forall this anyway.Better, eventual restoration was helped by the KMT was beginning to question his brutal- they say,to introduce a pension now that is chance discovery in an old closet of an ar- ity. Tourists could tell from the villas’ un- paid for jointly by employers, employees chitectural plan of the original building. derground tunnels and menacing sentry and the government. After months of repairs the villa was re- postshowworried Chianghad been about Polls suggest the public supports the opened on October 1st 2013, China’s na- uprisings and attempts to assassinate him. idea. One conducted last year by the Open After the DPP came to power in 2000 it University ofHong Kong found that 72% of began dismantling the Chiang cult. Many 1,800 people interviewed would be will- statues of the generalissimo were re- ingto pay at least a little extra in income tax moved; about 100 of them are now dotted if it would secure a state pension. But Mrs round a park next to one of Chiang’s villas Lam is digging in her heels. To the govern- in Cihu district in northern Taiwan, where ment and to Hong Kong’s tycoons, democ- his body lies in a black marble sarcopha- racy is scary for two reasons. It might pro- gus. Several of the mansions have been duce a leader who is inimical to the party turned into hotels and art galleries. The air- in Beijing, and it would probably produce port was renamed in 2006 as Taiwan Tao- one who is more sympathetic to the pub- yuan International Airport. lic’s demands than to those of businesses. De-Chiangification was suspended Universal suffrage might pave the way for during the KMT’s return to power between universal pensions. That is one more rea- 2008 and 2016. Now Taiwan’s government son why Mrs Lam does not want to tinker is at it again. It says it wants to redesign the with the political system. 7 majestic Chiang Kai-shek Memorial in the centre of Taipei, the capital. It has not said what this will entail, nor whether it will Journalist wanted: The Economist is looking for a agree to the demands of many DPP activ- journalist with a good knowledge of China and of standard Chinese, who is keen to be posted in Beijing or ists that its large bronze statue of a seated elsewhere outside the UK, to help with our coverage of Chiang be removed. China would proba- foreign affairs. Applicants should send a CV and an bly be upset were it to be hauled away. In original 600-word article on any subject, written in the style of The Economist, to [email protected] by his tomb, the Gissimo would not know October 31st. With the Missimo’s car in front which way to turn. 7 SPECIAL REPORT EMERGING MARKETS October 7th 2017

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Out of the traps

After a rocky few years, emerging markets have become more mature and resilient, says Simon Cox. But along with the drama, some of their dynamism has gone IN 1875 THE Ottoman Empire defaulted on half its foreign debt, a victim CONTENTS of the “first major debt crisis of the developing world”, according to one account of the mess. Its creditors, led by the Imperial Ottoman Bank, 6 Definition forced the empire’s grand vizier to accept a humiliating solution. Rather What’s in a name? than wait to be repaid out of tax revenues, they won the right to collect 8 The middle-income trap half a dozen taxes themselves, including stamp duty and duties on alco- Mixed-income myths hol. After 15 years of tax farming, the Imperial Ottoman Bank was com- fortable enough to build impressive new headquarters in Istanbul, neo- 12 Macroeconomic resilience orientalist in style on one side and neoclassical on the other. Freedom from financial fear Since long before the term was invented, emerging markets have 14 Commodities provided a rich source ofboth peril and profit. That financial crisis in 1875 A drag, not a curse was followed by many others, including a hatful in Turkey. And like the Imperial Ottoman Bank, investors with strong stomachs have often prof- 16 Premature ited the most from emerging markets at their worst. Hedge funds that deindustrialisation bought impaired Argentine debt for roughly 20 cents on the dollar after Sew what now? its default in 2001extracted a handsome settlement from its new govern- 18 Protectionism ment last year, worth perhaps ten times what they paid, according to Anti-trumping duties some estimates. The more recent history of emerging markets has also tested plenty 19 Political risks of stomachs. Within days of Donald Trump’s election victory his popu- Movements in EM major list promises raised American bond yields, sending the price of emerg- 20 Convergence ing-market assets the other way. Trading partners winced at his tweets Merging markets threatening American companies planning to shift their production abroad. This “Trump tantrum” appeared to be the latest in a grim se- quence ofsetbacks foremergingmarkets. It followed China’s botched de- valuation of the yuan in 2015, the collapse in oil and iron-ore prices in 2014 and the “taper tantrum” in 2013, when mere talk of a slowdown in asset purchases by America’s Federal Reserve threw emerging markets into turmoil. The Trump tantrum came on top of political risks arising in emerging markets themselves, including Russia’s invasion of Ukraine, A list of sources is at the Philippines’ waron drugs, a successful coup in Thailand in 2014 and a 1 Economist.com/specialreports

The Economist October 7th 2017 3 SPECIAL REPORT EMERGING MARKETS

big international bank to nearly triple its loans in two years. The Pointing the right way bank’s own manager peddled South African mining shares such Emerging markets, total returns, $ terms, Jan 2013=100 as the Transvaal Consolidated Land and Exploration Company. When the shares crashed, the bank suffered a run, turning to the 130 government and its London owners for a bail-out. This reckless 120 financial institution was none other than the Imperial Ottoman Dollar bonds Bankthat had grown rich from tax farming a few years earlier. 110 Pessimists can find a number ofreasons to worry, some tra- ditional, others more novel. Classic emerging-market crises of- 100 DC Stocks ten begin in Washington, , when the Fed raises interest rates 90 or tightens monetary policy in other ways. So nerves will jangle if an uptick in American inflation pushes the Fed to increase 80 Local-currency bonds rates faster than the market now expects. And for a new varia- 70 tion on this old theme, investors can fret about the Fed’s recent 2013 14 15 16 17 decision to begin trimmingthe assets it bought afterthe global fi- Source: Thomson Reuters nancial crisis. The commodity cycle is another time-tested source of in- stability. The halving of oil prices in the second half of 2014 in- 2 failed one in Turkey in 2016, the removal of an unpopular presi- flicted great pain on Russia and other crude exporters. Converse- dent in Brazil for a fiscal misdemeanour, and the survival of em- ly, costly oil in the years before 2014 added to the chronic trade battled rulers in South Africa and Malaysia. deficits and inflation suffered by countries such as India and Strange as it may seem, though, the presidency of Mr Pakistan. The Latin American debt crisis in 1982 was caused by a Trump, an avowed opponent of globalism, has coincided with a combination of a commodity shock and a Fed shock. The petro- recovery in globalisation. In the first half of this year the volume dollarsearned byGulfexportersduringthe oil-price spikes ofthe of emerging-market exports was 4.6% up on a year earlier, the 1970swere deposited in American banks, which lentthem incau- fastestgrowth since 2011, accordingto the NetherlandsBureau for tiously to Latin American governments. These loans then be- Economic Policy Analysis, a government agency. The growing came impossible to repay when the Fed raised interest rates demand for semiconductor chips and sensors lifted South Ko- sharply in 1979-81. rea’s and Malaysia’s electronics exports; the recovery of the oil price bolstered Russia; and a favourable turn in the weather The have-nots benefited Brazil’s harvest ofsoyabeans and corn. Countries not blessed with commodities have worries of Higher exports have helped lift GDP. In the first half of 2017 their own. The only natural resource in many emerging markets the four biggest emerging economies (Brazil, Russia, India and is manpower, but a growth model based on labour-intensive China, known as the BRICs) all grew simultaneously for the first manufacturing now faces two unaccustomed threats. One is time in three years. Emerging-market growth still cannot match automation. The growing versatility and user-friendliness of ro- that in the miracle years of 2003-06, but it has been equally botic technology may be eroding the advantages of cheap la- broad. So far21ofthe 24 countries in the MSCI emerging-markets bour, resulting in what economists call “premature deindustrial- index, the most popular stockmarket benchmark, have reported isation”. Post-industrial rustbelts are common in rich economies GDP figures for the second quarter of this year, and all of them like America. The fear is that emerging-market industries will were up on the previous quarter. Not since 2009 has growth turn rusty before their people grow rich. been positive in every member that publishes quarter-on-quar- Another threat is protectionism. Emerging economies have ter numbers. alwaysrelied on accessto the world’sbiggestmarketsfortheir ex- Thisimprovementin emerging-marketgrowth hasbeen ac- ports. But the Trump administration is keen to reduce America’s companied by renewed enthusiasm for their currencies, bonds trade imbalances, and has become more active in imposing anti- and shares (see chart above). In August these countries recorded dumping duties and other tariffson goods it considers too cheap. their ninth month in a row of capital inflows from portfolio in- It has so far opened investigations into 65 potential cases of vestors, the longest streaksince 2014, according to the Institute of dumped or subsidised products (from Chinese staples to Colom- International Finance. An index of emerging-market exchange bian citric acid), compared with 44 in the same period of2016. 1 rates compiled by MSCI has risen by14% since its trough in Janu- ary 2016. It has enjoyed its best 18 months since 2011. Even ill-fa- voured currencies such as the Russian rouble, Mexican peso and Chinese yuan have defied their doubters, strengthening against Strength in numbers the dollar this year (see chart on right). Currencies against the dollar, % increase Dec 31st 2016-Sep 20th 2017 The price of emerging markets’ “hard-currency” dollar 05101520 bonds rose by over 6% in the first halfofthe year, according to J.P. Morgan. And bonds denominated in their own, hardening cur- Mexico rencies did even better, rising by double digits. But nothing has China been as eye-catching as their stockmarkets. The MSCI EM index India rose above 1,000 in May from below 700 in January 2016, an an- Russia nualised gain ofabout 33%. Brazil The strength of the rally makes many old hands nervous. The history ofemerging markets is full ofimprudent investors as South Africa well as improvident borrowers. The delusion of those parting Indonesia with their money often matches the myopia of those squander- Turkey ing it. In 1895, for example, a stockmarket boom prompted one Source: Thomson Reuters

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2 As some countries worry about exporting to America’s pened so many times for so many of the old wizened EM hands market, others worry about importing its politics. In both Brazil that they are conditioned to believe it has to be like that again.” and Mexico, the candidates for the next presidential election in- It does not, but plenty ofdoubters remain. In particular, the clude outspoken populistswho drawstrength from battlingwith failure ofemergingmarketsto deal effectivelywith earlier shocks Mr Trump ormirroring his provocations. Emerging markets have (such as higher oil prices in the 1970s, tighter Fed policy in 1979-81 traditionally had a strong comparative advantage in populism. and mightier Chinese manufacturing in the 2000s) has contrib- But that is another imbalance Mr Trump seems keen to correct. uted to a lingering concern that middle-income countries are This special report will examine each of these dangers in more likely to become “trapped” as they develop, marooned turn. It will argue that emerging economies in recent years have somewhere between poverty and prosperity. become more resilient, albeit less vigorous, losing some drama If the “middle-income trap” were found to be real, it would as well as some dynamism. That should allow their recovery to pose a more serious problem than ever before. Countries at that continue despite the threats they face. intermediate level of development account for a growing share A lot of emerging-market investors are “waiting for the ofthe world’s GDP and its people. The global economy could not good old-fashioned crisis”, said Mark Dow, a money manager prosper if such an enormous part of its population and produc- and former IMF economist, in a podcast interview late last year. tion were to become thus ensnared. Fortunately, as this report In their experience, “it always ends with a blow-up…it’s hap- will argue, the trap is a myth. 7

What’s in a name?

A self-fulfilling prophecy WHAT COUNTS AS an emerging market? Broadly speaking, an economy that is not too Emerging and emerged rich, not too poor and not too closed to Membersof the MSCI EM index,GNIper person (Atlas method), current $, 2016, ’000 foreign capital. The term was coined by 01020304005510 0 Antoine van Agtmael in 1981when he was Qatar* 75.7 Turkey Philippines working for the International Finance Corpo- United Arab Emirates Malaysia Egypt ration (IFC), a division of the World Bank. He South Korea Russia Indonesia hoped to create what he had named: a set of Taiwan Mexico India promising stockmarkets, lifted from obscuri- ty, thereby attracting the investment they Greece Brazil Pakistan needed to thrive. Czech Republic China At the time, it was hard work even to Chile Income level Colombia Poland High Peru compare the performance of stockmarkets in Upper middle places like Brazil, India and South Korea. The Hungary Lower middle Thailand IFC, having collected data on ten such mar- S. Africa kets, felt that foreign investors might take to Sources: World Bank; national statistics *2015 these boondock bourses, but would be put off by the risk of investing in a single company or was never all that homogeneous. The ten tant to investors than their economic weight the trouble of diversifying across many firms markets in the original MSCI index included would suggest, thanks to their unusually and places. The answer, the IFC concluded, the Philippines but also Portugal, a country deep and open stock- or debt markets. The was to provide them with a one-stop, broadly seven times as rich (at market exchange best example is South Africa: the combined representative “Third-World Equity Fund”. rates). Indeed, the markets are now more value of shares on its stockmarket is more When Mr Agtmael pitched the idea to a group tightly correlated than they were in the early than three times its GDP. The biggest com- of fund managers at an event hosted by years, according to MSCI (though less so than pany listed on its stockmarket is Naspers, Salomon Brothers, some were sceptical, in the crisis years from 2008 to 2013). mainly because it has a 33% stake in Tencent, other intrigued. One liked the idea but hated The emerging-markets group has also a Chinese internet giant. the name. So Mr Agtmael spent the weekend become more prosperous and more Asian. As well as progress, uplift and dyna- dreaming up the term “emerging markets”, The World Bank now classifies nine of MSCI’s mism, emerging markets have traditionally with which he hoped to evoke “progress, 24 benchmark economies as high-income. featured crises, defaults and slumps. Many uplift and dynamism”. That label proved (These economies, which include Taiwan, have been laid low by profligate govern- wildly successful. South Korea, Qatar, the United Arab Emirates ments, overstretched companies, mis- The first such fund, pioneered by Capi- and several members of the European Union, matched balance-sheets, fickle foreign tal Group in 1986, included only four coun- will not feature prominently in this special capital or volatile commodity prices. Such tries. The most popular equity benchmark, report.) Asia accounts for almost 70% of the setbacks can take a toll on their long-term the MSCI EM index, started in 1988 with ten group’s combined GDP and commands a prospects, preventing them from graduating and now spans 24. Many people complain similar weight in the equity index. From Hong to the ranks of mature markets. Poor econo- that the category has become an indiscrimi- Kong “I can cover 60% of the market cap mies typically become “emerging markets” nate grab-bag, throwing together economies within four hours’ flight,” says Sean Taylor of because they have grown quickly. They re- at utterly different stages of development, Deutsche Bank Asset Management. main “emerging” because they have not such as Taiwan and Pakistan. But the group Some countries are much more impor- managed to grow steadily.

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The middle-income trap earns higher returns when it is scarce. By the same logic, a coun- try’s growth will naturally slow down as the gap with the lead- ing economies narrows and the scope for catch-up growth di- Mixed-income myths minishes. All else equal, then, middle-income countries should grow more slowly than poorer ones. But Mr Garrett was making a bolder argument: that middle-income countries tend to grow more slowly than both poorer and richer economies. Countries that are neither rich nor poor can hold their The notion of a trap resonated widely with policymakers, own against rivals at both extremes note Messrs Kharas and Gill, especially in countries where growth had lostits lustre. Najib Razak, Malaysia’s prime minister, EVERY FEW YEARS Foreign Affairs, a magazine about inter- began talking about it in 2009. Trap-talkalso spread to Vietnam’s national relations, provokes a fracas in a neighbouring dis- leaders in 2009 and appeared in South Africa’s National Devel- cipline, international economics. In1994 it published an essay by opment Plan in 2012. Paul Krugman, “The Myth ofAsia’s Miracle”, which re-examined By farthe most prominent trap-watcher is China, one ofthe the source of the tigers’ success. Then, after the Asian financial few middle-income economies that is more than middle-sized. crisis, it came up with “The Capital Myth” by Jagdish Bhagwati, In 2015 Lou Jiwei, then China’s finance minister, said that his which re-examined the case for free capital flows, the source of country had a 50% chance of falling into the trap in the next five the tigers’ humiliation. In 2004 it offered “Globalisation’s Miss- to ten years. The same fear haunts Liu He, an influential eco- ing Middle” by Geoffrey Garrett, then at the University of Cali- nomic adviser to Xi Jinping, China’s president. Mr Liu was one of fornia, Los Angeles. This essay is cited much less often than the the driving forces behind a report entitled “China 2030”, pub- other two, but in a roundabout way it has been equally influen- lished in 2012 by his Development Research Centre (DRC)and tial. It argued that middle-ranked countries were in a bind, un- the World Bank. The report featured a chart that has perhaps able to compete either with the cutting-edge technology of rich done more than any other to spread the idea ofa middle-income nations or the cut-throat prices of poor ones. “Middle-income trap (see chart). It showed that of101countries which counted as countries”, it said, “have not done nearly as well under global- middle-income in1960, only13 had achieved high-income status ised markets as either richer or poorer countries.” by 2008. The rest spent the intervening50 years trapped in medi- To prove his point, Mr Garrett ranked the world’s econo- ocrity or worse. mies by GDP per person in1980, dividing them into three groups: top, middle and bottom. He then compared their growth by that Slow and queasy measure over the subsequent two decades, finding that the mid- The evidence in the chart and Mr Garrett’s essay was sug- dle-ranked economies grew more slowly than either the top or gestive but hardly systematic. However, it was buttressed by a bottom ones. Three years later Homi Kharas and Indermit Gill of more rigorous pair of studies by Barry Eichengreen of the Uni- the World Bank cited Mr Garrett’s essay in a book about East versity of California, Berkeley, Donghyun Park of the Asian De- Asia’s growth prospects. They invented the term “middle-in- velopment Bank and Kwanho Shin of Korea University, which come trap”, which subsequently tookon a life ofits own. reached similar conclusions. They looked for fast-growing econ- The trap can be interpreted in a variety ofways, which may omies that subsequently suffered sustained slowdowns (defin- be one reason why so many people believe in it. Some confuse ing fast growth as at least 3.5% per person, and a slowdown as a the trap with the simple logic of catch-up growth. According to two-percentage-point drop in growth, both averaged over seven that logic, poorer countries can grow faster than richer ones be- years). Theirresearch indicated that these slowdowns seemed to cause imitation is easier than innovation and because capital cluster at GDP levels of $11,000 and $15,000 per person (con- verted into dollars at purchasing-power parity). Perhaps the most sophisticated analysis was published by Shekhar Aiyar and his colleagues at the IMF in 2013. They sought The trappists’ proof to distinguish between growth traps and the natural slowdown Income per person relative to United States, 1960 v 2008, % that any country can expect as it converges with leading econo- mies. Todo this, they first calculated an expected growth path for Log scale MIDDLE TO HIGH STAYING RICH each country, based on its income per person as well as its hu- 100 INCOME United States man and physical capital. Second, they looked for countries that were growing faster or slower than expected, resulting in posi- 50 tive or negative growth gaps. Third, they looked for unusually se- LOW TO MIDDLE Kuwait vere and sustained slowdowns, when these growth gaps wid- INCOME ened sharply. They found that middle-income countries were China MIDDLE- more likely to suffer such setbacks, no matter how middle in- INCOME come was defined. 10 “TRAP” The combined weight of this economic evidence and policymakers’ intuition is hard to ignore, and seems to justify 5 LOW-INCOME scepticism about the growth prospects of China, Malaysia, Thai- “TRAP” land and many other emerging economies. But neither the intu- Income per person relative to US, 2008 ition nor the number-crunching is as convincing as it looks. Intuitively, it seems to make sense that middle-income BECOMING POOR countries will be squeezed between higher-tech and lower-wage 1 rivals on either side. But those rivals rely on high technology or 1 Log scale 5 10 50 100 500 low wages fora reason. Rich economies need advanced technol- Income per person relative to US, 1960 ogies and skills to offset high wages. Poorcountries, fortheirpart, Source: World Bank need low wages to offset low levels of technology and skill. The 1

8 The Economist October 7th 2017 SPECIAL REPORT EMERGING MARKETS

2 obvious conclusion is that mid- more than 10% over the previous seven. That qualifies as a sharp Middle-income spread dle-income countries can and slowdown by the authors’ definition. But China is not trapped; it Middle-income countries do compete with both, com- is still growing fasterthan most countries, rich or poor. Share of world total, % bining middling wages with A similar problem bedevils the paper by Mr Aiyar and his middling levels of skill, tech- IMF colleagues. To see why, suppose a miracle economy were to 80 nology and productivity. grow much fasterthan an economist would expect, given its lev- Population To be sure, those average el of income, schooling and capital. Imagine its growth were 60 levels mask huge variations. then to moderate to a more normal pace. That might count as a Most economies have a mix of severe slowdown by the authors’ definition (since the country’s impressive leading firms and highly positive growth gap has dropped to zero), even though the 40 unsophisticated stragglers. The economy was still converging on high income at a normal pace. GDP productivity of the top quarter Or suppose a country were rapidly to increase its invest- of American firms is at least ment in schooling and physical capital to avoid the middle-in- 20 4.86 times that of the bottom come trap. Ifthe strategy were successful, it might result in steady quarter, according to a study by growth. But with the method used by the IMF paper, that con- 0 Eric Bartelsman, Jonathan Has- stant growth could nonetheless count as a severe slowdown be- 1987 2000 10 16 kel and Ralf Martin published cause, other things being equal, their model expects improved Source: World Bank by the Centre for Economic education and deeper capital to raise the pace of growth, not Policy Research. In developing merely shore it up. countries the gaps are even big- Neitherofthese papers, then, proves the existence ofa mid- ger. Indeed, middle-income countries are often more accurately dle-income trap as commonly understood. Indeed, Mr Eichen- described as mixed-income economies. green has said that his line of research was intended to explore Shaping the mix are at least fourpossible sources of growth different questions. But what about the DRC’s and World Bank’s in GDP per person. The first is moving workers from over- “killer” China 2030 chart? manned fields to more productive factories (structural transfor- Its criteria for middle income are idiosyncratic. They in- mation). The second is adding more capital such as machinery clude any country with a GDP per person between 5.2% and per worker (capital-deepening). The third is augmenting capital 42.75% of America’s, measured at purchasing-power parity. The or labour by making it more sophisticated, perhaps by adopting good news is that eight countries on the chart (including Turkey, 1 techniques that a firm, industry or country has not previously embraced (technological diffusion). The final source of growth derives from advances in technology that introduce something new to the world at large (technological innovation). Economists find it helpful to keep these sources of growth separate in their minds. The mistake is to think they remain sep- arate between countries. In reality, in most countries several of these forces are at work simultaneously, at different paces and in varying proportions. Countries do not wait until the last surplus farm workerhas leftthe fields to begin capital-deepening. Nordo they wait until the returns to brute capital accumulation have been exhausted before they start to increase the sophistication of their production techniques. So development does not pro- ceed in discrete stages that require a nationwide leap from one stage to the next. It is more like a long-distance race, with a lead- ing packand many stragglers, in which the result is an average of everyone’s finishing times. The more stragglers in the race, the more room forimprovement. Positive splits The statistical work by Messrs Eichengreen, Park and Shin shows that middle-income countries do suffer slowdowns. But since itlooksonlyatcountrieswith an income perperson ofover $10,000, it cannot say whether they are more vulnerable to such setbacks than poor countries. That was not a question the au- thors ever intended to answer. When their method is extended to countriesfurtherdown the income scale, itturnsout thatslow- downs among poorer economies are at least as prevalent as among middle-income ones. Countries in the middle do slow more often than rich coun- tries, but that is partly because rich economies rarely grow fast enough (3.5% per person over seven years) to be eligible for a slowdown as the paper defines it. Nor is such a slowdown suffi- cient to trap an economy. Hong Kong, Singapore, South Korea and Taiwan have all endured at least one, and none of them is trapped in middle income. Growth in China’s GDP per person has also slowed, to about 7.6% over the past seven years, against

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2 Malaysia, Oman and Poland) have since escaped the middle-in- come bracket thanks to better data or further growth. Ten others, the Slovak Republic among them, have also crossed that thresh- old but were not included on the chart because either the data or the countries themselves did not exist in 1960. But the chart contains a more fundamental flaw. Its criteria for middle-income are too broad to be useful. By its definition, a country with a GDP ofjust $590 perperson (at1990 prices) count- ed as middle income in 1960. That includes countries like China in the middle ofits Great Famine. At the other extreme, a country with a GDP per person of$13,300 in 2008 also counted as middle income. This upperthreshold for2008 is more than 2,000% high- er than the lower one for1960. No wonder so many countries re- mained stuckin between them. One of them was China. Its GDP per person increased ten- fold between 1960 and 2008, despite the famine and the Cultural Revolution. But because it started that period above $590 and ended it below $13,300, it remained confined to the middle square ofthe China 2030 grid. Macroeconomic resilience One of the World Bank staff involved in the China 2030 re- port has subsequently co-written a paper investigating the mid- dle-income trap more closely. Itfound no “evidence for[unusual] Freedom from financial stagnation at any particular middle-income level”. More recent- ly, research by Xuehui Han of the Asian Development Bank and fear Shang-Jin Wei of Columbia, and separately by Lant Pritchett and Larry Summers of Harvard, has also cast doubt on the trap. An- Emerging markets have acquired more room for other Harvard economist, Robert Barro, the doyen of empirical manoeuvre growth studies, thinks that “this idea is a myth.” The transition from middle to upper income is certainly “challenging”, he IN WALKING A middle path, between self-indulgence and writes. But it is no more challenging than the transition from low self-mortification, Buddhists face great temptations. This to middle. struggleforself-control animatesmanyoftheirpaintings, includ- Messrs Kharas and Gill are themselves agnostic about the ing “Star’s Seed” by the Thai artist Thawan Duchanee. The paint- precise definition and empirical salience ofthe term they invent- ing depicts a muscular man with the mandibles of a rhinoceros ed. They introduced it “with modesty, because we had not rigor- beetle—beastly appendages that symbolise man’s base cravings. ously established its prevalence”, they wrote ten years later. Only by shedding these cravings, Buddhists believe, can man be Since some middle-income countries have undeniably stagnat- free from fear. ed, barriers to their growth clearly exist. As Messrs Kharas and The painting hangs on a wall in the Bank of Thailand, Gill see it, what matters is whetherthese threats take a distinctive which faces its own temptations and fears. Like any central bank, “middle-income” form, not whether they are more common or it must resist the lure of inflation. And like many of its peers in severe than the dangers facing other economies. emergingmarkets, it lives with a fearofglobal financial forces be- yond its control. When America’s Federal Reserve raises interest Trappist agnosticism rates, when global investors lose their appetite for risk, or when The duo came up with the term chiefly because the eco- multinational banks shrink their lending, emerging markets nomicsprofession seemed to offerno clearorconvincing growth worry about the impact on their own currencies, balance-sheets recipe for middle-income countries. Partly as a result, policy- and economies. makersoften feltcaughtbetween two stools: eitherthey clungon The temptations and the fears are connected. Emerging to old growth strategies (such as low-end manufacturing) fortoo markets have traditionally struggled to keep inflation under con- long, or they embraced sophisticated models (such as the trol. For that reason, they have often tethered their exchange “knowledge economy”) too soon. The middle-income trap is rates to the dollar and borrowed in hard currencies at the insis- really a middle-income dilemma. tence of foreign creditors. This institutional anchoring helped What about Mr Garrett’s original finding in Foreign Affairs, them attract inflows of foreign capital, which often financed which helped inform the thinking ofMessrs Kharas and Gill? An large current-account deficits. But their anchors also acted as effort to replicate that exercise, with newer data covering the shackles. They forced the central banks slavishly to follow the same 20 years, shows a much narrower gap between middle- Fed’s monetary policy so as to preserve theircurrency’s standing and high-income growth for the period from 1980 to 2000. And against the dollar. And they left their economies vulnerable to that gap all but disappears if the countries are divided into three any interruption in foreign lending and investment. groups of equal size, rather than Mr Garrett’s somewhat arbi- Whenever foreign capital inflows dried up, emerging mar- trary 25-45-30% split. kets wrestled with a painful dilemma. To appease foreign inves- More importantly, middle-income countries, even by his tors and defend their currencies, they could raise interest rates to definition, grew fasterthan their high-income counterparts over punishingly high levels; but that would bankrupt many domes- the two decades from 1990 to 2010, as well as from 1995 to 2015. It tic companies. Or they could ease monetary policy and let their seems that in the 1990s and 2000s middle-income countries currencies drop; but that would also bankrupt any companies were quite capable of competing with cutting-edge economies. with dollar debts. Either way promised ruin. So what tripped them up in the 1980s? Part ofthe answer may lie Ruin duly arrived in a succession of financial crises. When with America’s Federal Reserve. 7 the Fed raised interest rates to 20% to fight inflation in 1979-81, Lat- 1

12 The Economist October 7th 2017 SPECIAL REPORT EMERGING MARKETS

2 in American governments could no longer afford to service the amounts of cheap debt. These lax financial conditions were, vast dollar loans extended to them by American banks. The debt however, rudely interrupted in May 2013, when Ben Bernanke, crisis that followed condemned the region to a “lost decade” then the Fed’schairman, mused on an eventual slowdown in the which may have helped inspire the notion of a middle-income bank’s asset purchases. That was enough to unsettle big emerg- trap. Something similar happened in Mexico in 1994, when the ing markets like Brazil, India, Indonesia, South Africa and Turkey, Fed again raised rates faster than expected. And a broader wave despite their flexible currencies. They became known as the of crises struck emerging markets from July 1997, when the Thai “fragile five”. baht broke its peg to the dollar, to January 2002, when Argentina The tantrum demonstrated that floating currencies could formally abandoned the peso’s parity with the greenback. These not insulate emerging economies entirely from global financial blows rid them of both their shackles and their anchor. Without forces, as Ms Rey has argued. But recent research by Maurice the external discipline provided by the dollar, they had to build Obstfeld, Jonathan Ostry and Mahvash Qureshi of the IMF con- their own institutional defences against inflation. firms that flexible exchange rates still offer more autonomy than dollar pegs. And that autonomy is greater still in countries with Control yourself narrower trade deficits, lower inflation and lower levels ofdebt. Happily, in the subsequent struggle for macroeconomic The fragile five seem less delicate today than they did in self-control, emerging markets have proved themselves more 2013. In the interveningyears, all ofthem have narrowed orelim- man than beetle. Inflation, averaged across the world’s emerging inated their current-account deficits; all except India have bene- and developing countries, fell from 13% in 1999 to less than 4.4% fited from an improvement in the competitiveness of their cur- last year, according to the IMF. In the members of the MSCI rencies; and all except Turkey have reduced inflation and credit emerging-markets index it is even lower. The latest average, growth. In both India and Brazil, the combined debt of house- weighted by each country’s size in the index, is only 2.6%, says holds and non-financial corporations has declined as a propor- Bhanu Baweja ofUBS, a bank (see chart). tion of GDP since the taper tantrum. In South Africa it began fall- This self-control has brought a number of benefits. First, it ing in 2016, and in Indonesia it has increased only slowly. has allowed emerging-market governments to sell bonds de- The credit growth causing most concern among emerging nominated in their own currencies, which has given them more economiesisnotin the formerlyfragile five butin China. Itsstock fiscal room for manoeuvre. For most of the past half-century, ofoutstanding credit as a proportion ofits GDP is a massive 213%. their tax and spending policies have been stuckin a “procyclical- This figure, known as “total social financing” (TSF), is supposed ity trap”, according to Carlos Végh, Daniel Lederman and Feder- to capture all sources of finance for households and enterprises. ico Bennett of the World Bank. Governments have raised discre- Economists often subtract some items from this total (such as tionary spending during booms, to placate clamorous constitu- equity financing) and add others (such as the local-government ents, then cut it during busts, to appease jittery creditors. bonds that have replaced some bankloans to infrastructure ven- But in more recent years the pattern has shifted. Of the big tures). But these adjustments do not greatly change the underly- emerging economies, Chile, South Korea, Turkey, India, China, ing story. Mexico, South Africa and Malaysia have all been able to pursue What is scary about the number is how quickly it has risen. countercyclical policies, on average, since the turn of the cen- Five years ago it was below169%. The IMF has identified 43 previ- tury; and since the global financial crisis that began in 2007, Peru ous cases in which a country’s ratio of credit to GDP has risen by and Colombia have joined their ranks. “The region appears to more than 30 percentage points in five years. In 38 of them the have begun to finally break the shackles of the procyclicality boom ended in a financial crisis or “major” slowdown. And in trap,” note Mr Végh and his team. two ofthe remaining five the crisis arrived a few years later. In addition to this fiscal flexibility, the increased macroeco- Many economists worry that a similar fate awaits China. nomic credibility of emerging markets has won them an unac- Some bearish investors are counting on it. They have bet heavily customed degree of monetary freedom. When the Fed tightens against the yuan in the belief that a financial bust in China will monetary policy, they no longer have to follow in lockstep. They oblige its authorities to ease monetary policy and cheapen its 1 can keep interest rates steady, letting their currency fall against the dollar, without worrying as much about the increased threat ofinflation orthe heavierweight ofdollardebt. Indeed, since the Fed began to raise interest rates in December 2015, many emerg- Mostly moderating ing-market central banks have shifted their own rates down, not Consumer prices, August 2017 or latest, % increase on a year earlier up. In 17 out ofthe 24 members ofthe MSCI emerging-markets in- Central-bank dex, the central bank’s policy rate is now the same or lower than inflation target, % it was before the Fed’s first hike. Emerging But some sources of vulnerability remain. The central Europe 0246810 bank’s policy rate is not the only determinant of a country’s fi- Middle East Turkey 0246 nancial conditions. Some economists, such as Hélène Rey of the and Africa Russia London BusinessSchool, have argued thatbroaderfinancial con- South Africa Hungary ditions, including longer-term interest rates, credit growth and Czech Republic Poland capital flows, are driven by a forceful and synchronised global fi- Asia 0246 nancial cycle that is beyond the control of local central banks. Indonesia Latin Even when theyare notconstrained bya pegto the dollar, emerg- Philippines America 0246810 ing markets cannot free themselves from these global forces, Ms South Korea Mexico Rey argues. Policymakers must either submit to them or repel India Colombia them by erecting capital controls. China Peru The “taper tantrum” of 2013 lent support to this fear. Gov- Taiwan Brazil ernments and especially companies in emerging markets had Thailand Chile taken advantage of worldwide monetary easing to issue large Sources: Haver Analytics; central banks

The Economist October 7th 2017 13 SPECIAL REPORT EMERGING MARKETS

2 currency. Such exchange-rate fluctuations are now common- place in other emerging economies. But China is still an outlier. It allows the yuan to move each day by just 2% either side of a benchmarkdollarrate it sets each morning. In August 2015 it tried both to devalue the currency modestly and to introduce more two-way flexibility in its movements, but succeeded only in cre- ating self-fulfilling expectations offurtherdepreciation. For a few months China seemed caught in the same trap that ensnared other Asian emerging markets in the late 1990s. It appeared to face an invidious choice between vigorously tight- ening monetary policy to defend the yuan, or letting the curren- cy fall. But China had fourdefences that other economies lacked. Its dollar debts were modest relative to the size of its economy; it still had a large current-account surplus, which brought in a steady stream of dollar earnings; it was sitting on a bigger stock- pile of foreign-exchange reserves; and it had retained closer con- trols on capital outflows. Between August 2015 and January of this year it lost over $500bn of reserves as it tried to cushion the yuan’s decline. It cracked down on what it deemed to be wasteful overseas acqui- sitions by Chinese firms. And it subjected requests for dollars by companiesand individualsto heightened regulatoryscrutiny, in- cluding a daunting increase in paperwork. Eventually it was able to quash the downward pressure on the currency. Over the first eight months of this year the yuan strengthened by over 5% against a dollar that had lost much of its upward momentum. In Commodities August, the dollar value of China’s foreign-exchange reserves in- creased forthe seventh month in a row. Whatever its impact on the yuan, will China’s credit boom A drag, not a curse nonetheless result in a sharp slowdown in growth? To answer this question, it helps to scrutinise why its credit-to-GDP ratio rose so quickly in the first place. During the crisis year of 2009, the ratio jumped because creditgrewdramatically, thanksto Chi- Raw materials need not undermine the countries that na’s stimulus efforts; but since then credit growth has been slow- export them ing steadily (see chart). The ratio has nonetheless continued to rise because nominal GDP has expanded unusually slowly. THE LAMP POSTS in Kliptown, South Africa, do not all Many economists point out that the credit-intensity of Chi- stand up straight. One lists awkwardly, laden with cables na’s economy deteriorated between 2011 and 2016. It took more carrying stolen electricity to a squatters’ settlement nearby. credit to generate a yuan of growth. The reason may be that Many families in this suburb of Soweto, a formerly black town- much ofthis credit was spent not on newly produced assets such ship in greater Johannesburg, are still crammed into makeshift asbuildingsormachinery, buton existingassetssuch as land and housing. When it is hot outside, the temperature inside is “times previously constructed buildings. This kind of spending adds two”, says one resident, who shares six rooms with 20 others. nothing to GDP, which measures only new production, not And when it turns cold, the chill inside is also “times two”. transfers ofownership ofexisting wealth. On the otherside ofthe railway tracks the government is in- If that credit mix could be vestingheavilyin WalterSisuluSquare, where in 1955 the African reversed, it would help China National Congress (ANC) and its allies adopted the Freedom to reduce leverage without re- Charter, a statement of principles for a post-apartheid nation. Too intense ducing growth. The relation- The charter’s commitments, written in stone on a monument in China, corporate credit ship between new credit and the square, include demolishing slums and building well-lit sub- % increase on new production would im- urbs. They also include transferring ownership of the mineral a year earlier As % of GDP prove. Fortunately, that im- wealth beneath the soil to the people. The contrast between 40 200 provement has already got un- what the charter says and what the slum itself reveals tells you der way: credit growth has how broken the system is, says one squatter. slowed in recent quarters even The resources beneath South Africa’s soil, including iron 30 150 as nominal GDP growth has ore, precious metals and coal, ought to be an unmitigated bless- picked up. In response, China’s ing. Johannesburg, the city of gold, owes its existence to these credit-to-GDP ratio in the sec- riches. Its landscape is still dotted with piles of sandy residue, or 20 100 ond quarter fell by a fraction of “tailings”, from miningand quarrying. The industry accounts for a percentage point. If it contin- over 20% of South Africa’s exports and employs over 450,000 ues to stabilise, it will lift a big people. But it also adds to the volatility of South Africa’s econ- 10 50 macroeconomic cloud still omy and the pugnacity ofits politics. hanging over emerging mar- Mining and quarrying shrank by 4.7% in 2016, then re- 0 0 kets—especially those that pro- bounded, growing by 4.3% year-on-year in the first half of 2017. 2008 10 12 14 16 vide the raw materials for Chi- This improvement partly reflects stronger growth in China, Source: Bank for International Settlements na’s growth. 7 which consumes almost half of the world’s coal, 30% of its gold 1

14 The Economist October 7th 2017 SPECIAL REPORT EMERGING MARKETS

ly escape the ups and downs of global commodity cycles, they can do a lot to moderate them. By containing the upturns, they can cushion the downturns. The key to this lies not in the mining industry itself, but in a country’s central bankand finance minis- try. Resource-rich economies need equally resourceful macro- economic policies. One of the best examples is Chile. Its fiscal rule curbs gov- ernment spending when the copper price exceeds its long-term trend, as judged by an independent committee of experts. Dur- ing good times, fiscal restraint makes room for mining to boom without unduly squeezing the rest of the economy. During bad times, it leaves scope forfiscal easing to offset the damage. Chile’s fiscal benchmarks were better calibrated than the rule Russia introduced in 2008 (and overhauled in 2013). Rather than allow an independent committee to estimate the long-term oil price, Russia used a backward-looking average. According to the IMF, that resulted in a benchmark oil price of $85 a barrel in 2016 when prices had already fallen to $42. Russia was forced to abandon its fiscal rule in 2015. By then the country’s central bankhad also given up trying to defend the rouble, allowing it to fall in line with the price of crude. At the time Russia’s devaluation was humiliating. But a cheaper ex- change rate can be a godsend for an oil exporter when the price ofcrude drops. Russia’s diminished currency kept the rouble val- ue of oil revenues steady. And by boosting Russia’s competitive- 2 jewellery and over 40% of its steel. But the industry’s economic ness, it helped to offset the damage that lower oil prices inflicted prospects remain hostage to its political fortunes. on the country’s trade balance. Unemployment is now lower Like any industry, miningmust offer sufficiently rewarding than it was in 2013, when oil prices were around $100 a barrel. pay and profits to attract the capital and labourit requires. Unlike Havingsurvived the M-shaped commodity cycle, resource- other industries, however, mining tends to generate excess re- rich emerging markets can hope for an easier script in the years turns or “rents” on top of that. Bosses, workers and politicians ahead. China’s growth has stopped slowing and OPEC produc- are then tempted to squabble over the division of those rents, tion has stopped rising. The cartel decided in November 2016 to sometimes to the detriment ofthe sector as a whole. This kind of cut production by over 3% to 32.5m barrels per day (a decision economic volatility and political bitterness are two of the more matched by restraint from 11 other oil producers, including Rus- troublesome “tailings” from resource wealth, not only in South sia). America, meanwhile, has become an “unwitting swing pro- Africa but in many emerging markets. In 11of the 24 countries in ducer” of oil, in the words of the Economist Intelligence Unit, a MSCI’s benchmark equity index, resource rents exceeded 5% of sister company ofThe Economist. When crude prices drop below GDP between 2011 and 2015. That qualified them as “resource- $45 a barrel, shale producers withdraw, pushing the price back rich”, according to the World Bank. The rents of all 24 members up. When prices rise above $56, America’s nimble operators in- taken together also amounted to about 5% oftheir combined GDP. Many of these resource-rich econo- Economists have questioned whether the “resource mies have gone through a twin-peaked or “M-shaped” cycle since the mid-2000s. curse” is real. Rather than resource dependence leading Their commodities sector (as a proportion to slow growth, it could be the other way around of GDP) peaked on the eve of the financial crisis in 2007, plunged, then rebounded between 2008 and 2011 and faltered again after 2014. The first vestin newrigs, pushingthe price backdown. So another boutof drop reflected a collapse in demand following the global finan- commodity-price volatility should not scupper the emerging- cial crisis. The second one was more complicated. A slowdown market recovery. in Chinese commodity purchases played a part, especially in the The economic instability and political division sometimes case of coal and construction-related resources such as iron ore. associated with natural resources have caused some economists But in the case of oil, a rise in supply (and projected supply) was to thinkofthem asa curse, nota blessing. In a seminal paperpub- more important. The boom in tight oil and shale production in lished in 1995, JeffreySachsand AndrewWarner, two economists America prompted OPEC, the oil exporters’ cartel, to pump more then both at Harvard, found that economies dependent on re- crude to defend its market share. Cheap energy, in turn, cut the source exports grew more slowly than others not so blessed. cost of agricultural production and dampened demand for bio- But economic thinking on this issue is also prone to divi- fuels, leading to lower prices forgrains and soyabeans. sion and swings in sentiment. Several researchers have ques- It is not easy to cope with a commodity cycle of this magni- tioned whether the resource curse is real or just a statistical illu- tude, driven by a boom in demand in the world’s second-biggest sion. The seminal Sachs-Warner study, they say, may be marred economy, then a supply boom in the biggest. In the face of these by reverse causality: rather than resource dependence leading to global forces, emerging economies can resemble the squatter’s slow growth, it could be the other way around. This is because house in Kliptown: their economies run twice as hot when com- the two authors calculate resource exports as a proportion of modity markets warm up, and twice as cold when the tempera- GDP, so anything that lowers GDP will mechanically increase re- ture drops. But although resource-rich economies cannot entire- source dependence by their measure, creating the illusion of a 1

The Economist October 7th 2017 15 SPECIAL REPORT EMERGING MARKETS

2 causal linkfrom resources to growth. Economists may have missed the blessings of natural re- sources because they were looking in the wrong place. Oil, gold, copper and other endowments may add to the level of GDP but not its growth rate. Imagine, for example, a $100bn economy growing at 1% a year. Suppose it suddenly discovers a big plati- num deposit, which yields a steady additional income of $100bn, year in, year out. That would double the country’s GDP to about $200bn, much to the benefit of its people. But it would also halve the country’s growth rate, because now half of this $200bn economy is growing at1% and the other halfnot at all. Graham Davis of the Colorado School of Mines calls this phenomenon “resource drag”. In South Africa the mining and quarrying industry has been growing more slowly than the economy as a whole since 1980, dragging down South Africa’s overall GDP growth by about 0.4 percentage points. But having both the resources and the drag is still better than having neither. Patricio Meller of CIEPLAN, a Chilean think-tank, reckons that economists have been biased against natural resources ever since Adam Smith, who witnessed impressive advances in pin- makingbut comparative stasis in agriculture. Even in Smith’s day that was a mistake, says Mr Meller. After all, Britain’s industrial revolution owed a lot to coal-mining. MrMellersees the natural resources in his country as a plat- form fortechnological innovation. Many ofthe lorries that serve Chile’s mining industry,for example, are remotely controlled by terials are so soft. When fabric is picked up or put down, it loses people sitting in an office in Santiago, over 1,000km away. In- its form, creasing, crumpling, folding and draping in unpredict- deed,thecombinationoftechnologies—bigdata,end-to-endsen- able formations. That can make it hard fora robot to keep trackof sors, analytics—now being applied to advanced manufacturing whatitishandlingand where to applyitself. Itmight be “easierto could also be applied to mining and agriculture. automate the activities of a fashion designer than to automate The application of new technologies to commodities may the people who sew clothing”, suggests Michael Chui of the alleviate whatever curses natural resources can bring. But their McKinsey Global Institute. application to manufacturing industry is raising a different fear Jian Dai, a robotics professor at King’s College London, in labour-rich emerging markets. As industrial machines be- once described the formidable feats ofrobotic dexterity required come more sophisticated, will they increasingly replace industri- even to iron a garment, something any teenager is quite able (if al workers? And if fewer jobs are on offer in metal-bashing and not always willing) to do. It requires miniaturised infra-red sen- clothes-making, who will employ them? 7 sors to find the edge of the fabric, which must then be squeezed between robotic fingertips in an “impactive grip”. The robot also has to maintain the tension and smoothness of the material and Premature deindustrialisation align its seams. To manage all this, MrDai writes, the robot needs several moving parts linked in a “multiple kinetic chain”. One firm that is tackling similar challenges is SoftWear Sew what now? Automation, based in Atlanta, Georgia, 8,000 miles from Dhaka. Its Sewbot uses high-speed cameras to keep track of the fabric, vacuum nozzles to pick up and rotate pieces, and rotating balls embedded in a worktop to move the fabric along. “Our technol- Automation is less of a threat to workers in the ogies enable the micro-manipulation and macro-manipulation emerging world than it is made out to be of the fabric to mimic what a seamstress could do,” says Palani- swamy Rajan, the company’s CEO. His machines can already BANGLADESH EXPORTS 60% more ready-made garments make simple items like pillows and bath mats on a commercial than India, a country with over eight times its population. scale. Next year the company hopes to offer a T-shirt production On the busy roads of Dhaka, Bangladesh’s capital, white vans line. It says that a single Sewbot operator will be able to produce nose through the traffic on “Emergency Export Duty”, according 1,142 T-shirts in an eight-hour shift, 17 times the number a tradi- to the ambulance-like letters painted on their sides. The success tional garment worker could make in that time. of this quintessentially labour-intensive industry helped make These intriguing advances in Atlanta reflect broader pro- Bangladesh a lower-middle-income country in 2014, according gressin robotictechnology. The machinesare becomingcheaper, to the World Bank’s classifications. safer, more versatile and easier to instruct, notes Mr Chui. Unlike But some think that Bangladesh’s garment industry now many existing industrial robots, which are kept in cages, the lat- faces a new problem almost as grave as the traffic: the threat of est generation are safe enough to be used in crowded work- automation. Robots are already common in other kinds of spaces. They can also be easily “programmed”, a word Mr Chui manufacturing, but still rare in clothes-making. Of the 1.63m in- puts in quotation marks, since no coding is required. dustrial robots in operation worldwide in 2015 (the latest year for These pieces of kit are no longer the preserve of high-in- which figures are available), only 1,580 were in textiles, apparel come countries like Japan or Germany. Of all the industrial ro- and leather, says the International Federation ofRobotics (IFR). bots shipped in 2015, a third ended up in middle-income coun- Robots find garment-making so hard because its basic ma- tries, where theywere mostlyused in carmakingand electronics, 1

16 The Economist October 7th 2017 SPECIAL REPORT EMERGING MARKETS

2 according to IFR. China was the world’s biggest single buyer. ment-makers pay high duties to import the man-made fibres that The rising efficiency of robots has made economists ques- now dominate the industry. Exporters can get a refund, but the tion some of their traditional prescriptions for success in devel- procedure is cumbersome. Perhaps it could be automated. opment. Work by Simon Kuznets in the 1960s and 1970s suggest- As things stand, regulatory barriers are far more damaging ed that modern economic growth requires movingresources out for South Asia’s garment-makers than automation. Indeed, the of agriculture into industry, then out of industry into services. practical people who orchestrate supply chains for clothing re- This arc of industrialisation is supposed to carry poor countries tailers are somewhat sceptical about the role of robots in the in- into prosperity before eventually turning down as sophisticated dustry. “There are many people who have done semi-automa- services take over. tion. But fully automated garment factories, we have not seen But what if robots, not people, fill the factories? The McKin- any…we’re probably years away,” says Spencer Fung, chiefexec- sey Global Institute calculates that it would be technically possi- utive of Li & Fung in Hong Kong. The company’s chairman, Wil- ble (ifnot necessarily economically sensible) to automate 67% of liam Fung, agrees. E-commerce may have transformed retailing, India’s manufacturing employment. It came up with similar fig- but “the supply chain that supplies this highly digitised consum- ures for Indonesia and Thailand. If poor countries cannot move er market is actually analogue.” enough workers into industry, the benefitsof productivity gains Automation can speed things up, but it also adds to costs. in manufacturing cannot spread widely through their econo- The operator of one of SoftWear’s Sewbot lines may be 17 times mies. Their opportunities for development will be squeezed by as productive as a traditional garment-worker, but the typical automation’s impactive grip. cost of labour in the United States, even on the minimum wage, Indeed, the arcofindustrialisation has alreadychanged, ac- is more than 18 times as much as in Bangladesh. And that does cording to Dani Rodrik of Harvard University. In today’s emerg- not count the cost ofthe bot. ing economies, industry’s share of employment is peaking at a lower level than it used to do, and at an earlier point in their de- Bots for basics velopment. This trend towards premature deindustrialisation is SoftWear Automation itself is surprisingly measured in its “not good news fordeveloping nations”, he notes. claims forits technology. “There’s the perception that robots will But Mr Rodrik’s results are not as depressing as they seem. take over and automate everything,” says Mr Rajan, the firm’s Asia, as he points out, has so far defied premature deindustrial- boss; but he believes the sewbots will remain in the minority isation. The same, in aggregate, is true ofSub-Saharan Africa. It is even 20-30 years into the future. “I expect we’ll probably auto- chiefly in Latin America that the arc of industrialisation has lost mate about 20-25% of the apparel industry,” he predicts. Robots height and reach. This Latin deindustrialisation may reflect the will take care of “the high-volume basics”. But “the higher fash- gradual abandonment of “import substitution” after the 1960s, ion, lower batch sizes are always going to be done by people.” when governments lowered the tariffs protecting local alterna- SoftWear Automation occasionally receives calls from Ban- tives to foreign industrial goods. It may also reflect the arrival of gladeshi garment-makers, but the company serves only the China as a manufacturing superpower in recent decades. But it American market. “If you are looking to deploy our technology probably has little to do with robots, which are no more preva- because you think you can save labour costs, then it’s the wrong lent in Latin America than elsewhere. reason to do it,” saysMrRajan. Instead, hiscompanyaimsto min- Some researchers have questioned whether the develop- imise transport costs, reduce environmental strains and relieve ing world as a whole has deindustrialised. They argue that acute American labour shortages. One oftheirprincipal custom- manufacturing employment became geographically more con- ers supplies America’s armed forces, whose uniforms are re- centrated after1990, but no less important. Nobuya Haraguchi of quired by law to be made within the country. This anachronistic the United Nations Industrial Development Organisation (UN- legislation is supposed to preserve America’s industrial capacity IDO), Charles Fang Chin Cheng of the University of New South to make the things its army needs, but “the average age of seam- Wales and Eveline Smeets, a consultant, have painstakingly stresses in America is 56,” Mr Rajan points out. pieced together employment data on over100 developing coun- Forthe foreseeable future, then, the Sewbotisnot a threatto tries, going back to 1970. They find that the average of each coun- the abundant labour in countries like Bangladesh. Its existence try’s manufacturing-employment ratio has indeed declined owesa lotto some cutting-edge innovation and more than a little since the early 1990s, as Mr Rodrik showed. But when they look to some long-standing American protectionism. Unfortunately, at developing countries in aggregate, the share ofmanufacturing more examples ofsuch protectionism are on the way. 7 employment is higher than in earlier decades (see chart). These results are not as contradictory as they seem. To see why, imagine that the world contained only two countries: Co- lombia and China. In Colombia, industry accounted for about Better than it looks 30% of employment in 1990, according to the International La- Manufacturing, % share of developing-country employment bourOrganisation. That fell to around 20% in 2015. ForChina, the 15 opposite was true. On average, then, industry’s share remained roughly the same in both years: around 25%. But in aggregate, in- 14 dustry’s share increased enormously, because a tenth of China’s Aggregate workforce is a much bigger number than a tenth ofColombia’s. 13 China’s takeover ofmanufacturing employment may itself 12 have peaked. The number of Chinese working in industry start- Average ed fallingin 2013, and China’sshare ofworld clothingexports has 11 also stagnated since then. This represents a “historic opportuni- 10 ty” for countries like India, notes Arvind Subramanian, chief economic adviser to India’s government. Countries such as Ban- 1980 85 90 95 2000 05 10 12 gladesh, Indonesia and Vietnam are seizing it, but India itself is Source: “The Importance of Manufacturing in Economic Development: Has This Changed?” by lagging. Itshandicapsare largelyself-imposed. The country’sgar- Nobuya Haraguchi et al, World Development, May 2017

The Economist October 7th 2017 17 SPECIAL REPORT EMERGING MARKETS

Protectionism So far the world has not embarked on a trade war, at least judging by the ballistic evidence. The members of the World Trade Organisation (WTO) between them imposed about11new Anti-trumping duties trade restrictions per month in the seven months to mid-May 2017, the lowest rate since 2008. They also initiated 25 trade “rem- edies”, such as anti-dumping duties or countervailing tariffs against subsidised imports, which claim to redress unfair trade Does the American president’s protectionism pose a (ratherthan restrict free trade). That was in line with the monthly threat to emerging countries? average forthe past five years. But there is no room forcomplacency. Sometimes the dam- EVEN BEFORE THEYclaim theirbaggage at the airport, visi- age Mr Trump hasinflicted on the global trading system must be torsto the cityofSan LuisPotosí in central Mexico see an ad- measured not against the status quo but against what might have vertisementforthe site where Ford Motorswasplanning to build been. In his first week in office, for example, he withdrew from a $1.6bn factory. The Planta Ford isstill marked on a map in the ar- the Trans-Pacific Partnership, a trade and investment agreement rivals hall, albeit only on a Post-it note. Follow the map, and you with 11 other countries, including Chile, Mexico and Peru. The will see the factory’s white steel skeleton standing out against agreement might have added 8% to the GDP ofVietnam by 2030, the brown hills ofthe Gogorrón National Park. according to calculations by Peter Petri of the Peterson Institute Ford’s facility, intended to build its small Focus cars, would for International Economics and Michael Plummer of Johns have created 2,800 jobsdirectly, and manymore indirectly. But in Hopkins University, and almost as much to the economy of Ma- January the company announced it was pulling out and invest- laysia. White House officials have said that quitting America’s ing $700m in Flat Rock, Michigan, instead. President Donald trade agreement with South Korea is also a possibility, though no Trump, who had threatened to impose border taxes on carmak- longer a priority. Such a cavalier attitude towards existing agree- ers that shifted production to foreign locations, was delighted. ments will make future deals harder to strike. “Thank you to Ford for scrapping a new plant in Mexico and cre- Mr Trump has also quietly undermined the World Trade ating 700 new jobs in the US. This is just the beginning,” he Organisation, and the multilateral principles it represents, by tweeted to his many followers. Everybody in San Luis Potosí, by working around it. His government has launched an investiga- contrast, was “a little bit upset”, notes one resident. tion into China’s abuses of intellectual property, invoking old Eight months into his presidency, Mr Trump’s trade stance American legal provisions that the WTO was supposed to sup- does not look quite as upsetting to emerging markets as many plant. And he hasrefused to begin the processofappointing new had feared. Despite his campaign threats, he has not imposed judges to its trade tribunals. 35% tariffs on companies relocating to Mexico or 45% tariffs on Rather than impose sweeping tariffs against entire coun- goods from China. Nor has he yet withdrawn from the North tries, Mr Trump’s administration has turned to more targeted American Free Trade Agreement (NAFTA). measures, such as anti-dumping duties, against individual pro- ducts. These trade “remedies” can be deployed without getting bogged down in Congress. Indeed, the administration has cho- sen to initiate many of these investigations itself, rather than wait for aggrieved American industries to plead for them. America the dutiful How much difference will this new American trigger-hap- pinessmake? Dutiesagainstdumped orsubsidised products cov- ered 3.8% of American imports at the end of 2016, according to calculations by Chad Bown of the PIIE. The investigations now under way could almost double that figure to 7.4%. Notall ofthe newdutieswill applyto emergingeconomies. The threat of steel restrictions poses a bigger danger to the Euro- pean Union and Canada than to China. And many of the more obvious emerging-market targets have already been hit. China’s exporters, for example, are already accustomed to such pinprick protectionism. At the end of last year the country was subject to 139 such measures, covering 9.2% ofits American sales. So the increased use of remedies will not be fatal to emerg- ing-market exports, but it will be a growing irritant, especially if the countries concerned feel compelled to impose tit-for-tat ta- riffs. Retaliation would be easier to resist if the administration were to act quietly, but quietude has not been one ofits virtues. The emerging economy most at risk from Mr Trump’strade instincts remains Mexico, which is now locked in a difficult rene- gotiation of NAFTA. America wants to tighten the agreement’s rules of origin, which determine what counts as a North Ameri- can product. It wants to add provisions against currency ma- nipulation. It also seeks a freer hand to impose duties on dumped, subsidised or surging imports, and it wants American courts, not NAFTA panels, to resolve investment disputes. These and other measures, it hopes, will eliminate the big trade deficits 1

18 The Economist October 7th 2017 SPECIAL REPORT EMERGING MARKETS

2 it now runs with both the other members, Mexico and Canada. currency controls. In 2016 it returned to the international capital Yet it is not clear how a trade agreement like NAFTA can markets, and earlierthisyearitsold a bond with a100-yearmatu- curb a trade deficit. Suppose a renegotiated agreement allowed rity,usually reserved forthe most creditworthy borrowers. America to impose highertariffsin the name ofnarrowing itsim- The populism Argentina is escaping has a long history in port-export gap. Those tariffswould limit the demand for foreign the region. In its 1950s heyday, the movement successfully currencies. That would reduce their price, making them more crossed class boundaries, scrambling left and right. It champi- competitive against the dollar. That, in turn, would tend to undo oned domestic industry,opposing a suspect international elite. the effect ofthe tariff. To keep these disparate coalitions together, populists tried One NAFTA member already has experience of trying to to give something to everyone, notes Michael Conniff of San engineer a better trade balance by fiat. Back in 1993, Mexico re- José State University.That usually meant favouring everyone to- quired manufacturers to export $2-worth of cars for every $1- day at the expense ofeveryone tomorrow.Populist governments worth of car imports. NAFTA phased out such practices, and presided overpublicspendingfinanced byborrowing, prices fro- Mexico’s car industry has never looked back. zen by fiat, local industry shielded from imports and wage hikes If Mexico has to concede anything to keep NAFTA alive, it unmatched by productivity gains. might accept a ban on currency manipulation. Since both Cana- Ultimately, such policies proved unsustainable. But as An- da and Mexico let theirexchange rates float, any such prohibition drés Velasco, a formerfinance minister ofChile, has pointed out, would probably remain redundant. But it would allow Ameri- “ultimately” can take a very long time. Before it exhausts its lim- ca’spresidentto claim an unprecedented breakthrough: incorpo- its, populism typically moves through several distinct phases. It rating currency safeguards into a trade agreement for the first often begins in weakened, underheated economies, where ini- time. That would make a good tweet. With luck, he and his team tially it works well, providing a boost to spending. “Everyone would then declare victory and go home. will try to scare you with the spectre of an economic collapse,” San Luis Potosí, for its part, seems to have shrugged off the Juan Perón wrote in 1953. “But all of this is a lie. There is nothing Ford setback. About 3km east of the abandoned site, BMW is more elastic than the economy.” building a new factory of its own that will eventually employ However, an underemployed economy is far more elastic 1,500 people. “I thinkthe city is [enjoying] one ofour best times,” than one going at full tilt. Once spending is strong enough to re- says a local resident. “For sure, other companies will come at the store employment, reactivate idle factories and revive imports, end of the day.” Formal employment in the state increased by populism runs into capacity constraints. Budget and trade defi- 7.7% in the year to May. The governor has boasted about the pace cits widen and price pressure builds. ofjob creation on Twitter, where he hasover50,000 followers. In This inflationary pressure typically meets with one of two matters of populism, two-way trade remains strong. 7 responses. It can be offset by high interest rates from the central bank, ifthe populistleaderallowsit, squeezingthe private sector. Alternatively,the inflationary momentum can be leftunchecked Political risks until the publicclamourforprice stabilitybringsthe government down or forces a retreat. Where do today’s emerging economies stand in this cycle Movements in EM major of populism? Brazil, like Argentina, is in a post-populist phase. The previous government, led by Dilma Rousseff, was never as reckless as the Kirchners in Argentina, but it did overspend in ad- vance of the 2014 presidential election. Having failed to predict the commodity downturn in the second halfofthat year, Brazil’s How populism can shape emerging markets government was shocked at how inelastic the economy proved to be. A zealous enforcement of the fiscal rules provided the pre- THE SOUND OF an orchestral horn fills the hall as musi- text forMs Rousseff’s impeachment. cians warm up for an evening performance of Rachmani- Other emerging economies are in earlier phases of the cy- noff and Tchaikovsky. The venue is a dramatic Beaux-Arts build- cle. Rodrigo Duterte of the Philippines talks like a populist, but ing that started life as the central post office of Buenos Aires. It has so far left his economic policy in the hands of competent perfectly illustrates Argentina’s pendulum swings between lib- technocrats. South Africa’s Jacob Zuma used to do the same, but eralism and populism. In 1946 it doubled as a headquarters for has since removed two respected finance ministers in the past the charitable workofthe president’s wife, Eva Perón. In 1997 the couple of years, turning the Treasury over to a loyalist instead. postal service was privatised during one of Argentina’s periodic Turkey’s central bank, for its part, is trying to keep a lid on infla- experiments with free markets and hard money. As that came to tion, but has received little public backing from the country’s a grisly end in the default of 2001, bankruptcy also ensnared the president, Recep Tayyip Erdogan. post office’s new owner, a conglomerate led by Franco Macri. Perhapsthe mostinterestingcase ofa “pre-populist” emerg- The postal service was renationalised early in the presiden- ingmarket is Mexico. It has largely embraced macroeconomic or- cy of Néstor Kirchner, who led a new wave of “post-neoliberal” thodoxy, demonstrating its commitment to open trade and in- populism. In 2005 MrKirchnerdecided to turn the defunct build- vestment policies by locking itself into NAFTA. But dis- ing into a cultural centre. His wife, Cristina Fernández de Kirch- appointing growth, widespread corruption and gang violence ner, who succeeded him as president, eventually completed the have left many Mexicans dissatisfied. The leading candidate for project and named the building after him. Her chosen successor the next presidential election, due in July of 2018, is Andrés Ma- lost the 2015 presidential elections to none other than Mr Macri’s nuel López Obrador, a formermayor ofMexico City, who attacks son, Mauricio, whose government swiftly rescheduled the debts the crookedness of the establishment and seeks a revision of that his father’s company still owed to the state. NAFTA. In some ways, he islike a mirrorimage ofAmerica’spres- The Macri government has been tidying up a lot else, too. ident, leaning heavily to the left just as Mr Trump leans to the Among other things, it consolidated Argentina’s multiple ex- right. In their politics, as in other ways, emerging economies are change rates, stopped propping up the peso and steadily relaxed beginning to resemble their rich counterparts more closely. 7

The Economist October 7th 2017 19 SPECIAL REPORT EMERGING MARKETS

Convergence cade, lent credence to the idea of a middle-income trap. But this report has argued that this dan- Merging markets gerwasneverasgraveasmany people believed. Reprints Believers in the trap often Reprints of this special report are available argue that once developing at US$7.00 each, with a minimum of 5 copies, plus 10% postage in the United Emerging economies are becoming more like their countries have exhausted the States, 15% postage in Mexico and Canada. rich counterparts easy gains from cheap labour, Add tax in CA, DC, IL, NY, VA; GST in Canada. they stagnate. Some worry that For orders to NY, please add tax based on THESE ARE NOT your father’s emerging markets, notes even the transient advantages of cost of reprints plus postage. For classroom use or quantities over 50, Mark Dow, a money manager who used to work for the cheap labour have been eroded please telephone for discount information. IMF, on his blog. The phrase alludes to a1980s car advertisement by automation, exposing poor Please send your order with payment by contrasting a range of flashy new models with the tried-and- countries to “premature dein- cheque or money order to: trusted versions bought by a previous generation. Today’s dustrialisation”. But a closer Jill Kaletha of Foster Printing Service Telephone: +1 866 879 9144 Extension: 168 emerging markets are also different from earlier models. But un- look at the evidence suggests or email: [email protected] like the cars, they are less exciting than their predecessors. that industrial employment in (American Express, Visa, MasterCard and In the past, they suffered from a chronic lack of macroeco- emerging markets has not de- Discover accepted) nomic credibility. They could not persuade outsiders to hold clined, it has merely migrated to For more information and to order special their money or their debt through thick and thin, unless they an- the biggest of them, China. reports and reprints online, please visit our chored their exchange rates to the dollar and denominated their Moreover, this migration may website www.economist.com/rights debt in harder currencies than their own. So they have often now be reversing, as Chinese struggled to offset downturns by easing either monetary or fiscal employment shifts to services, Future special reports policy.They could not cut interest rates forfearofsinking the cur- leaving gaps for other work- E-commerce October 28th rency and unleashing inflation, and they could not cut taxes or shops ofthe world to emerge. Tech in Africa November 18th Marriage November 25th increase public spending without raising fears of default. They Nine of the 24 members of were locked into a “procyclicality trap”. the benchmark MSCI stock- This lackofmacroeconomic leeway leftthem vulnerable to market index are already high- Previous special reports and a list of forthcoming ones can be found online: rising American interest rates and sudden outflows of foreign income countries, according to economist.com/specialreport capital. Italso made itharderforresource-rich economies to cope the World Bank, and others are with the vagaries of the commodity cycle. But, as this special re- on the cusp. Indeed, the average port has argued, emerging economies have begun to grow out of income per person of the index members, weighted by the size these handicaps. Their central banks have earned more infla- of their economies, is now much closer to the bank’s high-in- tion-fighting credibility of their own, making it easier for their come threshold ($12,236) than it was when the indexbegan in the governments to sell debt in their own currency. That, in turn, has late 1980s. helped to loosen the pro-cyclicality trap. Thisnewmaturityisalso reflected in these countries’ finan- cial-market performance. In the past, emerging-market equities Cycling ban offered investors the prospect ofhigher returns, subject to higher This greatermacroeconomic maturity should allow emerg- volatility. But over the past five years they have offered a combi- ing economies to cope better with two global dynamics that nation of risk and return that sits well within developed-market have often scuppered them in the past: the commodity cycle and norms, accordingto MSCI. In theirmarketperformance and their the Fed cycle. It is therefore unlikely that the Fed’s efforts to raise macroeconomic policies, the gap between emerging economies interest rates and trim its balance-sheet will condemn emerging and the developed world has narrowed. It is therefore ironic that economies to another bout of turmoil like the taper tantrum of one of the biggest dangers emerging markets face is a downward 2013, let alone the Volcker shockof1979-81. That shock, which left convergence in their politics. many promising Latin American countries languishing for a de- President Donald Trump professes to admire the strong- man politics of Russia, and he covets the trade surpluses of Chi- na. Steve Bannon, his former chief strategist, believes China has borrowed the “American system” of manufacturing protection proposed by Alexander Hamilton in the late 18th century. He wants Mr Trump to bring that system back home. Rising protec- tionism in America would limit the scope for emerging econo- mies to grow rapidly through labour-intensive manufacturing. And the opportunity for these economies to anchor their trade and investment policies in multilateral agreements has also di- minished, thanks to America’s disenchantment with such deals. Mr Agtmael hoped that his “emerging markets” label would distance these economies from a long list of third-world associations: “Flimsy polyester, cheap toys, rampant corruption, Soviet-style tractors and flooded rice paddies”. By those stan- dards emerging markets have been 80% successful, shedding all of these associations except the third. They bear little resem- blance to the marketsofthe crisis-ridden 1990s, letalone the ones Mr Agtmael named a decade earlier. As it happens, he is now a grandfather, and these are not his emerging markets. 7

20 The Economist October 7th 2017 Middle East and Africa The Economist October 7th 2017 49

Also in this section 50 Ethnic tension in Ethiopia 50 Aid that suits Africa’s leaders 51 The Palestinians try to reconcile 52 Lebanon’s railway dreams 52 Jalal Talabani, a lamented Kurd

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Liberia’s election president and war criminal. Mr Taylor is still popularin some places—and reviled in Into a vague future others. Ms Taylor says Mr Weah chose her because of her tribe, sex and the fact that she lives in Bong county, the third most populous, where she has been senator since 2005. MONROVIA Ms Taylor’s frankness highlights a truth of Liberian politics: ethnicity and geogra- Many candidates want to run Liberia. Few have a plan phy matter. Tension between the descen- S LIBERIA prepares for a general elec- most 5,000 Liberians between 2014 and dants of Liberia’s founders, who were for- Ation on October 10th, people are mak- 2016. The UP’s incumbency, therefore, may mer slaves from America, and its native ing their preferences known. Some wear T- not be an advantage for Mr Boakai. In 2014 population calmed as indigenous politi- shirts with the faces of candidates on only two of12 senators seeking re-election cians rose to prominence (Ms Sirleaf, Mr them. Crowds of exuberant supporters kept their seats. “We are struggling,” says Boakai and Mr Weah are all natives). But block roads. The country was devastated Catherine Borbor, who sells drinks in cen- candidates still play regional politics. Even by civil war for the best part of14 years un- tral Monrovia, the capital, and voted to re- Ms Sirleaf, in 2011, won the support of til 2003. But aside from a few scuffles, the elect Ms Sirleaf in 2011. “So we decided to Prince Johnson, a former warlord known campaign has been peaceful. People feel lookforanother person.” for overseeing the torture and murder of excited, not adversarial. Liberia is set to The person she found is George Weah, the former dictator, Samuel Doe, in 1990. have its first transfer of power from one who is best known for having once been a More important, from MsSirleaf’sperspec- elected president to another since 1944. great footballer. Anational hero, he lost the tive, he was popular in Nimba county, Li- It is still not clear who among the 20 election to Ms Sirleaf in 2005 and was also beria’s second most populous. candidates will succeed Ellen Johnson Sir- on the losingticket (as the vice-presidential Other contenders in this year’s race are leaf, the president, who won a Nobel prize candidate) in 2011. But the former slum- following her lead. Charles Brumskine, for securing Liberia’s peace. “Continuity” dweller trounced Ms Sirleaf’s son, Robert, who served as president of the Senate un- is the message of her Unity Party (UP). Its in a senate election in 2014. He won 78% of der Mr Taylor until he fled in 1999, is run- candidate is Joseph Boakai, Ms Sirleaf’s the vote in Liberia’smostpopulouscounty, ning with Harrison Karnwea, a formeroffi- mild-mannered vice-president, who is Montserrado, which includes Monrovia. cial from Nimba county. Benoni Urey, a seen by many as a safe (and uncorrupt) wealthy businessman, had reportedly choice. But although Ms Sirleaf has said Hope, change, whatever you want hoped to team up with Ms Taylor but set- she backs Mr Boakai, she did not appear at Like most other candidates, Mr Weah is tled forthe son of a slain Nimba politician. his campaign launch. And in September running on a vague platform of improving More such manoeuvring will occur before she told the UN General Assembly that her education, employment and health. “I the second round of voting, probably next stepping down “paves the way forthe next have been very successful. I have done so month, when the field is narrowed to two generation of Liberians to lead the coun- well,” he told Radio France Internationale candidates (assuming no one gets 50% of try”. Mr Boakai is 72. “Perhaps she wants to when asked to defend his poor record in the vote this time around). be neutral,” saysPatrickWorzie, a senior of- the Senate. His slogan is the clunky, Whoever emerges as president will un- ficial in the UP. Obama-esque “Change For Hope”. doubtedly reward political backers with War-weary Liberians give the UP credit Mr Weah’s star power means he proba- plum jobs and patronage. But Liberia’s re- for maintaining peace and stability. But blywill notneed to saymuch in order to re- cent economic woes may lower the gains they also complain of rampant corruption tain his base ofdevoted supporters. But his from corruption. As one international offi- and a shockingly bad education system. choice of Jewel Howard Taylor as his run- cial puts it: “Even ifyou’re the most corrupt The economy has struggled to recover ning-mate may prove a misstep. Ms Taylor leader going, you’re not going to make vast from the Ebola epidemic, which killed al- is the ex-wife of Charles Taylor, the former amounts ofmoney in Liberia.” 7 50 Middle East and Africa The Economist October 7th 2017

Red YEMEN SUDAN Chinese aid in Africa ERITREA Sea

Blue No place like home Nile AMHARA DJIBOUTI The birthplaces ofAfrican leaders receive an awfullot ofaid from China White Nile Addis SOMALIA N 2010 Yang Jiechi, then China’s foreign Mary in America, has scanned through Ababa Awaday Harar Iminister, visited Yoni,a village in Sierra media reports to categorise Chinese ETHIOPIA Leone. Mr Yang had a job to do: hand giving, making it easier to compare ap- SOMALI SOUTH over a fancy new school, financed by ples with apples. It geolocated more than Omo SUDAN OROMIA Chinese aid, to the local authorities. 2,000 projects in 50 African countries Sierra Leone certainly needed more between 2000 and 2013. A team ofecono- schools, but some wondered why the mists recently used the database to see if UGANDA KENYA 500km Chinese chose the middle ofthe bush for these projects coincided with presidents’ the project. birthplaces. Ethnic tension in Ethiopia It just so happens that Yoniis the In a working paper, the pundits show home village ofErnest Bai Koroma, Sierra that China’s official transfers to a leader’s Unity v diversity Leone’s president. Yoni’sresidents, note birth region nearly triple after he or she Daron Acemoglu and James Robinson, assumes power. Even when using a two economists, live in new houses that stricter definition ofaid provided by the would pass for“palaces” by the stan- OECD, a club ofmostly rich countries, an HARAR dards ofrural Africa. increase of75% was found. They got Scholars have long had a hunch that similar results when looking at the birth- Anotheroutbreakof violence is testing Chinese aid could be more easily manip- places ofpresidential spouses. Crucially, Ethiopia’s ethnic federalism ulated than the Western sort, which often they found no such effect with aid doled OR centuries the city of Harar, on the comes with strings attached. A Chinese out by the World Bank, their benchmark Feastern fringes of the Ethiopian high- white paper in 2014 stated that the gov- for Westernassistance. “Webelieve lands, was a sanctuary, its people protected ernment would not impose any “politi- Chinese aid is special,” says Andreas by a great wall that surrounded the entire cal conditions” on countries asking for Fuchs, a co-author ofthe study. city. Butin the late 19th century it was final- help. The commerce ministry,China’s Even before receiving aid, leaders’ ly annexed by the Ethiopian empire. Harar lead aid agency,says most projects are birth regions are often richer than aver- regained a bit of independence in 1995, initiated by recipient states. This ap- age, notes Roland Hodler, another co- when the area around it became the small- proach makes aid more vulnerable to author. China gives them a further est of Ethiopia’s nine ethnically based, misuse by local leaders, say critics. boost—the paper concludes that a10% semi-autonomous regions. Today it is rela- But proving such corruption is diffi- increase in Chinese aid lifts regional GDP tively peaceful and prosperous—and, since cult. China regularly blends aid with by 0.24%. This suggests that China is last month, a sanctuary once more. commercial loans, confusing researchers. widening geographic inequalities within In recent weeks thousands of Ethiopi- Since 2013, however, AidData, a research recipient countries. The authors stop ans have poured into areas around Harar, lab based at the College ofWilliam and short ofsaying that it makes social unrest fleeing violence in neighbouring towns more likely,but they say it is a possibility. (see map). Nearly 70,000 people have China’s approach to aid has other sought shelter just east of the city. Several Strings detached side-effects. In a paper released earlier thousand more are huddling in a make- Africa, average number of World Bank conditions this year, Diego Hernandez, an econo- shift camp in the west. Most are Oromo, Per project mist, showed that China’s rise as a devel- Ethiopia’s largest ethnic group. Its mem- opment financier has increased competi- 40 bers clashed with ethnic Somalis in Febru- tion between donors. This, in turn, has ary and March, resulting in the death of strengthened recipients’ bargaining hundreds. The violence erupted again in 30 power, says Mr Hernandez. Traditional September, when more than 30 people donors have responded by lowering were killed in the town of Awaday. Re- 20 conditionality,or the number ofstrings venge killings, often by local militias or po- attached to aid (see chart). Using data lice, have followed, pushing the death toll 10 from1980 to 2013, he finds that African still higher. In response, the government countries have received15%fewer condi- has sent in the army. 0 tions from the World Bankforevery1% Ethnic violence is common in Ethiopia, 1980 85 90 95 2000 05 10 13 increase in Chinese aid. Mr Koroma is no especially between Oromos and Somalis, Source: World Bank Development Action Database doubt pleased. whose vast regions share the country’s longest internal border. Since the introduc- tion of ethnic federalism in 1995, both swept to power in 1991 after a bloody 15- Butthe wayfederalism wasimplement- groups have tried to grab land and re- year civil war, federalism was seen as a ed caused problems from the start. New sources from each other, often with the way to placate the ethnic liberation move- identity cards forced people to choose an backing of local politicians. A referendum ments that helped it to power. The previ- ethnicity, though many Ethiopians are of in 2004 that was meant to define the bor- ous regime had been dominated by the mixed heritage. Territories often made lit- der failed to settle the matter. A peace Amhara, the second-largest ethnic group tle sense. In the Harari region, a minority agreementsigned bythe two regional pres- (the Eritreans broke away to form a new of Hararis rule over much bigger popula- idents in April was no more successful. state). Eventually ethnic loyalties would tions of Oromos and Amharas, a source of When the ruling Ethiopian People’s wither as people grew richer, went the resentment. Boundaries that were once Revolutionary Democratic Front (EPRDF) thinking ofthe Marxist-inspired EPRDF. porous became fixed, leading to disputes. 1 The Economist October 7th 2017 Middle East and Africa 51

2 For years the EPRDF sought to dampen ment, now dominated by the Tigrayan eth- charge ofthe misery. the tension by tightly controlling regional nic group, was rocked by a wave ofprotests So are regional powers. Qatar, the main politics. Butitsgrip hasloosened over time. last year by the Oromo and other frustrat- sponsor of Hamas, is under embargo by Local governments have grown stronger. ed groups. Egypt and three of its Gulf neighbours, Regional politicians are increasingly push- Many complain that the rulers in Addis which want the emirate to cut ties with Is- ing ethnic agendas. The leaders ofOromia, Ababa are doing too little. They have been lamists. It has not halted aid to Hamas, but the largest region, have drafted a bill de- slow to respond to the recent violence, fu- it has quietly urged the group to reconcile manding changes to the name, administra- elling suspicions that they were complicit. with Fatah. The United Arab Emirates has tion and official language of Addis Ababa, “We are victims of the federal govern- dangled the prospect of massive invest- the capital, which has a special status but ment,” shouts Mustafa Muhammad Yusuf, ment in a post-Hamas Gaza. It is working sits within Oromia. They have stoked eth- an Oromo elder sheltering in Harar. “Why closely with Muhammad Dahlan, an ex- nic nationalism and accused other groups doesn’t it solve this problem?” Fatah security boss who was banished by ofconspiring to oppress the Oromo. Federalism may have seemed the only Mr Abbas and now lives in Abu Dhabi. Politicians in the Somali region are no option when it was introduced in 1995. But The greatest pressure has come from more constructive. They have turned a some now suggest softening its ethnic as- Egypt, which controls Rafah, the sole bor- blind eye to abuses by local militias and a pect. “In the past the emphasis was too der crossing accessible to most Palestin- controversial paramilitary group known much on ethnic diversity at the expense of ians. It has been largely closed since 2013. as the Liyu. The region’s president “has a unity,” says Christophe Van der Beken, a Egypt accuses Hamas of working with ji- fairly consistent expansionist agenda”, professor at the Ethiopian Civil Service hadists who are fighting a bloody insur- says a Western diplomat. “He may have University. “The challenge now is to bring gency in Sinai. Though the charges are ex- spied an opportunity.”The federal govern- the latter back.” 7 aggerated, Hamas has indeed allowed dozens of wanted Egyptian militants to seek refuge in Gaza. The generals in Cairo Palestinian politics would be happy to see Mr Abbas’s men backon the border. Hamas extends a hand Hamas has not agreed to that. It may let Mr Abbas run the schools and hospitals, but it will not give up a militia that boasts tens ofthousands offighters and a cache of rockets. “This will never be up for discus- CAIRO sion,” says Moussa Abu Marzouk, a top Ha- mas official. So this effort is likely to fail for An effortto end the riftbetween Hamas and Fatah will probably fail the same sortsofreasonsasthe past six. Mr T MUST have felt like déjà vu for Rami posed by both Israel and Egypt. Condi- Abbas cannot accept a well-armed group IHamdallah, the Palestinian prime minis- tions worsened further this spring when operating under his nose. It would be a ter, as he crossed the heavily-fortified bor- Mahmoud Abbas, the Palestinian presi- threat to the unpopular president’s tenu- der into Gaza on October 2nd. It was his dent, slapped his own sanctions on the ter- ous rule. first visit in two-and-a-half years. There ritory to press Hamas into a deal. Most of It could also bankrupt his government. were speeches, rallies and lofty promises Gaza’s 2m people receive just four hours of Israel would probably withhold the tax to end the schism that has paralysed Pales- electricitya day.Tapwaterisequally scarce revenue on which the PA depends, and tinian politics for more than a decade. It and when it is available it is brackish and some Western countries might suspend was like a replay of a trip he made in 2014 polluted. Nearly two-thirds of young peo- foreign aid. “Ifsomeone from Hamas has a to inaugurate a new unity government— ple cannot find work. In dingy, crowded weapon, I’ll put him in prison,” Mr Abbas which fell apart within weeks. hospitals, basic medicines are in short sup- told Egyptian television. He may not get The Palestinian territories split in 2007, ply. Hamas is keen to put someone else in the chance. 7 a year after Hamas, the militant Islamist group, won a majority in parliament. It seized control of Gaza after months of bloody fighting with its nationalist rival, Fatah. Since then Hamas has run the coast- al strip as a separate fief, with its own civil servants and police. The two parties have signed six reconciliation deals meant to end the split, but none held. Hamas was loth to give up its enclave. Now it seems more amenable. It has agreed to cede control ofthe civilian minis- tries in Gaza. Over the coming year it will add 3,000 police officers from the Palestin- ian Authority (PA), which runs the West Bank and is dominated by Fatah. Yahya Sinwar, Hamas’s number two, said he would “breakthe neck” ofanyone who op- poses reconciliation. (That may not be an idle threat: in the 1980s his job was to kill Palestinians who collaborated with Israel.) Hamas has few alternatives at this point. Life in Gaza has been grim for a de- cade, amid three wars and a blockade im- Mr Hamdallah (right) tries to shake loose some concessions 52 Middle East and Africa The Economist October 7th 2017

Lebanon’s railway border and on to the city of Homs—and years he battled his Kurdish rival, Masoud thus with luck farther afield in the Middle Barzani, pittinghishumble originsand left- Back on track? East—would cost far less and boost trade. A ist leanings against the Barzanis’ tribal heft. consortium of Italian firms is also looking (In 1996 Mr Barzani even summoned Sad- at tunnelling through the mountain to dam’s tanks to invade Mr Talabani’s east- reopen the Beirut-Damascus route. ern fief, Sulaymaniyah.) But in recent years BEIRUT Despite the enthusiasm, Lebanon’s Mr Talabani, ever the conciliator, endorsed trains will go nowhere until the war next- Mr Barzani’s extended presidency of the Syria’s destruction revives a dream of door stops. “No one wants to put money in Kurdish enclave, healing that rift. rebuilding Lebanon’s railway when it’s still unclear what’s going to hap- Claiming Mr Talabani as one of his RAVELLERS to Lebanon have long be- pen in Syria,” says Raya Haffar, a former fi- own, Haider al-Abadi, Iraq’s prime minis- Tmoaned the state of the country’s nance minister. Firms from the Gulf and ter, declared three daysofmourning, and is roads. Writing in the 1850s, an Irish banker, China are eyeing investments that seek to planning what is likely to be a state funeral JamesFarley, called the route from Beirut to capture some of the $200bn needed to re- when his body arrives back from Ger- Damascus a “wretched mule path”. The build Syria. A railway from Lebanon’s many. Kurdish officials are heading to perilous journey over rough mountain ports to Syria’s cement-hungry cities might Baghdad, hoping to repair relations while passes took four days, as long as you encourage them. But even ifthe war ends it marching beside his cortège. Mr Abadi is dodged bandits and avoided the winter will take years before work on a new rail refusing to talk until the Kurds invalidate snow. The mules have gone but the sorry network can begin. If Lebanon’s track re- their recent referendum, which they claim state of the country’s roads persists. Years cord isanythingto go by,itsrailway dreams resulted in a 93% vote forindependence. of political chaos, low investment and are more likely to hit the buffers. 7 There are signs that both sides are try- more recently the influx of1.5m Syrian ref- ing to de-escalate the crisis. Mr Abadi has ugees, which hassapped resources, exacer- relaxed financial restrictions and an inter- bated the problem. Could a revival of rail- national flight embargo on the Kurdish en- ways save the day? clave. Kurds (and Mr Talabani’s body) still The fate of Lebanon’s rail network must fly via Baghdad, but airlines are ex- tracks the rise and fall ofthe country’s for- pecting that requirement to be dropped tunes. Built by an enterprising French soon, too. count when Beirut was still ruled by the Other threats still loom. Iranian tanks Ottoman Turks, the first line opened in have deployed near Kurdistan’s eastern 1895, cutting the trip to Damascus to nine border. Turkey is discussing the return of hours. Tourism, trade and a nascent wine Iraqi immigration officials to its crossings industry set up by a French road engineer with the enclave, which would subject flourished. When T.E. Lawrence’s band of Kurdistan to Iraqi border controls for the saboteurs blew up parts of the Turks’ Mid- first time in 25 years. But the tank move- dle East rail network in the first world war, ments are seen as posturing, and Turkey Lebanon’s dynamic railway factory pro- has not yet carried out its most substantial duced the spares needed to mend the dam- threat: to plugthe oil pipeline that provides age. By the eve of next world war, you the bulkofthe Kurds’ revenues. could travel from Beirut to London. At its Kurds are divided. Some say the reac- peak, the country’s railway was said to tion of the government in Baghdad proves span 408km, roughly the same amount of its undying hostility. On October 3rd Arab trackas today’s London underground. Iraqi MPs prevented Kurdish ones from en- The skeletal remains of Lebanon’s iron Jalal Talabani tering the parliament in Baghdad unless heyday are now scattered across the coun- they renounced the referendum. Suppor- try. Rusting trains, dilapidated stations and Kurdish and Iraqi ters of Nuri al-Maliki, a former prime min- tracks overgrown with wild flowers are all ister, talkofa vote ofno-confidence in Fuad that is left. The civil war, which erupted in Massoum, a Kurd who is MrTalabani’s suc- 1975 and ravaged the country forthe next 15 cessor as Iraq’s president. If he goes, some years, gradually destroyed the network. predict Mr Maliki would bid forthe largely Militias blew up the tracks. The Israeli titularpost as a step towards regaining con- The mediating skills ofthe Kurds’ Jalal army shelled them. Syria’s security forces trol of Iraq. “It’s like the Arab chauvinism Talabani will be missed dug up parts ofthe line to sell as scrap met- of the Baath,” complains an ousted Kurd- al in Pakistan. An open-airnightclub in Bei- UNERALS can bring estranged parties ish official leaving Baghdad, referring to rut’s old central station is the closest most Ftogether. And ifanyone’s could heal the Saddam’s old party. Lebanese will ever come to a train, provid- fissure between leaders in Baghdad and Other Kurds say the problems are self- ed they can afford the fancy cocktails. those in Iraq’s Kurdish enclave, that of Jalal inflicted. Three Kurdish parties, including Talk of restoring the tracks to their for- Talabani should be the one. Mr Talabani Mr Talabani’s Patriotic Union of Kurdistan mer glory is nothing new. Several govern- died on October 3rd in Germany, aged 83. (PUK), have refused to join a new “political ment-commissioned studies since the For 60 years “Mam”, or uncle, as Arabs and leadership” body set up by Mr Barzani to 1990s have argued that a railway linking Kurds alike called him, made a career out prepare for independence. Kurdish elec- Lebanon’s coastal cities with Syria makes ofbridging differences. tions due next month might have shown economic sense. The latest, funded by the After Saddam Hussein fell in 2003, he where sympathies lay. But Mr Talabani’s European Investment Bank, says a line became Iraq’s first non-Arab president. A five-year absence because of sickness has connecting Beirut to the northern port city Sunni preacher’s son, he kept excellent re- left the PUK embroiled in a succession cri- of Tripoli would generate enough revenue lations with Shia politicians, particularly sis and ill-placed to campaign. His one- to cover operating costs and recoup some in Iran. He kissed both Iran’s president, time deputy, Barham Salih, has split to of the $3bn it would take to build. A track Mahmoud Ahmadinejad, and America’s found a new party. If only Mr Talabani shipping freight from Tripoli to the Syrian secretary of state, Condoleezza Rice. For were around to offeradvice. 7 Europe The Economist October 7th 2017 53

Also in this section 54 Russia shifts on Ukraine 55 The EU’s Eastern Partnership 55 German radical theatre 56 Preserving the Bialowieza forest 57 Charlemagne: Love triangle

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

Spain and Catalonia In the event ofa UDI, few doubt that Mr Rajoy will feel obliged to suspend, at least Outrage in Catalonia in part, Catalonia’s autonomy, is possible under Article 155 of Spain’s constitution (never before invoked). The king appeared to signal this when he criticised the Cata- lan authorities’ “inadmissible disloyalty” BARCELONA AND MADRID to the democratic state and called for the upholding of constitutional order. But in- The government mishandles Catalan defiance voking Article 155 “will be another error in HENMariano Rajoypledged thatthe fourofthem serious, according to the Gen- a long list of mistakes” by the Spanish gov- Wreferendum on independence organ- eralitat, as Catalonia’s regional govern- ernment which have boosted support for ised by the Catalan government for Octo- ment is known. The central government independence, Mr Puigdemont told the ber 1st would not take place, it always said 33 policemen were hurt. Although the BBC this week. looked like a hostage to fortune. And so it police closed some 320 polling stations be- The eventsofOctober1sthave given the has proved. As riot police used force to fore being ordered to withdraw, thousands pro-independence coalition new allies. evict activists from polling stations, pic- of others functioned. The Generalitat Ada Colau, the left-wing but non-seces- tures of elderly citizens bloodied by trun- claimed that 2.3m people voted, or around sionist mayor of Barcelona, backed a re- cheon blows caused dreadful damage to 43% of an electorate of 5.4m. With oppo- gional general strike on October 3rd called the image of Spanish democracy. And the nents of independence staying away in to protest against police violence and “in vote mostly went ahead regardless. droves, 90% of the votes were Yes. The defence of democratic liberties”. For the For Mr Rajoy, Spain’s conservative numbers cannot be verified, but are in line first time, Catalan secessionism has won prime minister, it was the worst of both with recent opinion polls, which have sup- some sympathy in Europe beyond far-left worlds. It leaves a question-mark over the port forleaving at 40-45%. and far-rightallies. The European Commis-1 future of his government, and even of his country. On the back of the vote, Carles Puigdemont, the Catalan president, said Referendum result*,October 1st 2017, % Turnout, % BASQUE Blank or null 2.9 the region’s parliament would issue a uni- CANTABRIA COUNTRY NAVARRE YES NO 43 lateral declaration of independence (UDI) ASTURIAS 89.3 7.8 in the coming days, in accordance with a GALICIA LA RIOJA NIA Catalonia as % of Spain Catalonia Spain LO law it rushed through last month. Spanish TA 2016 2016 CASTILE & LEÓN ARAGÓN A C democracy faces “very grave times”, de- SPAIN Barcelona GDP GDP per person, €’000 L clared King Felipe in a rare televised ad- S 01530 A C 20.1 A I Madrid I R G A dress on October 3rd. He was right. C E L Catalonia Rest of Spain N U A CASTILE- E

B L The referendum took place peacefully T EXTREM-

LA MANCHA A GVA† Unemployment, % in much of Catalonia, in a celebratory at- R ADURA V

O 02550 Mediterranean 20.3

P MURCIA mosphere. The trouble happened in Barce- Sea lona and other larger towns. Activists had ANDALUSIA occupied schools where polling was to CANARY ISLANDS Population Youth unemployment, % 02550 take place. Riot squads of the Spanish na- 250 km 16.0 tional police and the Civil Guard waded in † to evict them, causing almost 900 injuries, Sources: Catalangovernment.eu; Idescat; Eurostat *Provisional, 95% of votes counted Gross value added 54 Europe The Economist October 7th 2017

2 sion ignored Mr Puigdemont’s invitation nomic slump. But he shows little sign of to mediate, but did criticise violence and the flexibility and imagination that resolv- KHARKIV LUHANSK called on both sides to talk. It also reiterat- ing the Catalan problem demands. Letting UKRAINE ed its support for Mr Rajoy and his efforts it fester carries a cost. Mr Rajoy’s minority DNIPROPETROVSK Line of to uphold the constitution. government has had to postpone sending Contact Luhansk Dnipropetrovsk S B A Mr Puigdemont has repeatedly outwit- the 2018 budget to Congress, because the Donetsk N O ted Mr Rajoy. The government underesti- events in Catalonia mean it has lost, for D mated the strength, staying power and un- now, the support of the Basque national- DONETSK RUSSIA ity of the independence movement. “We ists. The Catalan conflict could dent eco- are convinced that time will defuse this nomic recovery. This week Spanish shares ZAPORIZHIA problem,” a senior official in Madrid said and bonds have been pummelled. Mariupol 100 km in March. That it did not showed how out The Catalan government has quietly of touch with Catalan realities the govern- constructed the rudiments of an indepen- Sea of Kiev ment is. Mr Rajoy’s government is stuffed dent state. It has schooled two generations UKRAINE Azov with abogados del estado—state lawyers in its (questionable) narrative of oppres- CRIMEA who form an elite bureaucratic corps—but sion. The Catalan police chose not to use is short of politicians and communicators. force to close polling stations. “Catalonia is On the referendum, the prime minister already different, it’s a new state in Eu- Yet as unpalatable as the proposal is, its “decided to act in the only way he knows rope,” exclaimed Dolors Solà, a representa- mere appearance hints at important shifts how, which is to apply the law”, says a tive of the ruling pro-independence co- in Russian thinking. “Summoning the Un- source close to the ruling People’s Party alition at a polling station in Vic, a town ited Nations deep into Russia’s historical (PP). “He’s disconcerted because applying north ofBarcelona. space is a serious step,” says Dmitri Trenin, the law didn’t work. He doesn’t know Not yet: secessionism has failed to head of the Moscow Carnegie Centre, a what to do.” achieve sufficient support in Catalonia to think-tank. impose itself. A silent, divided and leader- Until recently, the status quo in Ukraine What’s there to talk about? less majority is against it, including some largely satisfied Moscow. Heading into On the evening of the vote, Mr Rajoy 30% of the population who want a better 2017, the Kremlin saw a rosy geopolitical blamed the violence on the Generalitat. deal within Spain. Letting matters fester picture: Donald Trump won the White “We did what we had to do,” he said. But has costs for Catalonia, too. “If there’s no House and spoke of lifting sanctions on he also called on all political forces in the negotiation we could go to an Ulsterisa- Russia; a victory by Marine Le Pen seemed parliament to “reflect together on the fu- tion…with two worlds living in the same possible in France; Angela Merkel was pre- ture”. Ministers insisted that after October space,” fears Xavier Capelles, a tax lawyer occupied with her own re-election in Ger- 1st, talks could start. But can they? Neither in Vic, recalling the religious bitterness that many. Ukraine, for its part, was fretting side now trusts the other. The government disfigured Northern Ireland foryears. about being abandoned by the West. As re- has said it cannot negotiate with Mr Puig- Until now, the independence move- cently as last spring, Russian officials main- demont, because ofhisdefiance ofthe con- ment has been impeccably non-violent, al- tained that the Ukrainian government stitution; many in Catalonia abhor Mr Ra- beit constantly provocative. But the situa- would soon collapse and that the Ukrai- joy and the PP, which campaigned against tion is volatile. If Mr Puigdemont and Mr nian elite, as one Kremlin adviser put it at an attempt to give the region greater pow- Rajoy cannot between them swiftly take the time, would “come to theirsenses” and ers in a new autonomy statute in 2006. constructive steps towards an agreement return to Russia’s embrace. The bigger difficulty is what to discuss. or, worse, ifMr Rajoy attempts to arrest the The situation in Ukraine now seems to Spain’s constitution of1978 granted sweep- Catalan leader, that could easily change. 7 be turning into “a stone around the neck”, ing powers of self-government to Catalo- says Fyodor Lukyanov of the Council on nia. It gave Spain, including Catalonia, de- Foreign and Defence Policy, a Russian gov- mocracy, a welfare state and much greater Ukraine and Russia ernment advisory body. The hopes that prosperity (until a housing bubble burst in Ukraine would implode or that Moscow- 2008). But the system was made unwieldy Back to the table friendly forces could take power in presi- by a decision to grant regional autonomy dential elections due in 2019 have evapo- across the country, rather than just to the rated. The international backdrop has tilt- Catalans, Basques and Galicians who had ed too. German politics have moved to the long demanded it. And it has not dimin- KIEV AND RIGA right; Emmanuel Macron occupies the Ely- ished Spanish conservatives’ attachment sée; Russian officials strain to decipher Mr VladimirPutin’s dubious peacekeeping to a centralising tradition, says José Álvarez Trump’sshifting stances on Twitter. offersignals an important shift Junco, a historian of nationalism at Ma- Ifanything, Western pressure on Russia drid’s Complutense University. “They’d HE proposal came out of nowhere. has increased. This summer, America like to think Spain is like France and Ma- TAfter years of swatting down Ukrai- named Kurt Volker, a hawkish former am- drid like Paris.” As a result, Barcelona does nian calls for international peacekeeping bassador to NATO, as its new envoy deal- not have the status of a de facto joint capi- forces, Vladimir Putin changed course ing with Ukraine, and the White House re- tal that it deserves. ahead of the UN General Assembly last vived discussions about providing the Mr Rajoy is thus constrained by pres- month, putting forward his own plan for country with defensive weapons. Cru- sure from his base. “The PP wins elections so-called blue helmets in eastern Ukraine. cially, America’s Congress strengthened thanks to its [Spanish] nationalism and ex- Officials in Kiev and the West dismissed sanctions on Russia. plicit anti-Catalanism,” says Mr Álvarez. the Russian offer as a cynical ploy. The de- For Mr Putin, the sanctions hamper his Over the past few days, Spanish flags have tails, diplomats say, betray Russia’s true in- ambition to be respected as an equal started to appear on balconies across tent: MrPutin foreseespeacekeepingforces among world leaders. Some Western offi- much ofthe country. stationed along the front line inside Uk- cials have noted a recent change of tone in Mr Rajoy’s dogged determination, raine, and not along the border with Rus- Moscow. In complaining about sanctions, sangfroid and quiet ruthlessness helped sia—essentially formalising the internal di- some of the Kremlin’s biggest hawks Spain out of its banking crisis and eco- vision ofthe country. sounded almost “pathetic”, according to 1 The Economist October 7th 2017 Europe 55

2 one former American official. Trying to Germany strike a more conciliatory posture, Russia has this autumn started dispatching repre- sentatives to trans-Atlantic gatherings it Who owns the people’s stage? long considered hostile. “Putin is ready to bargain,” reckons Mr Trenin. The peace An escalating row overthe future ofBerlin’s most avant-garde theatre plan serves as an opening bid. Whether he is willing to make real com- OCH KUNST”, or “Artafter all”, promises remains to be seen. Mr Putin’s “Dread the blue banner tagged to the chief goal—halting Ukraine’s integration façade ofthe Volksbühne, a theatre in with the West—has not changed. The central Berlin. It was put up by a group of Kremlin does not trust Ukraine’s president, left-wing activists who occupied the Petro Poroshenko, to ensure the security of building in late September. They want its separatist proxies, and Mr Putin cannot the theatre to be managed by a “col- be seen to betray them. One observercom- lective”. The stunt was part of a wider pares the situation to having one’s hand protest against cultural policies which stuck in a door, and needing to pull it out the occupiers believe favour “mass tou- without letting the door close. rism” and gentrification at the expense of Western officials, though deeply scepti- local artists and poorer residents. cal of Russia’s intentions, see no harm in The occupation (or “transmedia the- pursuing dialogue. Mr Volker is planning a atre performance”, as the activists call it) second meeting with Vladislav Surkov, a was the latest act in a drama over Berlin’s high-level Kremlin operative responsible cultural politics that has dragged on for for Ukraine. They may soon find them- over two years. At the centre ofthe row is selves at an impasse again. Rather than Chris Dercon, a Belgian manager who bringing the sides closer to resolution, the ran London’s Tate Modern museum knotty details of peacekeeping merely un- before taking over as artistic director of derline how farapart they remain. 7 the Volksbühne (“people’s stage”) this season. The appointment, announced in No crowd-pleasers here the spring of2015, ousted FrankCastorf, a The EU’s Eastern Partnership famousEast German director who had chance, there are several who mourn the led the theatre to international renown old ways. The Volksbühne has taken on a Disappointed with politically charged productions— symbolic role in a wider debate over the and generous state subsidies. relationship between art, globalisation suitors Many in Berlin’s cultural establish- and the future ofthe city. ment worry that Mr Dercon, who has There is no sign that things will get RIGA little experience oftheatre, will ruin the less dramatic. After talks failed—the Volksbühne’s avant-garde credentials by activists were offered rooms for debates Europe’s easterners want to be part of putting on a bland, crowd-pleasing pro- and performances—the occupiers were the club gramme ofinternational productions. kicked out by the police. The actors have HE question of where Europe’s eastern Others regard his appointment as a returned to rehearsals. The activists have Tborder lies has bedevilled statesmen breath offresh air in a place that had moved to the square outside, named forcenturies. It has proved equally difficult become set in its ways. “When it comes to after Rosa Luxemburg, a socialist heroine. for the European Union, which must de- theatre, Berlin is a divided city these There they host talks and performances, cide how to deal with countries to its east days,” wrote Hubert Spiegel, a culture and vow to continue their fight. Over that would like to join the club. In 2009 the editor at the Frankfurter Allgemeine Zeit- 40,000 people have signed a petition EU launched the Eastern Partnership, ung. For each theatre fanwho wants to asking Berlin’s mayor to renegotiate the meant to handle the European aspirations give Mr Dercon’s globalist approach a theatre’s future. The next act has begun. of Belarus, Ukraine, Moldova, Georgia, Ar- menia and Azerbaijan. The idea was to promote economic integration and Euro- themselves. But Georgia, Ukraine and party is influenced by its founder, Bidzina pean values, and to fend off Russian influ- Moldova have already reached trade Ivanishvili, a secretive billionaire. The bu- ence—but with no promise that the partner agreements and visa-free travel deals with reaucracy, trimmed by the previous re- states could ever join. Now, with a summit the EU, and resent having to carry out diffi- formist government, has since been between the EU and the partners coming cult reforms that will not necessarily bring swelled by patronage, according to Giorgi up in November, they are growing dissatis- them any closer to membership. Kandelaki, an opposition MP. The govern- fied with the arrangement. Opposition groups, meanwhile, allege ment has indulged in populism, banning “Without a light at the end of the tun- that their governments’ Europhilia is foreign ownership of land and moving to nel, completing the process will be very partly a cover for continuing corruption write a prohibition on same-sex marriage hard,” Tamar Khulordava, who chairs the and repression. Moldova’s governing into the constitution. Georgian parliament’s committee on Euro- Democratic Party, backed by Vladimir Pla- In Ukraine, which made its European pean integration, told a conference in Riga hotniuc, an oligarch, loudly proclaims the choice in 2014 bystaginga revolution, there last week. The six Eastern Partnership country’s pro-European orientation. But it has been little progress towards ending the states have promised to meet 20 new tar- has made only halting progress in investi- oligarch-dominated political system. Re- gets before 2020, including some that may gating the use ofMoldovan banks in multi- cently the government has been suppress- be unpopular, such as promoting sexual billion-dollar Russian money-laundering ing anti-corruption organisations and has equality and forcing farmers to meet EU schemes. failed to reform its courts. As for Armenia, safety standards. European officials note In Georgia reformist momentum has Azerbaijan and Belarus, they are to vary- that these are good things to do in and of slowed. The governing Georgian Dream ing degrees autocratic and are closely knit1 56 Europe The Economist October 7th 2017

2 into Russia’s security infrastructure. That grounds for Polish kings (and, after Russian net stacked with a preordained mix of spe- sets them at odds with Georgia, Moldova annexation in 1772, for tsars). It suffered cies, much less a source of wood. Even and Ukraine, which have territory occu- only two episodes of untrammelled ex- with the recent uptick in revenues from pied by Russian troops and would like se- ploitation—by German occupiers in the logging, the forestry service spends a net curity guarantees from the EU. first world war and by a rapacious British 20m zlotys ($5.5m) a year on Bialowieza. All of this strengthens the EU’s doubts company in the 1920s. These prompted Given low lumber prices, closing that defi- about how far the Eastern Partnership Polish foresters to turn pristine areas into cit would require logging on a scale no one should go. On September 16th Georgia, nature reserves and, in 1947, a 5,000-hect- is willing to contemplate. Tourists, mean- Moldova and Ukraine issued a joint call for are (19 square miles) national park. while, spend around 72m zlotys annually the November summit to establish a road Today Poland’s forestry service insists in the area, according to one study. map to membership. Instead it may fall that it, too, is being a responsible steward. A plan Mr Cimoszewicz co-wrote a few short of the last summit in 2015, which “ac- The felling being condemned by Brussels years ago to turn the region, one of Po- knowledge[d] the European aspirations” was necessary, it argues, to prevent dead land’s poorest, into an ecotourism hub, of the partner countries. The Netherlands trunks from collapsing onto cyclists and complete with an impressive science cen- and Germany, whose voters are allergic to walkers (the EU court decision exempts tre, has been shelved for lack of funds. further EU expansion, are reluctant to re- cutting on safety grounds, but argues that NGOs’ long-standing demand to place all peatthatpledge. The bestthe partner coun- the Poles have gone much further). It justi- of Bialowieza under full protection, as tries can hope foris probably that Europe’s fies the controversial use ofheavy machin- Belarus did with most of its part in 2012, eastern border remains fuzzy enough that ery by noting the scale of the task: in the facesopposition from local authorities that it might one day include them. 7 past three years perhaps 1m spruces have suspect eco-absolutism will curb growth. succumbed to bark beetle. However, most “We used to look to Poland as an example; scientistspointtodryconditions,notinsuf- now they look to us,” observes a Belaru- Poland ficient pruning, for the bark-beetle out- sian ecologist wryly. break. They also note that microbe-rich PiS looks unmoved by environmental Saving the trees deadwood is vital to forest renewal. Stud- arguments. It dismisses protests by con- ies have found that removing it reduces cerned scientists, NGOs and ordinary citi- biodiversity. The older the tree, the more zens—which range from signing open let- fertile its remains, says Rafal Kowalczyk, ters to chaining themselves to HAJNOWKA who runs the Polish Academy of Sciences’ tree-harvesters—as political attacks by for- research station in Bialowieza. eign and domestic opponents of its “Po- A row overlogging in Europe’s last great Many local residents shrug off such land first” nationalism. As for EU finger- ancient forest worries in any case. Those with ties to the wagging, Jan Szyszko, the environment AWNin Bialowieza forest, and the bel- long-declining lumber industry regard rot- minister, once declared that Eurocrats Dlowing of deer in rut competes with ting wood as a wasted resource. The larger “can’t tell a barkbeetle from a frog”. the buzz of chainsaws. The rival rackets number engaged in tourism fret that rows Perhaps Mr Szyszko, a forestry profes- sum up an increasingly ill-tempered argu- oflifelesstrunks put visitors offrather than sor, agrees with one local forestry official ment over the Polish half of the ancient lure them. “How many people will come who says that Bialowieza, weakened by woods that straddle the frontier between to see dead trees?” huffs Jerzy Sirak, the climate change, emptying aquifers and Poland and Belarus. The row has reverber- mayor of Hajnowka, a town on the west- pestilence, “can’t survive without man’s ated beyond the forest’s borders, and in- ern edge ofthe forest. help”. Mr Cimoszewicz offers an alterna- deed beyond Poland’s. It pits competing vi- Quite a few, reckons Wlodzimierz Ci- tive explanation for the government’s sions of environmental stewardship and moszewicz, who as prime minister in heavy-handed treatment of it. Bialowieza, economic development, and of Poland’s 1995-99 doubled the national park’s size to with its royal connections, stately oaks and path under the right-wing Law and Justice its current 10,500 hectares. Bialowieza’s majestic roaming bison, remains a potent (PiS) party. value, he argues, lies in being a laboratory symbol of Polishness. “Whoever controls Last month the European Commission for natural processes, not a museum cabi- it, controls the country,” he reckons. 7 asked the European Court of Justice (ECJ) to fine Poland for ignoring an earlier order to halt logging in parts ofthe forest protect- ed under EU law—in effect, nearly all of the 60,000 hectares of it that lie in Poland. In July UNESCO, the guardian of the planet’s human and natural wonders, urged the government to end logging or risk Bialo- wieza’s demotion from a world heritage site to one “in danger”, causing anger in Belarus, whose half of the forest would also be affected. International alarm is understandable. The mixed forests that once blanketed cen- tral and western Europe have long since been turned to timber or fuel. Bialowieza’s towering oaks, hornbeams and spruces, plus the European bison and other endan- gered species that roam beneath their can- opies, offer a unique glimpse of the conti- nent’s ecological past. Gamekeepers began to safeguard Bialo- wieza in the 15th century as hunting Where the bison still roam The Economist October 7th 2017 Europe 57 Charlemagne Love triangle

The EU and Japan are getting closer. But America is still the partnerthat matters most many traumas inflicted by Brexit, then, add this: a fear among Britain’s friends that its withdrawal from the deepest trading bloc the world has everknown makes it harderto advance the case for open markets. EnterEurope. Trade talksbetween the EU and Japan opened in 2013, soon got bogged down but reached a preliminary agree- ment in July; the two sides hope to conclude the deal by the end of the year. There are still a few wrinkles, especially on the eter- nally vexed question of legal redress for aggrieved investors. But the deal should bring quick advantage to both sides, opening European markets to Japanese car firms, which have been out- stripped since South Korea signed a trade deal with the EU in 2010, and Japanese markets to European food exporters. Together the EU and Japan account for one-third of global GDP. The deal will be the largest each side has ever finalised. Mrs May hopes to copy and paste its provisions once Britain leaves the EU. Impressive stuff. But both the EU and Japan make yet grander claims for their agreement, hoping it can shape the rules of glo- balisation by enshrining high product standards that will be- come global. Beyond cuts in tariffs, the agreement includes chap- ters on antitrust, corporate governance and sustainable KIRA SHIMIZU of Keidanren, Japan’s main business lobby, development. And a deal suits the diplomatic priorities of both Ahas a theory about Brexit. The first one, he says, came in 1534 sides. For the EU it balances out the “protective” measures ad- with Henry VIII’s decision to break from the Catholic church. vanced by, amongothers, Emmanuel Macron, France’snewpresi- This rupture sparked a period of free-thinking innovation that dent. This week the club agreed on new anti-dumping rules to culminated in James Watt’s invention of the steam engine 250 cover subsidised Chinese steel and the like. For the Japanese, the years laterand the advent ofthe Industrial Revolution. With luck, partnership is a way of making the case for trade when walls are chuckles Mr Shimizu, Brexit the Sequel will spur a somewhat going up all over the world. “We weren’t confident enough to do quicker reinvention ofBritain’s economic model. this on our own,” says one formertrade official. But even MrShimizu thinks Britain may face “five to six” years of pain after it leaves the European Union, and more if it fails No match for Rocket Man properlyto adaptto the change. Britain accountsfornearly halfof Where might this friendship lead next? Mr Abe, who faces a re- Japanese investment in the EU, so Japanese firms have more to election battle later this month, has long sought a more assertive lose than most from a messy divorce. Japan’s car plants in Britain global role for Japan, and the EU is an obvious partner. Yet this rely on complex supply chains that span Europe; its London- strategy has its limits. A Belgian minister once described Europe based banks use “passporting” rules to operate across the EU. If asan economicgiantbuta political dwarfand military worm; the Britain leaves the single market, some of this business may move description fits Japan all too neatly. The two sides’ “Strategic Part- across the English Channel—or leave Europe entirely. nership Agreement”, negotiated alongside the economic one, Unusually fora countrywhere diplomacytendsto be oiled by contains little to thrill the soul. True, the EU has begun a conversa- discretion, government departments and business groups have tion on defence co-operation, and Mr Abe wants to remove the issued a series ofincreasingly alarmed communiqués as they ob- pacifist clause from Japan’s constitution. But such moves are serve the Brexit talks stalling. Predictability is the watchword. Ja- hardly equal to the threats posed by Kim Jong Un’s nukes and pan’s officials express reliefthat Theresa May, the prime minister, rockets, or China’s muscle-flexing in the South China Sea. It is no has finally accepted that EU rules will continue to apply for a few coincidence that the most high-profile joint security effort be- years after Britain leaves the club in 2019, giving companies time tween the EU and Japan involves keeping shipping lanes free for to prepare. Recent meetings between Mrs May and Shinzo Abe, trade, notably to counterpirates offthe Somali coast. (Britain may her Japanese counterpart, have helped soothe nerves in Tokyo. prove a more interesting security partner forJapan; the two sides But Japan remains bemused at Mrs May’s persistent refusal to ac- are stepping up defence and counter-terrorism co-operation.) cept that Britain faces a trade-off between its access to European And that is why America remains the indispensable partner markets, and its ability to write its own rules. for European countries and Japan alike. When Russia annexed Yet Japan’s concerns run deeper than fretting about an intra- Crimea and invaded Ukraine, America and Europe co-ordinated European spat. In the 19th century American gunboats forced the sanctions in response. Mr Trump may not be doing much to sup- Japanese shogunate to open its markets to foreigners. Today it is port Japan, but its decades-old alliance with America is still its Japan, where exports have been driving growth, that fears the best hedge against the rise of China. European and Japanese in- world is losing its taste for trade. To its dismay, Donald Trump’s terests do not always make a comfortable fit; Europe covets Chi- first big decision in office was to withdraw from the 12-country nese investment, for example, while Mr Abe has been courting Trans-Pacific Partnership, a jumbo trade agreement (Mr Abe still Vladimir Putin, despite a long-standing territorial squabble be- hopes to lead the 11remaining countries to conclude a somewhat tween Japan and Russia. So, while Japan and Europe may bang shrunken deal). In Tokyo your columnist sat on a panel assessing the drum for trade, when the rhythms of war start to pound they the dangers of a protectionist-inspired global recession. To the must still lookelsewhere. 7 58 Britain The Economist October 7th 2017

Also in this section 59 Is Boris Johnson unsackable? 59 Monarch’s crash-landing 60 Bagehot: The new Tory torchbearers

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

The Conservatives stituent who felt unable to vote Conserva- tive because she was a nurse. “That was all Spluttering she felt she needed to say,” he reported. When it comes to public finances, Mr Clev- erly argued that the Conservatives simply needed to remind voters that Britain’s fi- nancial mess was Labour’s fault: “That is MANCHESTER their cosmic role in life: to screw things up, so we can come and fix them.” Mrs May The party has lost faith in its leader’s approach but not yet found an alternative doubled down on this theme. She was in- OR A prime minister at the peak of her ergy and housing. By contrast, packed troduced by a video outlining the eco- Fpowers, it would have been unfortu- meetings on the fringes were alive with de- nomic mess inherited by the Conserva- nate. For one barely clinging to her job, it bate about the hole the party is in, and tives in 2010. But seven years have passed amounted to almost cosmic levels of bad how it should dig its way out. and such explanations are wearing thin. luck. First, Theresa May’s speech to the Members worried a lot about their Jeremy Corbyn haunted the event. The Conservative Party conference in Man- party’s make-up, which—as was plain to prime minister, chancellor and foreign sec- chester was interrupted by a prankster anyvisitor—isold and white. Youngpeople retary referred to Labour’s leader by name who was somehow allowed to hand her a were approached with near-anthropologi- 20 times in their speeches, having barely P45, a form given to British workers when cal fascination. Fewer than one in four un- mentioned him at last year’s conference. they get the sack. Then she suffered a der-30s backed the Tories in the June elec- Yet the Tories still seem unsure how to at- coughingfitthatnoteven a lozenge gallant- tion. “If it is a cohort effect then the tack him. Mr Corbyn was variously por- ly provided by the chancellor of the exche- Conservatives are doomed,” Ben Page, a trayed as a pantomime villain and a threat quercould halt. Finally, letters from the slo- pollster at Ipsos MORI, cheerily reminded to the nation. Membersmooed theirassent gan on the wall behind Mrs May began delegates. Nearly 30 fringe events on hous- as Mr Johnson laid into “that NATO-bash- dropping off one by one. Sitcom writers ing show that the party is onto the main ing, Trident-scrapping, would-be abolisher would have thought it a bit much. cause ofyoung people’s dissatisfaction. of the British army”. Philip Hammond, the After calling an election this spring that The party has also lost support from chancellor, kicked offhis speech with a his- stripped the Tories of their majority and ethnic minorities. Sam Gyimah, one of its tory lesson on Britain in the 1970s and then cost 30 of her MPs their job, Mrs May al- few black MPs, urged Toriesto concentrate a whistle-stop tour of countries where so- ready faced a tough gig. Boris Johnson, the on values, such as enterprise and freedom. cialism has brought misery. Some minis- foreign secretary, had spent the previous “You reach out to the Sikh community the ters left the impression that their priority fortnight trampling government policy same way you reach out to Rotarians,” he was simply to block Labour, rather than with apparent impunity (see next story). said. Others blamed Mrs May’s harsh line govern. “Keeping Corbyn out seems to me Now her fluffed speech, which was sup- on immigration. Yet some of the Tories’ a duty of any sensible politician, particu- posed to reassert herauthority, has revived few gains in England in June came in larly a Conservative politician,” said Da- speculation about how long she can last. places such as Mansfield and Middles- mian Green, the de facto deputy prime Even before the fiasco it was clear that brough, with big chunks ofwhite working- minister, to a three-quarters empty fringe. the party was growing tired of its leader class voters. Some 45% of people who vot- Brexit, skated over quickly by Mrs May, and beginning to plan for the future. There ed for the UK Independence Party in 2015 created the most excitement among at- were frequently empty seats in the main backed the Toriesin 2017, according to You- tendees, especially when anyone suggest- hall, where ministers made mainly stale Gov. The party has yet to find a way to ap- ed it would be hard, fast and easy. Yet on speeches. When she could get her words peal to both groups. this subject more than on any other it is out, Mrs May confusingly combined a de- It is alive to the growing anger about proving difficult to agree on a strategy. The fence of the free market with promises of austerity. James Cleverly, a barrel-chested cabinet is publicly split. And the mood of more intervention in higher education, en- soldier turned MP, recalled meeting a con- the conference, at which delegates cheered 1 The Economist October 7th 2017 Britain 59

2 references to Agincourt and Waterloo, sug- The cabinet gests that party members will be hostile to any leader who proposes to compromise. The Toriesstill have some cause for op- All about Boris timism. Even after weeks of infighting un- MANCHESTER dera powerlessprime minister,the party is One ofthe great puzzles ofpolitics is how the foreign secretary keeps his job not far behind Labour in most polls. The next election need not come until 2022. ORIS JOHNSON is a serial problem all sides ofthe party,including some “The popularity of snap elections may B forthe Conservative Party’s high Brexiteers, were happy to tell journalists have gone down,” noted Mr Green. Fol- command. He is always plotting behind that Mr Johnson’s time was up. He also lowing her botched relaunch, Mrs May re- the scenes to get the top job. He has been has the air oflast year’s man. Grassroots ceived public support from colleagues. flagrantly disloyal on the most divisive activists are now rallying behind an Yet few have much enthusiasm for her issue facing the government. Days before eccentric new hero in Jacob Rees-Mogg. in private. Tory MPs’ beliefthat the party is Theresa May delivered a speech in Flor- One theory is that Mr Johnson is too weak to bear another leadership con- ence laying out the government’s consid- constantly redrawing his “red lines” in test is being tested to the limit. The prime ered position on Brexit, he published an order to force Mrs May to sackhim. He is minister sits atop a party that knows it article laying down “red lines” forBritain apparently finding it hard to get by on a must change everything from its policies to keep within during its negotiation. He cabinet minister’s salary of£142,467 to, eventually, its leader. And bad luck has is also gaffe-prone. The day before Mrs ($189,000) a year and wants to get back to little to do with that. 7 May’s big speech to the party conference earning serious money as a writer. Why he joked, to nervous laughter from his deal with the difficult workofnegotiating fellow Tories, that Sirte, in northern with the European Union when you can The collapse of Monarch Libya, could become “the next Dubai” if recharge your bankaccount on the back- they could “clear the dead bodies away”. benches—and at the same time hone Crash-landing So why doesn’t the prime minister your Churchillian rhetoric before leading sackhim? One reason, as with almost a rebellion against the betrayal of Brexit? everything in British politics, lies in Brexit. Sacking a man whose allies call him the “godfather ofBrexit” might upset the delicate balance offorces in the cabi- net. Another reason is Mr Johnson’s An ailing airline runs out ofrunway popularity in his party.A YouGov poll HORTLY before dawn on October 2nd, found that he is favourite among party Sstartled passengers booked to fly on members to be the next leader. The Daily Monarch Airlines began to get text mes- Telegraph, a Tory-leaning newspaper, sages informing them that their flights had splashed his conference speech on its been cancelled. It was the first news that cover with the headline, “The roaring Britain’s fifth-biggest airline had ceased lion”. Mr Johnson knows how to cheer trading and was in administration. up the Conservative troops at a time The government had been warned that when it is all too easy to give in to despair. Monarch was in trouble only a month be- Nevertheless, the party’s patience is fore, so a prepared rescue plan quickly wearing thin. Several Tory MPssuchas took off. Over 30 aircraft were hired to Sarah Wollaston and Heidi Allen called bring back about 110,000 passengers from forMr Johnson to be sacked after his abroad in what was billed as the country’s Libya remarks. Offthe record, Toriesfrom Angling for a P45? biggest peacetime repatriation. A further 860,000 people lost forward bookings, and with them weddings, birthday jollies compounded Monarch’s woes, as many of As profits declined, Monarch got out of and more. its costs, such as fuel, were in dollars. charters and concentrated on short-haul, It is the third business failure for Mon- More important, the airline failed to budget flights. But, says Robin Byde of Can- arch’s secretive private-equity owners, adapt to the changing aviation market. It tor Fitzgerald, a financial services com- Greybull Capital. Greybull bought Mon- wascreated to service the boom in package pany, in Europe this is the most fiercely arch in 2014, when the airline was already holidays. Its first charterflight took offfrom competitive market of all, dominated by struggling, from the Swiss-Italian Mante- Luton airport, where the company was four big firms: Ryanair, easyJet, IAG (which gazza family who had set it up in 1968. headquartered, for Spain. That was the includes British Airways, Aer Lingus and Greybull pumped money into Monarch, story for the next three decades: flying Iberia) and the Lufthansa group. Despite but the airline had still been expected to working-class Britons to Mediterranean re- cutting costs, Monarch could not achieve lose over £100m next year, said Monarch’s sorts for all-in holidays, in some comfort. the economies of scale to compete with its boss, Andrew Swaffield. Passengers remember the free on-board rivals. AirBerlin and Alitalia went bust ear- Monarch had a good business flying to drinks and classy grub. lier this year forsimilar reasons. Egypt and Tunisia. But services were That business model, like many others, Monarch made a desperate bid to move stopped to both destinations in 2015 after was shattered by the internet. Punters now from short-haul into long-haul, ordering 15 the bombing of a Russian airliner over the book their own holidays. The rise of low- new planes (on top of a previous 30) in Sinai peninsula and the mass shooting of cost airlines such as easyJet, founded in June. But it was too late. The company mostly British holidaymakers on a beach 1995, gave passengers cheap alternatives to could not find a buyer for its short-haul op- at Sousse. The numberofpassengers flying charter flights. Numbers on charter flights eration. The share prices of Monarch’s ri- from Britain to north Africa fell from operated by British airlines fell by two- valsleapton itsdemise; theywill now feast 177,000 in August 2016 to 95,000 in August thirds from 2001to 2016, even as the overall on the carcass, grabbing pilots and airport 2017. The fall in the pound since June 2016 number ofpassengers increased. slots. Unsentimental business, aviation. 7 60 Britain The Economist October 7th 2017 Bagehot The new torchbearers

The Conservative Partyneeds to promote the next generation ofleaders—and fast moting talented younger Tories. The current cabinet is ripe for a makeover, if not a complete gutting. Benjamin Disraeli once mocked the opposing front bench as a row ofexhausted volcanoes (“Not a flame flickers on a single pallid crest”). The current Tory front bench is a row of ex- hausted molehills. Philip Hammond is doing a decent job of steering the economy through Brexit, and delivered a good speech in Manchester. Amber Rudd is a competent if not scintil- lating home secretary. But what on Earth is the point of Chris Grayling, the transport secretary? Orindeed ofa foreign secretary who is as despised abroad as he is divisive at home? Fast-tracking the younger generation would help the party to tackle its problem with younger voters. The party’s top jobs are now held by a gerontocracy. Mrs May and Mr Hammond are a generation older than their predecessors, Mr Cameron and George Osborne, and Mrs May’s closest confidant is her Oxford contemporary, Damian Green. As well as hampering the party’s attempt to appeal to younger voters, gerontification is causing in- ternal management problems. Mr Tugendhat’s success in depos- ing Crispin Blunt from his position as chair of the House of Com- mons foreign-affairs committee shows just how much pressure HE party that met in Manchester this week was in a dismal there is forchange from the younger generation. Tmood: divided over Brexit, depressed by the recent election Fast-tracking young stars might provide more diverse faces as debacle and disillusioned with its leadership. The only energy in well as youthful ones. The party saw its share of the ethnic mi- the conference was energy tinged with derangement. The biggest nority vote fall from 24% in 2015 to 19% in 2017, a drop that may crowds gravitated to hardline Brexiteers who argued that Britain have cost it 40 seats in the election and certainly sounds an alarm should leave the European Union “tomorrow” and that Brussels bell in a fast-diversifying society. The younger generation in- should be paying us rather than us paying them. A great party is cludes several leading lights who challenge the idea that the Tory in danger ofbecoming a fanatical sect. party is a white one. MrSunakand Kwasi Kwarteng, both the chil- By any reasonable measure the Conservatives are lagging be- dren of immigrants, have stellar academic credentials. Sam Gyi- hind Jeremy Corbyn’s Labour Party. Tory party membership is mah was brought up partly in Ghana before going to a British probablya fifth thatofLabourand maywell be lowerthan thatof state school then Oxford. Nusrat Ghani is the party’s highly re- the Liberal Democrats. Almost half the Conservative Party’s garded first female Muslim MP. Having done so much to retoxify members are over 65 and only 5% are 18-24. In June’s election the the Tory brand with her (largely vain) pursuit of Brexit-support- party lost every age group under 45. ing working-class voters, Mrs May has a duty to detoxify it again Butthe partydoeshave one bigthingon itsside: an impressive by producing a more diverse cabinet. cohort ofyoung MPs who forthe most part got their parliamenta- ry seats in the 2010 and 2015 intakes, as part of David Cameron’s Out with the old modernisation drive. This generation contains a remarkable Perhaps most important, fast-tracking young stars will provide range oftalents. Were itnotforhiscatastrophicdecision to call the some new intellectual energy. The cabinet is entirely devoid of EU referendum, Mr Cameron would have gone down in history big, or even small, thinkers. Even a relatively intelligent figure as one of the Tories’ best party managers. Rory Stewart has suc- such as Mr Hammond is a technocrat rather than a philosopher. ceeded in the demanding professions of the armed forces, the in- By contrast the next generation contains a number of intellectu- telligence service and academia; Tom Tugendhat served in the als. Mr Kwarteng has written excellent books on British imperial- army in Iraq and Afghanistan; Rishi Sunak is a successful entre- ism. Mr Stewart has held a chair at Harvard. George Freeman is a preneur with remarkable contacts in both America and India. particularly impressive policy entrepreneur. He recently organ- And outside Parliament but waiting in the wings, Ruth Davidson ised a festival of ideas, billed as the Conservative Glastonbury, has demonstrated her ability to take apart a politician, Nicola and possesses an ability to relate broad conservative principles Sturgeon, who supposedly had history on her side. to specific proposals. In herdarkestdaysafterherelection debacle Theresa Maytold In his conference speech Mr Johnson reminded the Tories of the 1922 Committee ofseniorMPs that, “I got us into this mess and Winston Churchill’s great line about giving the lion its roar. A I’m going to get us out.” So farshe has done little to make good on more apposite line for the Tory party’s current predicament is her promise. Mrs May’s biggest mistake has been to use her pow- John F. Kennedy’s one about passing the torch to a new genera- ers of patronage for purely defensive purposes, balancing the tion. The generation at the top ofthe Conservative Party has been party’s established factions against each other in order to shore given its chance and, in too many cases, has been found wanting. up her position. That has given her a cabinet that lacks either di- It is time to give a chance to a new generation—one that knows rection ordiscipline. Boris Johnson, herforeign secretary, is forev- what it is to live in a world of student debt and out-of-reach er challenging her authority in public and other ministers are do- houses and that has the energy and ideas to renew a fading party. ing the same in private. She should instead have used her powers MrsMay’sjob in the time remainingto heristo make sure thatthe of patronage to remake the upper echelons of her party by pro- torch is passed as smoothly and quickly as possible. 7 International The Economist October 7th 2017 61

Men, women and work be a problem for firms—and for society. BHP Billiton, a mining company, has found The gender gap that sites with more women are run more safely. Heavily male police forces and fe- male nursingcorps are unlikely to have the best mix ofskills, experience and priorities to deal with crime victims and patients of the opposite sex. One theory for why boys do worse than girls in school is the short- Women still earn a lot less than men, despite decades ofequal-pay laws. Why? age ofmale academic role models. ALWAYS wanted to be a mum,” says that of a man. This is not, as many assume, The gender pay gap would shrink if “IMeghan, a British woman with two because employers pay a woman less than men moved into female-dominated jobs children. She wanted a career, too, and they would have paid a man in her place. and vice versa. But in America such work- worked hard for it, earning a degree in eco- Data from 25 countries collected by Korn place genderintegration stalled about a de- nomics and accounting, and taking profes- Ferry, a consultancy, show that women cade ago after steadily increasing for more sional exams. At a big accounting firm in earn 98% asmuch asmen who do the same than two decades. A study of 12 European London, she managed junior employees. job for the same employer. The real reason countries concluded that between 1995 When her daughter was born she faced a is twofold. Women outnumber men in po- and 2010 the share of female workers in choice between her career and being the sitions with lower salaries and little most occupations changed little. A similar mother she wanted to be. After her boss re- chance of promotion. And men and wom- pattern has been found in Australia. fused her a flexible work schedule, she en are segregated between occupations quit. Six years later she is a childminder, and industries; those where women pre- Two roads diverge earning a fraction of her former salary. dominate pay less. Men and women are free to study what Now divorced, she says that a professional Just a fifth of senior executives in G7 they want, and discrimination at work has role in accountancy would have been fi- countries are female. Across the European been banned fordecades. But there is plen- nancially better for her family. But finding Union supervisors are more likely to be ty of evidence that workplace segregation, one with hours that worked for a single male, even when most of their underlings and men’s and women’s differing career parent seemed impossible. are female. Nearly 70% ofworking women paths, cannot be explained away as a mat- Stories like this sum up the “mother- in the EU are in occupations where at least ter ofdiffering preferences. hood penalty” to women’s careers. It is the 60% of workers are female. The top four Research in Canada has compared reac- main reason why the pay gap between jobs done by American women—teacher, tions to ads forthe same jobs that used ste- men and women in rich countries is no nurse, secretary and health aide—are all at reotypically masculine words (leader, longer narrowing. Employers view long least 80% female. competitive and so on) or feminine ones hours as a sign ofcommitment and leader- Occupations dominated by women (such as support, interpersonal and under- ship potential. But from scarce, pricey child have lower status and pay. Primary teach- stand). Women found the “masculine” care to short school days, the world is or- ers in the OECD earn 81% of the average for jobs less appealing, but not because they ganised for families with a parent at graduate jobs. Nurses earn less than police felt they would be unable to do them. They home—and that is usually the mother. officers; cleaners less than caretakers. read the words as a signal of a male- In the rich and middle-income coun- Women’s lower earnings mean that after dominated workplace, where they would tries that make up the OECD, the median divorcing or being widowed, they often not belong. wage of a woman working full-time is 85% end up poor. And skewed workforces can Stereotypes that discourage men from 1 62 International The Economist October 7th 2017

2 female-dominated jobs are at least as in- their partner had also scaled back. old daughter was the youngest child the grained. Florence Nightingale, who estab- When women give priority to caring nursery had ever taken. “They had no idea lished the principles of modern nursing in for toddlers they fall behind. A recent what to do with her,” she says. A German the 1890s, believed that men’s “hard and American study put the motherhood pen- father says his mother-in-law lamented horny” hands made them unsuitable for alty—the average by which women’s fu- that putting their toddlers in child care the job, “however gentle their hearts”. ture wages fall—at 4% per child, and 10% for would turn them into “drug-dealers”. Some American nursing schools started the highest-earning, most skilled white Often, the high cost of child care makes admitting men only in 1981, after a Su- women. A British mother’s wages fall by the decision to leave work a forced one. In preme Court ruling. 2% foreach yearshe isoutofthe workforce, America full-time child care costs 85% of A plethora of programmes and cam- and by 4% if she has good school-leaving the median rent. And even where it is sub- paigns encourage girls into science and en- qualifications. Jennifer Young, an Ameri- sidised, mothers often go part-time be- gineering. And they now have role models can mother with a degree in mechanical cause the school day ends long before the aplenty. But campaigns to get boys into engineering, had been out of the work- workingone. Butpart-time jobsare usually teaching and nursing are few and far be- force for13 years when Cummins, an engi- a career dead-end. tween. Men who become nurses often neering firm, offered her a re-entry intern- Many women switch to jobs requiring stumble into the job. Marius Malmo at the ship in engineering last year. She had been lesseducation orexperience. Nearlya third Stavanger University Hospital in Norway sure that a part-time or administrative job of working women in Britain say they are explains that, after he failed to get into the was her only possible route back to work. overqualified for their jobs, compared police academy, a policeman offered Some new mothers leave their jobs be- with less than a quarter of men. In Ameri- friendly advice: nursing, he said, used the cause they prefer to be their children’s ca only 15% of women with graduate de- same “people skills”. He decided to try it main carers. But they are also influenced grees in science and engineering, which for a year before reapplying to the police, by censorious attitudes. In many countries are in short supply, were employed in their but loved nursing and stayed. He says he the common opinion isthathavinga work- specialism in 2011, compared with 31% of likes intensive care and operating theatres, ing mother is harmful for pre-school chil- men. And nearly a fifth were out of the la- because they are “where the action is”. dren. Germans call a working mother of bour force, a share twice as high as among Neither choice offield nor lackof ambi- small children a Rabenmutter(raven-moth- similarly qualified men. tion can explain why the share of women er). When Anna, an academic in Berlin, re- That men are typically paid more than shrinks higherup the careerladder, even in turned to work full-time her nine-month- women who are at a similar stage in their 1 industries that women dominate. The pro- portion of business and management de- grees earned by women has grown steadi- Houses divided ly, but that of women in managerial and senior jobs has not kept pace. In America Earlier this year The Economist and YouGov, a pollster, asked people in eight countries about half of college degrees in business how they balance career and family. Men were two to three times less likely than women awarded since 2000 have gone to women, to think that, in their family, the majority of household and child-care duties fell on the but the share of senior executives who are woman’s shoulders. They were more likely to say that such tasks were split equally. female has remained stuckat one in five. When we asked which partner had scaled back at work when their first child arrived, we Women used to be less likely to ask for found another perception gap. Both men and women were less likely to say that their promotion. No longer: a survey by McKin- partner had made adjustments than members of the opposite sex were to say they had sey in 2016 found that women in corporate made adjustments themselves. Perceptions in France differed most: 55% of women said America asked at the same rate as men. It that they, and only they, slowed down at work, twice as high as the share of men who said also found that women and men were pro- that only their partners did so. Though it is unclear who is more accurate, many people moted at similar rates, except at the lowest are clearly ignorant about the reality of their partners’ lives. And even if men are open to rungs of the career ladder, where women doing more at home so their wives can do more at work, the necessity may not occur to lagged behind. A possible reason is that them. Gender equality could be boosted by some frank kitchen-table conversations. managers are reluctant to promote women Between you and your partner, who is mostly responsible for household tasks and child care? who are starting families, or are likely to do Adults with spouses or partners, Feb 2017, % so soon. Me Equal split My partner Something else/don’t know It so happens that the opportunity for 50 the critical first promotion often coincides with wanting to start a family. Data from 25 Women Britain show that the age at which wom- 0 United States Australia Britain France Germany Sweden en’s pay starts to fall behind men’s tracks 0 the age at which they typically have their Men 25 first child (see chart on next page). Claudia Goldin of Harvard University has found a 50 similar pattern for college-educated Amer- Did either you or your partner scale back your career after you had your first child? ican women. For example, by reducing working hours or taking a less demanding job A survey earlier this year of America, Adults with children under 18 living at home, Feb 2017, % Australia, Britain, France, Germany and Only I did Only my partner did Both of us did Neither of us did Don’t know Scandinavian countries by The Economist 50 and YouGov, a pollster, gauged how chil- dren affected working hours. Of women 25 Women with children at home, 44-75% had scaled 0 United States Australia Britain France Germany Sweden back after becoming mothers, by working 0 Men fewer hours or switching to a less demand- 25 ing job, such as one requiring less travel or overtime. Only 13-37% of fathers said they 50 Sources: YouGov; had done so, of whom more than half said The Economist

64 International The Economist October 7th 2017

countries mothers of young children are and that is without taking account of the Ages apart harder than other employees to fire. The likelihood that they would earn more for Britain, gender pay gap for median wage* difficulty of covering for such long ab- the rest oftheir lives, too. In Britain, by con- By generation, % sences, and the fear that the occasional un- trast, the government’s offer of up to 30 1911 26 46 66 81 2000 Birth year sackable mother will slack when she re- hours of free care for three- and four-year- 40 turns to work, may put firms off hiring or olds had only a modest effect on how Silent Greatest promoting young women, even though much mothers worked, possibly because 30 Baby boom such discrimination is illegal. the hours on offer are too few and cannot 20 In the 1970s the Scandinavian countries always be taken when suits parents best. Generation X 10 were the first to offer parental leave, to be Nurseries were paid too little for those Millennial + shared as parents wish. But few men took hours, which probably reduced quality 0 – it. Making the pay more generous and ear- and put some parents off. 10 marking some of it for fathers helped. In 16 20 25 30 35 40 45 50 55 60 65 70 Age Sweden and Norway, which replace 80- To help mothers, help fathers too Source: Resolution *Gross hourly earnings, 100% of earnings, about 90% of fathers Even with wisely designed maternity poli- Foundation male minus female as % of male now take parental leave. In Germany a cies, generous child care and Scandinavian two-month bonus for fathers who take rates of paternity leave, women will not 2 workinglives helps explain why it is usual- some of the shared parental leave in- catch up with men at work without a ly the mother who sacrifices her career for creased take-up by new fathers from 21% to broader shift towards flexible working. the sake ofthe children. But there are other 34% between 2008 and 2014. That would also help men to be better fa- reasons, too. New fathers are usually fur- If no parental leave is reserved for fa- thers. Fewer now aspire to be just a bread- ther along in their careers than new moth- thers, couples usually decide that the winner. Research by the Diversity Council ers are, for the simple reason that most mother should take all of it, partly because ofAustralia found that more than a third of men are older than their wives. she has stayed at home post-partum and young fathers had seriously considered Skewed perceptions within house- therefore knows the ropes. That decision leaving their organisation because it holds may also play a part. Although men can shape a couple’s future, says Jeremy would not let them work flexibly. Though are doingmore child care than theirfathers Davies ofthe Fatherhood Institute, a chari- Australian men ask for flexible working did, our survey suggests that they may ty, as it confirms the mother as the parent- less often than women they are much overestimate how much (see box on previ- ing expert. Then it is easier to relegate her more likely to be rejected. In Britain nearly ous page). And they seem not to realise career to second place. In Sweden, which halfofyoungfatherssaytheywould like to how much motherhood harms their increased the parental leave earmarked for shift to a less stressful job, the better to bal- partner’s career. Those men who go be- fathers from two months to three in 2016, ance workand family. But they are twice as yond changing nappies or dropping chil- one study estimated that every month of likely as women to think that doing so dren off at school can feel painfully con- leave a father took boosted his partner’s would harm their careers. spicuous. Tim Rutherford-Johnson, a salary four years later by 7%. “Even Google is against me,” exclaims a British man who cared full-time for his Although a growing number of coun- Dutch father at a gathering about paternal children when they were small, says that tries are expanding paternity leave, few leave, which is just two days in the Nether- in the playground he used to announce cover two-thirds of earnings, the level re- lands. When he searched for advice on right away that he was a stay-at-home fa- commended by the OECD. In Britain, combining fatherhood with work, the ther. “I felt as if there was a big question- where some parental leave can be shared search engine asked if he had meant markover my head,” he says. but paternity pay is low, many men give up “motherhood and work”. As men’s and Government policies also play a role in the idea oftaking a career break when they women’s aspirations converge, the re- men’s and women’s decisions about how realise just how much it would cost, says sponses to the two queries will look in- to combine parenthood and jobs. They do Mr Davies. “So progressive couples end up creasingly similar. 7 more than raise or lower the cost of work- like familiesin the 1950s.” ing for women. They shape men’s and Seemingly gender-neutral policies for women’s expectations for their own and parents may be used by fathers and moth- each others’ careers—and companies’ deci- ers in different ways. After Britain expand- sions about whom to hire and promote. ed parental leave for fathers, for example, Many countries have offered paid ma- some male academics used their leave to ternity leave for decades. When it lasts a write books rather than to do child care, year or less, it boosts women’s employ- thus enhancingtheirpromotion prospects. ment. In America, the only rich country Children do not stop needing to be without legal entitlement to maternity looked after when they start to walk. leave, a quarter of women return to work Among OECD countries, greater public within ten days of giving birth. But many provision of child care and education for never return because they cannot bear the children aged under five is strongly corre- thought ofleaving a newborn in child care, lated with higher employment rates for or because paying forit would wipe out all mothers of young children. One ten-coun- or most ofwhat they earn. try study concluded that halving the price When maternity leave is longer than a of child care increases the total number of year, it reduces women’s overall participa- hours worked by mothers by 7-10%. tion in the workforce and widens the gen- In Germany a legal right to a place for der pay gap, says Olivier Thévenon of the children in kindergarten from the age of OECD. Long periods away from work can three, introduced in 1996, led a third of make skills rusty. And too-generous ar- mothers who could not otherwise afford rangements can backfire. A German wom- kindergarten to start working, though an has the right to return to her job after mostly part-time. The extra taxes they paid three years’ maternity leave. In many covered about 60% of the policy’s cost— Business The Economist October 7th 2017 65

Also in this section 66 Tax avoidance by big tech 67 Fixing Ford 67 Undersea internet infrastructure 68 Jio upends Indian telecoms 69 Health v hedonism in France 70 Schumpeter: Goldman Sags

For daily coverage of business, visit Economist.com/business-finance

Tech’s toughest job Japanese tech firm run by Masayoshi Son. One of Mr Son’s main conditions was From Uber to kinder that power be shifted to more recent inves- tors. Early Uber backers, including Mr Ka- lanick, will have to give up their “super- voting” rights. Mr Khosrowshahi’s conces- sion was that Mr Kalanick now has at least a theoretical chance to become chief exec- utive again (rules proposed earlier would Dara Khosrowshahi is offto a strong start but has miles to go have made that all but impossible). Bench- ERE’S the job spec. Unite a deeply di- ing licence in the British capital. Both sides mark, a venture-capital firm and an early Hvided board. Keep a strong-willed described the talks as “constructive” and investor in Uber, agreed to drop a lawsuit founder under control. Immediately re- announced further discussions. Later that against Mr Kalanick. cruit a new chief financial officer. Negoti- day, Uber’s new boss attended—via video All could still unravel. The governance ate with angry local regulators intent on link—a crucial board meeting that ended in compromise is contingent on the SoftBank closing down the business in their city. a promising truce. It not only limits the investment, which has two stages, going Convince courts that the company does power of Travis Kalanick, the firm’s co- through. It may seem a done deal that Soft- not have to provide its contract workers founder and former chief executive, but Bank and its partners would invest a first with the benefits due to full-time employ- creates the conditions for a $10bn invest- round of $1bn-1.25bn at Uber’s present val- ees. Change a cut-throat culture without ment by a consortium led by SoftBank, a uation of $68bn. That way the new capital curbing employees’ drive. On top of all injection is not considered a “down- this, deal not only with an intellectual- round”, ie, one that produces a lower valu- property (IP) lawsuit that could cost the In the rearview mirror ation. But much about the second round is firm nearly$2bn, butalso cope with a crim- Uber still unknown. The stake could be any- inal investigation by the FBI that could see Net revenues, $bn where between 14% and 17% ofUber, forex- some managers end up in prison. 3.0 ample, at a valuation ofas low as $50bn. No one sane, you would think, would Before Mr Khosrowshahi made it to even apply for such misery. But after some 2.5 London he had placed a full-page ad in the hesitation Dara Khosrowshahi (pro- 2.0 Evening Standard, a local newspaper, apol- nounced cause-ro-SHAH-hee), until recent- ogising “for the mistakes we’ve made” and ly the chiefexecutive ofExpedia, an online 1.5 acknowledging that “we must change”. travel agency, returned the headhunter’s This was meant to signal to regulators all call. Now he is boss of Uber, which, at 1.0 over the world that Uber’s swashbuckling $68bn, is the world’s most highly valued culture is a thing of the past. But he must privately-held company. Can he turn the 0.5 show that this is not just a change in style, firm, which in many ways has been a cari- ** * 0 but substance. cature of a disruptive Silicon Valley star- 2014 15 16 17 He will not lack for opportunities to do tup, into a more benign force—and take it Net losses, $bn so. A big question will be to what extent public by late 2019? 0 Uber will still insist on being a technology, Three weeks into the job, Mr Khosrow- ** * – rather than a transport, firm—a question shahi has already made meaningful pro- 0.5 which is on the agenda of the European gress. On October 3rd he paid a hastily-ar- Court of Justice. London, where Uber has ranged visit to Transport for London (TfL), 1.0 appealed the regulator’s decision, is likely the regulator that recently ruled that Uber 2014 15 16 17 to be the test case. TfL’s complaints about was not “fit and proper” to hold an operat- Source: Press reports *Data unavailable the firm, for instance that it did not proper-1 66 Business The Economist October 7th 2017

2 ly vet its drivers, suggest that the regulator neighbour of his former firm near Seattle against multinationals, most of them wants to treat it exactly like any other taxi may be a good model. Amazon, the e-com- American. Last year, Ireland was ordered operator. Yet Uber’s willingness to make merce giant, has built a well-oiled logistics to recover €13bn from Apple—smashing all concessions may be limited. On Septem- and computing platform that allows it to past records for EU corporate-tax cases. ber 26th it said it would pull out of the test and introduce ever more offerings, As with Apple, the commission con- province of Quebec rather than accept from smart speakers to drone delivery. cluded that Amazon received illegal state new regulations. Similarly, a reformed Uber could become aid—in the retailer’s case between 2006 Another unknown is the extent to the platform for all kinds of logistics ser- and 2014—through a tax-cutting arrange- which Uber will change how it deals with vices and more (though it will need to fo- mentunavailable to itsrivals. Itcame in the its drivers. It is still fighting efforts that cus more on profits than Amazon does). form ofa rulingfrom Luxembourg’s taxau- would require it to treat many as full-time UberEats, its delivery arm, is growing fast. thority, known as a “comfort letter”. Ama- employees. On September 27th, for in- The firm is testing a similar service for zon accordingly moved intellectual prop- stance, it started an appeal against the rul- medicines, called UberHealth. erty of various types into a Luxembourg ing of a British court that would guarantee The danger, if Uber’s flywheel really partnership that served as an intermedi- its drivers a minimum wage and holiday gets going, is that it may attract even more ary between Amazon’s European opera- pay. But Uber seems to realise that it has to regulatoryattention. In otherwords, to jus- tions—whose headquarters were a sepa- make life easierforthem. It now allows tip- tify its valuation, Uber would have to be- rate Luxembourg entity—and its American ping. And in some cities its algorithms take come really big. Yet that, in turn, risks trig- parent. As a partnership, the go-between into account where a driver wants to end gering yet more of a backlash, as Facebook was not subject to tax under Luxembourg up after work. and Google, which have both got into po- law (the statutory corporate rate is 29.22%). And then there are Uber’s cultural and litical trouble recently,can attest. 7 The European operating firm was. legal troubles. Mr Khosrowshahi appears The operating company was required to thinkthat he can soften, though not dull, to pay to the partnership substantial royal- the firm’s edge by being more transparent ties for, among other things, the right to use than Mr Kalanick and his team. A bonus the Amazon name, thereby shifting lots of system that led to counter-productive lev- profit to the untaxed entity. The commis- els ofinternal competition is under review. sion argues that the level of royalty pay- He can only hope that legal actions pend- ments was inflated and did not reflect eco- ing against the company do not cause too nomic reality. It says the arrangement much damage, such as the one from allowed Amazon to avoid tax on three- Waymo, Alphabet’s autonomous-car unit, quarters of all profits on its sales in the EU over IP, or a criminal probe into its Grey- (which the company does not disclose). ball app, developed to outwit regulators. Both Luxembourg and Amazon deny Yet turning Uber into a kinder firm may wrongdoing. Luxembourg’s authorities make it harder to clear the highest hurdle: have said before that Amazon chose to put making it as profitable as a valuation of its main European operations in the tiny $68bn requires it to be. The theory behind landlocked country for a variety of rea- Uber is that by subsidising rides it sets an sons, tax not being the main one. They economic flywheel in motion that at some have also pointed out that its operations in point powers itself. More riders attract Luxembourg are hardly empty shell com- more drivers, which will attract more rid- panies: the company employs over 1,500 ers and so on. In some big cities the fly- people there (though the IP-holding part- wheel is turning, generating profits, the nership, which no longer exists, had no firm has said, while acknowledging that employees or offices). Amazon says it did these are still fragile. But with accumulated not receive special treatment and is consid- losses ofabout $6bn (see chart on previous Tax avoidance ering an appeal. page), it seems to be more expensive than This week’s order could stoke trans- Uber expected to get up to speed. One rea- Raining on atlantic tensions. After the Apple ruling son isthatotherfirms, such asLyft in Amer- last year, American politicians queued up ica, have piled in. And it is not clear wheth- Amazon to echo the sentiments of Tim Cook, the erthe flywheel will keep spinningonce the firm’s boss, who derided Ms Vestager’s ac- subsidies are cut. Sceptics argue that the tion as “total political crap”. Many of them model is unsustainable. saw Brussels’ taxprobes as beingdriven by Aftertaking a bite out ofApple, Brussels Mr Khosrowshahi has yet to say public- tech-envy, notsound economics. Washing- targets the world’s top online retailer ly whether he will continue pushing for ton hinted at retaliation, though nothing growth or focus more on profits. But he ARGRETHE VESTAGER’S assault on specific has been suggested. could make Uber more efficient by leaving Mtechnology firms she deems to have The commission’s critics have a point. small markets and reining in its freewheel- improperly massaged down their tax bills The detailsofthe case are complex, and tax ingorganisation, in which regional manag- continued this week with a tilt at Amazon. experts will disagree about the legality of ers operated like entrepreneurs, doing The internet retailer faces a bill of €250m the arrangements under the spotlight, just largely what they liked to generate growth. ($293m) for back taxes over what the Euro- as they did with Apple. Few would deny Adeal with SoftBankwould also help. Ifhe pean Union’s competition commissioner that the frayed patchwork of international cannot invest in Uber, Mr Son, who has al- considers to have been an illegal sweet- corporate-tax rules need reforming; one ready made several bets on ride-hailing, heart deal with Luxembourg. proposal, espoused by President Emman- would certainly finance its rivals. The orderrequiringthe Grand Duchy to uel Macron of France and supported by But if he wants Uber to have a success- recover the money follows a well-publi- several other EU countries, would see mul- ful share flotation soon, Mr Khosrowshahi cised three-year investigation. It is the lat- tinationals taxed on revenues in particular must give it a new Gestalt, or personality, est in a series of tax-avoidance cases territories instead ofon profits. But punish- beyond that ofa ruthless disrupter. The big brought by the European Commission ing a firm fora 14-year-old ruling from a na-1 The Economist October 7th 2017 Business 67

2 tional government, happily accepted by Internet infrastructure both sides at the time, looks harsh. The un- certainty it stokes may also dampen for- eign investors’ interest in Europe. Ms Ves- Pipe dreams tager’s rulingwill add to the discomfortfelt by Jean-Claude Juncker, the commission’s Technology companies are building theirown undersea fibre-optic networks president, who was prime minister of Lux- embourg when the tax arrangement in HEN Cyrus Field, an American question was hammered out. American Wbusinessman, laid the first trans- firms should brace for further scrutiny of Atlantic cable in1858, it was hailed as one past tax deals. The commission is also ofthe great technological achievements looking into McDonald’s and Fiat Chrys- ofits time and celebrated with bonfires, ler’s arrangements in Luxembourg, and fireworks and100-gun salutes. Alas, the those of Starbucks in the Netherlands. The reason forthe festivities soon went away. only other non-American firm known to Within weeks the cable failed. be in its sights on taxis Engie, a French utili- On September 21st the completion of ty.The Apple case is likely to produce plen- another trans-Atlantic cable was wel- ty more drama, too. The company and Ire- comed with much less ado. But it is re- land are both appealing. The commission, markable nevertheless: dubbed Marea, meanwhile, is taking Ireland to the Euro- Spanish for“tide”, the 6,600km bundle pean Court of Justice over its failure to col- ofeight fibre-optic threads, roughly the lect the €13bn which it has been told it is size ofa garden hose, is the highest-capac- owed but clearly does not want. 7 ity connection across the ocean. Stretch- ing from Virginia Beach, Virginia, to Bilbao, Spain, it is capable oftransferring Fixing Ford 160 terabits ofdata every second, the Only 6,599km to go equivalent ofmore than 5,000 high- Waiting for parts resolution movies. It is jointly owned by Owning a private subsea fibre-optic Facebookand Microsoft. networkhas several advantages, in- Such ultra-fastfibre networks are cluding more bandwidth, lower costs, needed to keep up with the torrent of and reduced delay,or “latency”. Having data flowing around the world. In 2016 access to multiple cables on different traffic reached 3,544 terabits per second, routes also provides redundancy.If a The new boss has a plan forthe present, roughly double the figure in 2014, accord- cable is severed—by fishing nets, sharks, less so forthe future ing to TeleGeography,a market-research or an earthquake, among other things— IKE any mechanic with a misfiring car, firm. And demand forinternational traffic can be rerouted to another line. LFord’s new boss has had his head under bandwidth is growing by 45% annually. Most important, however, owning cables the bonnet working out what needs atten- Much traffic still comes from internet gives companies greater say over how tion. Jim Hackett emerged on October 3rd users, but a large and growing share is their data traffic is managed and how with a checklist of repairs to present to in- generated by big internet and cloud- equipment is upgraded. “The motivation vestors, who have been awaiting his diag- computing companies syncing data is not so much saving money.It’s more nosis since he took over in May. The list is across their networks ofdata centres about control,” says Julian Rawle, a sub- short but the engineering is complicated: around the world. marine cable-industry expert. restore Ford’s competitiveness while pre- These firms used to lease all oftheir Some people worry that owning the paringfora future ofelectric vehicles (EVs), bandwidth from carriers such as BT and pipes that carry their customers’ data will self-driving cars and transport services. Level 3. But now they need so much give big tech firms even more power than But those expecting a radical overhaul networkcapacity that it makes more they already have, likening the situation were probably disappointed. sense to lay their own dedicated pipes, to Amazon’s owning the roads on which Mr Hackett’s predecessor, Mark Fields, particularly on long routes between their its packages are delivered and the lorries was shown the door by Bill Ford, the firm’s data centres. The Submarine Telecoms that carry them. Others fret that conven- chairman, for failing to make a persuasive Forum, an industry body,reckons that tional networkoperators may struggle to case that he was reinventing Ford as a mo- 100,000km ofsubmarine cable was laid adapt their business models, as compa- bility firm at the forefront of automotive in 2016, up from just16,000km in 2015. nies such as Facebookare moving onto technology. Despite acknowledging to in- TeleGeography predicts that a total of their turf.“Within the next 20 years,” vestors that he and Mr Ford agreed that his $9.2bn will be spent on such cable pro- predicts Mr Rawle, “the whole concept of new job was “about the future not the jects between 2016 and 2018, five times as the telecom carrier as the provider ofthe past”, Mr Hackett was clearest about how much as in the previous three years. networkis going to disappear.” to make Ford fit forthe present. Ford has struggled in recent years. It has underperformed even amid the lowly huge variety of different specifications cording to Mr Hackett. Plans are also afoot stockmarket valuations of carmakers chal- available foreach vehicle (in the case ofthe to make more ofthe sort ofcars that people lenged by tech firms with bolder ideas Focus, from 35,000 to 96) and sharing parts want to buy. Buyers are turning against sa- about transport in the future. Mr Hackett across more cars will help to lower costs, loon cars and are demanding SUVsand admitted to investors that, despite record which have risen almost as fast as rev- trucks, so Ford will make more of them. profits oflate, Ford had fallen short on mar- enues since 2010. Bringing better technol- But altering the line-up ofproducts is hard- gins, depriving them of billions of dollars. ogy to the industrial process should also ly a step-change. He hopes to put that right chiefly by using cut the time it takes to develop new vehi- These are sensible fixes. But it is unlike- old-fashioned means—cutting costs. cles, by up to a fifth. This will all bring sav- ly that Mr Hackett’s measured tone will re- Reducing complexity by pruning the ings of $14bn over the next five years, ac- assure investors that Ford is taking a lead in 1 68 Business The Economist October 7th 2017

Indian telecoms tions, having bet that rapid user growth would offset the high fixed costs of acquir- Jioseismic ing spectrum and building networks. Now that Jio has snagged 84% of the 153m net mobile-phone additions in the year to July (see chart on next page), others must fight MUMBAI for the scraps. A key metric, average rev- enue per user, has cratered across the in- Dirt-cheap mobile data is a thrill for dustry.What profits remain are insufficient most, a headache forothers to service large debtpiles. Analysts atCred- HE security guards at the foot of Anti- it Suisse, a bank, calculate that over half of Tlia, a 27-floor private residence in Mum- around $40bn in loans to the industry sits bai, while away the days just as all bored with operators whose earnings before in- Indians have been doing in recent terest, tax, depreciation and amortisation months—watching movies on their phone. cannot meet interest payments. Using a mobile network to stream endless The government might get hit, too. Most Bollywood epics would until recently lending to struggling telecom firms was by have been an unthinkable luxury, even in state-owned banks, whose long-overdue the rich world. In India it now costs less recapitalisation from public coffers will than a cup ofstreet-side chai. have to be bigger as a result. And the gov- Thank the tycoon lording it in the sky- ernment itself is a creditor to telecoms Hackett plays it safe scraper’s upper reaches. As boss of Reli- companies, having agreed to spectrum ance Industries, Mukesh Ambani, India’s bills being paid slowly over time. Against 2 the new technologies that will determine richest man, has spent more than $25bn on that, Mr Ambani’s bet is uniquely in sync success in the longer term. Neither does it building Jio, a state-of-the-art mobile-tele- with the current government’s ambitions. help that its rival in Detroit, General Mo- coms network. The delight of the guards at Jio launched its service with newspaper tors (GM), is doing a much better job. It Antilia, and of the roughly 130m Indians ads featuring a full-page portrait of the launched a long-range EV, the Chevrolet who have signed up to the service since it prime minister,Narendra Modi, dedicating Bolt, last year, and on October2nd said that launched in September 2016, is matched its investment to his digital vision. And it planned 20 electric models by 2023. De- only by the misery ofMr Ambani’s rivals. other services that need widespread inter- spite announcing that it would reduce Jio’s rise is nothing short of spectacular. net adoption are clearly benefiting, from spending on internal combustion engines It tookless than a yearforit to be delivering media-streaming to e-commerce. by a third by 2022 and divert that cash to more data than any other mobile network Consolidation seems the order of the electric powertrains, Ford will not launch a in the world—one billion billion bytes a day for the rest of the industry. Having similar vehicle until 2020. Ford insists that month,itclaims,oroverhalfthedatadeliv- written €6.3bn ($6.9bn) off the value of its it is only interested in profitable EVs. But ered by all American carriers put together. local subsidiary and shelved a likely share withstanding losses while learning how to Less so when it comes to revenue: after giv- listing, Vodafone, the British-owned sec- make and market battery-powered cars ing away its services for seven months, it ond-biggest player, is merging with Idea may give GM and other carmakers a long- went on to charge customers a third of Cellular, the third-biggest. Reliance Com- term advantage. what other Indian operators do. munications, a smaller outfit once run by Ford also aims to become the world’s Nobody thinks Mr Ambani is about to Mr Ambani (it ended up with his brother most trusted mobility company. Much like relent after winning a mere 11% or so of the Anil after the family empire was split up in all bosses ofcarmakers faced with the puz- market, a figure that is creeping up by 2005) had been in talks with Aircel to com-1 zle offindingbusinessmodelsaround ride- around half a percentage point each hailing and autonomous cars, Mr Hackett month. Perhaps to terrify the competition was vague about how Ford might provide further, he has spoken of wanting half the services profitably. He did at least signal market to himself by 2021. To that end, the that it would find partners for self-driving general public this weekgot their hands on technology,abandoning Mr Fields’s riskier the JioPhone, the latest plank in the com- strategy ofdoing everything internally. pany’s growth push. Striking the right balance between A crossover between an antique Nokia- “thinking and doing” is important, accord- style feature phone (these still make up ing to Mr Hackett, who wants to “bend the most new handsets sold in India) and a arc towards doing”. That is certainly what smartphone, the device is bound to appeal catching up with GM will require. Deut- to Antilia’s security guards. It is free: you sche Bank recently suggested that Ford’s ri- only pay a 1,500 rupee ($23) deposit, re- val may have commercial driverless cars fundable after three years. Then, for a mere on the road within the next couple of 153 rupees a month, customers can con- years, well ahead ofany competitors. sume unlimited calls and data. Though the Ford has plenty of ground to regain. As screen is small and popular apps such as Barclays, a bank, points out, it went from Facebookare not (yet) available, analysts at being the “darling” of the industry a few CLSA, a brokerage, expect around100m Jio- years ago to a firm that investors now treat Phones to be sold in the next18 months. with “indifference, disinterest [and] apa- Jio’s gatecrashing ofwhat was an order- thy”. Mr Hackett has announced more ly market has plunged its rivals into crisis. than mild tinkering. Investors will doubt- Some moan that regulators have bent over less welcome the attackon costs but he has backwards to help Reliance, known for its no revolutionary scheme that might make ability to run rings around officials. Many them love Ford again. 7 operators are in precarious financial posi- A swami gets the religion The Economist October 7th 2017 Business 69

ploy: French singers, actorsand racing driv- Danone wants to get certified as a B- Jio whizz ersused to pushPernod Ricard’sliquor. But Corp—a for-profit firm that shows high so- India, net change in wireless subscribers, m with 90% of sales in markets outside of cial and environmental standards. It July 31st 2016-July 31st 2017 France, punchier efforts are needed. Two would be the largest company globally to 50 0+– 50 100 150 years ago the firm commissioned a global do so. In America that requires registration study of boozing habits, which totted up as a “public benefit” firm, letting board di- Jio all “moments of consumption” for drink- rectors legally promote the interests of Bharti Airtel ers, identifying 20 important ones in staff, customers and others, along with Idea America, the biggestmarket. Teamsof mar- those ofshareholders. Vodafone keters are now told to push a brand for Markets are not entirely convinced by Aircel each such experience: the firm’s tequila Danone’s strategy,however. An American R Comm when American friends gather to watch activist investor, Corvex, has taken a small Tata sport; its cognac at Chinese weddings; gin stake, worth $400m, in the company, and forSpaniards sharing an aperitif. is agitating for its operations to be im- Source: Telecom Regulatory Authority of India The firm must respond somehow, be- proved and growth lifted. cause drinkers, especially millennials (the Yet investors have drunk in the simpler 2 bine, but the deal now seems to have fallen generation which roughly includes those story at Pernod Ricard—ofa mixofresilient through. The smaller Reliance is flogging born between1980 and1996),are no longer Western markets and growth from devel- anything it can—from phone masts to its loyal, says Mr Ricard. “Back in the day,you oping ones. Its share price has risen by head office—in a bid to stay afloat. had a one-brand consumer,”who tooka fa- roughly 50% in the past decade, whereas Jio’s own financial position is hard to voured tipple on almost any occasion. Danone’s has been flat (though it has gauge. Its accounts are not separated from “Now it depends who you are with, where climbed since Mr Faber tookover in 2014). those of Reliance, whose profits generated you are, the time ofday.A consumer might Still, there is a risk for Pernod Ricard, in petrochemicals and oil exploration and have six brands,” he says. too: that younger, health-conscious con- drilling are funding the telecoms push. But Across Paris, Emmanuel Faber, the head sumers, who increasingly shun tobacco even the most bullish analysts are strug- of another large French consumer-goods and sugary drinks, will also turn against li- gling to figure out how Jio can provide a firm, Danone, is facing a similar challenge quor. Salesofspiritshave been robust in re- meaningful return to shareholders. As- as consumers of yogurt and bottled water cent years, even as consumption of wine suming it can double its existing customer prove fickle too. His style—ascetic and al- and beer has fallen in many countries, but base, it will still have sunk around $100 to most monkish, as an acquaintance puts it— millennial shoppers sound increasingly acquire each new subscriber. differs sharply from that of his compatriot. puritan. Goldman Sachs notes in a recent Investors are clearly impressed. They But the two bosses are responding to the report on millennials that 72% of such trust that Reliance’s increasingcontrol over same phenomenon: a lack of growth in young consumers in America disapprove the fast-growing market for data will even- food-and-drinks sales at big firms. “People ofothers who drink“nearly every day”. tually allow it to raise prices. The firm’s are walking out of brands that they’ve Mr Faber’s bet is on the trend towards shares are up by over 50% so far this year, been consuming for decades,” says Mr healthy behaviour. “To survive and regain having been flat for most of the past de- Faber. To stop feeling disconnected from leadership as a big brand, we must do big cade. At 60, Mr Ambani is staking his lega- the origin of food, he says, they are switch- things,” he says. If he is right about a “revo- cy on his new venture, the only major part ing to small, local firms that might produce lution” among consumers, then the firm of the Reliance empire he has created him- organic foods, forexample. must fight to keep their trust. Mr Ricard’s selfratherthan inherited. Whateverhe has Of the two firms, Danone faces the big- view is more old-school: consumers are in mind with Jio, he is not done yet. 7 gest and most immediate shift in consum- less loyal, but he still believes many will er tastes. Although he heads a global food long be happy to enjoy a drink. 7 firm with a market value of €46bn, Mr Pernod Ricard and Danone Faber warns that time may be up for stan- dardisation in food-making. The food in- Be a sinner, be a dustry “is going nowhere”, he adds, be- cause short-sighted companies see only a saint “transactional relationship”, not a deeper one based on values, with their customers. PARIS These days people have little faith in the makers of their food and drink. Mr The bosses oftwo famous French firms Faber talks at length about disenchant- struggle to keep theircustomers loyal ment shown by voters and consumers LEXANDRE RICARD wants to talk box- alike towardselites. Surveysshowthe pub- Aing. He runs Pernod Ricard, a firm that lic barely trusts CEOs such as himself sells Chivas whisky and Absolut vodka, when they speak about their companies, among other drinks. Formed by his grand- he says. Consumers “care about the sover- father in1975, with roots in a Pernod distill- eignty oftheir food, taking control back”. er set up in 1805, it is the world’s second- Danone’s response, like that of Pernod largest seller of wine and spirits, with a Ricard, is partly about niftier marketing—it market capitalisation of €32bn ($37bn). He runs an ad campaign called “One Planet. brags that Floyd Mayweather, an Ameri- One Health”. But the company is also can pugilist with 19m Instagram followers, changing some basics. Two decades ago recentlyendorsed one ofthe company’ste- Danone sold “beer, wine, chocolates and quila brands. Such a “key influencer” on a candies”, he points out. It has switched en- digital channel “gives us speed and scale”, tirely to healthier products, betting that says Mr Ricard. long-term growth lies there. The firm aims Celebrity endorsements are an old to be entirely carbon-neutral.Most striking, You see her after the third glass 70 Business The Economist October 7th 2017 Schumpeter Goldman Sags

Unusually, the famous investment bankhas more ofa business than an image problem $100 of such assets Goldman made $1.9 of pre-tax profits in 2016, less than the peer group’s average of $2.0. Each bank has a differ- ent mix of businesses, but you can compare Goldman to a best- in-class “clone” made up of JPMorgan’s investment banking and asset-management divisions. The clone made $2.2. (Goldman says that this comparison is too crude.) Mediocre profitability reflects unwieldy asset allocation. Goldman has toiled to cut its balance-sheet, particularly in bond- trading. But it has been hit especially hard by new “Basel 3” rules which determine how its risk-weighted-assets are calculated. As a result Goldman’s have risen by 35% since 2012. The trading arm ties up two-thirds of this, especially its derivatives book. Its lend- ing operation has grown, with exposures to higher-risk firms— those with a credit rating ofBBB or less—rising151% to $129bn. Goldman does not reveal the ROEs of these operating seg- ments but they can be imputed. In 2016 the trading unit appears to have had an ROE of 7% and its lending unit 5%. Most firms would have wielded the knife deeper. The bank has new pro- jects, such as its small online consumer bank. It has returned cash to shareholders. But its core strategy is to wait fortrading to recov- er. This may happen. Volatility may pick up, European competi- Y TRADITION, Goldman Sachs makes risky financial wagers tors might quit the game, or emerging economies could boom. B and stays icy cool under pressure. A bad trade on Treasury It is less clearhow any ofthese events would liftthe tradingdi- bonds in 1986 almost killed it, but was eventually cauterised. The vision’s returns to a punchy level. There have been highs and firm’s “big short” in early 2007, when it bet that subprime securi- lows since the crisis, but its average ROE has been only10%, based ties would tumble, helped it to book profits of $14bn in 2008-09 on current capital rules. If the terrible trio of Barclays, Deutsche and to perform relatively well duringthe worst financial crisis for Bank and Credit Suisse quit the trading game altogether and 80 years. Goldman also valuescandour, atleastinside the firm. In Goldman won a quarter of their business, its trading division’s this spirit it is time to acknowledge that the bank’s strategic direc- ROE would be a lukewarm 9%. China’s markets are booming but tion is beginning to feel like a bum trade. Its defence is that it is no local firms dominate, and Goldman is weak in India. worse than itsgroup ofpeers, butbeingaverage on Wall Streetis a Goldman’s “hang-in-there” strategy feeds into the discussion mug’s game and the antithesis ofthe Goldman way. over succession. Lloyd Blankfein has been the boss since 2006, While outsiders think that Goldman’s alumni run the world, and—it must be said—over the entire period has the best record of on Wall Street the firm’s aura has dimmed. Rival banks view it any banker other than Jamie Dimon at JPMorgan. But more re- with indifference, not awe. After shining in the years after the cri- cently Mr Blankfein may have been too tolerant of the trading di- sis, since 2012 its total return (share price gain plus dividends) has vision, where he and several lieutenants made their names. lagged behind the average of its four big American rivals by 36%. The problem is that even if he goes, there is no quick fix. The Other banks have caught up and Goldman’s trading arm, which firm’s other businesses—advising companies and asset manage- executes deals for clients, is misfiring, with its market share drop- ment—are excellent but mature. A few romantics imagine Gold- ping. Ithasstruggled to adaptto placid marketsand a clampdown man could return to being a partnership, but that is silly. In 1998 on proprietary trading (trading foryour own profit). the partners had $6bn of capital tied up in it; now they would Inevitably that gives rise to doubts about the firm’s strategy, need $97bn to buy it. Might Goldman combine with a commer- which is to slash costs and sit tight, hoping the industry’s nuclear cial bank, a model it flirted with in the 1990sand which JPMorgan winter ends. So while lower bonuses mean the pay bill is down has perfected? The only major lender without a big investment by 42% since 2007, there has been no wholesale retreat from the bank is Wells Fargo, and the combined firm would have $3trn of main businesses—advising and lending to companies, trading se- assets, enough to make regulators ululate. curities and asset management. Meanwhile, the bank is grap- pling with three problems: mediocre profitability, unconvincing The wonder years capital allocation and a tricky management succession. Goldman says that it has a “record of adapting to changing envi- Back when it was a partnership, Goldman was more profit- ronments” and notes that its average ROE over the past ten years able than Facebook is now. Its return on equity was 38% in 1998, was eight percentage points above the average of its peers. This before it went public. In 2007 its ROE was 29%, but it fell to 9% in legacymeansthatthe board will probablystickwith the plan and the most recent quarter. Two-thirds of this drop reflects tougher the man for at least a year. After that, mediocre performance capital rules. Its level of ROE matches the average of JPMorgan, would corrode morale and upset external shareholders, who Morgan Stanley, Citigroup and BankofAmerica. Investors expect own 90% ofthe bank. Ifno tradingupsurge comes, Goldman may a mild recovery, but do not expect Goldman to be exceptional, so have to shrink more. Its reign has been short. In the 1980s it was its shares do not trade on a notably superior multiple of bookval- notyettop dogon Wall Streetand wasa nonentityabroad. People ue, as they usually did in the glory years between 2006 and 2013. may look back with puzzlement at the two decades when Gold- Anothergauge isprofitsrelative to risk-weighted assets, a mea- man Sachs was the undisputed king of the investment-banking sure that regulators use to calibrate banks’ risk and size. For every industry and investment banking seemed to rule the world. 7

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Also in this section 74 Buttonwood: Merger woes 75 The gender gap in pensions 76 American shipping 76 Food and taxation 77 Tax havens 77 Chinese overseas acquisitions 78 Free exchange: Manias, panics and Initial Coin Offerings

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Pensions career records, and thus may not benefit from a full pension. The big squeeze Squaring this circle is not easy. States and local governments have tried to cut the cost to taxpayers of pension benefits in various ways. First, they have offered less generous pensions to new employees. But that leaves the bulk of the liabilities intact. Second, they have reduced the extent to Pension costs in American states are crowding out otherspending which pensions will increase with infla- CHOOLS in Pennsylvania ought to be a defined-benefit or DB scheme). Higher tion via a cost-of-living adjustment; this Scelebrating. The state gave them a $125m costs are the result of improved longevity, will save money in the long term but, with budget increase for 2017-18—enough for poor investment returns and inadequate inflation so low, does not save much in the plenty of extra books and equipment. But past contributions. Because of these fac- short term. Third, they have asked employ- John Callahan of the Pennsylvania School tors, many private-sector companies no ees to contribute more from their current Boards Association says all the increase longer offer employees DB pensions. The wages—ie, take a pay cut. and more will be eaten up by pension immovable object is the need, both legal These changes have made only a small costs, which will rise by $164m this year. and ethical, to meet past pension promises dent in the problem. Bigger savings would The same happened in each of the previ- to workers who may be relying on them as have to come in two areas. One seems out ous five years; cumulatively the shortfall their main source ofincome. ofthe question—cutting payments to those adds up to $586m. The pupil-teacher ratio Take teachers in California. Jennifer who have already retired or the benefits is higher than in 2010. Nearly 85% of the Baker of the California Teachers Associa- that workers have already accrued. The state’s school boards said pensions were tion points out that, when they retire, they trickier issue is whether it is possible to cut their biggest source ofbudget pressure. get neither income from Social Security the future benefits of existing workers. A A similar squeeze is happening all over nor employee health benefits. Moreover, 45-year-old, forexample, could keep the DB America. Sarah Anzia, at the University of 72% of the state’s teachers are women, pension based on his past earnings, but his California, Berkeley, examined 219 cities many of whom will have had interrupted future pension would be based on a de- between 2005 and 2014 and found that the fined-contribution (DC) system in which mean increase in their real pension costs the final income was not guaranteed. was 69%; higher pension costs in those cit- The money pit Making such a change is difficult; it is ies were associated with falls in public-sec- US pension contributions per person* unpopular with workers, and in some tor employment and capital spending. 2016 dollars states, possibly illegal. Arkansas, Illinois The problem is likely to get worse. and New York have deemed it unconstitu- 600 Moody’s, a rating agency, puts the total tional to cut the rights of existing employ- shortfall of American public-sector pen- 500 ees. In other states, the courts have ruled sion plans at around $4trn. That gap does 400 that rights, once promised, can never be not have to be closed at once, but it does 300 withdrawn. California’s Supreme Court mean that contributions by employers Employers may get the chance to overturn this ruling (and hence taxpayers) will increase even 200 this year or early in 2018 because of two 100 more than they already have (see chart). Employees cases currently in the system. In a sense, this is a meeting of irresist- 0 The issue cannot be tackled overnight. ible force and immovable object. The force 1975 80 85 90 95 2000 05 10 16 As Rob Dubow, the director of finance of is the rising cost of providing a pension Source: Nelson A. Rockefeller *State- and locally- the City of Philadelphia, points out, “The linked to a worker’s final salary (known as Institute of Government administered plans problem took decades to create so it will 1 74 Finance and economics The Economist October 7th 2017

2 take a while to solve.” His city recently the portfolio would need to earn 9% a year trators, cutting the return assumption by a agreed on reforms with unions involving after costs—not easy when annual infla- quarter of a percentage point increases the higher contributions from some employ- tion is expected to be only 2% or so. required contribution rate (as a proportion ees (with the highest earners stumping up Mr Dubow says that the 7.75% target has ofpayroll) by two to three points. most), extra revenue from sales taxes, and come down in recent years, and is deemed In consequence, it is in no one’s interest new employees being offered a mixed achievable by investment professionals. to make more realistic assumptions about DB/DC plan. The aim is to get the plan, just Over in California, Jack Ehnes of CalSTRS future returns. Workers (and their unions) 39.5% funded using current asset values, to (which oversees teachers’ pensions) says fear it might generate calls fortheir benefits 80% funding by 2031. that, aftertalkingwith his advisers, he now to be cut; states worry it would require Taking14 years to close the funding gap expects its scheme to return only 7%. them to raise taxes. Don Boyd, the director may seem like slow progress. But Philadel- Experts can differ, it seems. But small of fiscal studies at the Rockefeller Institute phia’s plan may be optimistic; it assumes changes in assumptions can make a huge of Government, a think-tank, reckons that an investment return of 7.75% a year. The difference to the amount employers need with a 5% assumed rate of return, states scheme has around 22% of its portfolio in to contribute. According to the National would have to stump up an extra $120bn a bonds. If those return, say, 3%, the rest of Association of State Retirement Adminis- year just to tread water—ie, to fund their 1 Buttonwood Adealtoofar

Mergers and acquisitions often prove to be disappointments HENyouare the chiefexecutive ofa than small ones. All-share deals tend to Wpublic company, the temptation to The winners’ curse perform less well than cash offers. Yet, de- opt for a merger or acquisition is great in- Russell 3000, value of $1,000 invested spite this, companies with a lot of cash on deed. Many such bosses may get a call ev- 3,000 their balance-sheets tend to be bad at ery week or so from an investment bank- Equal weight makingacquisitions, perhapsbecause the er eager to offer the kind of deal that is 2,500 money is too tempting for executives not sure to boost profits. 2,000 to use. Like a Wall Street trader with his Plenty of those calls are proving fruit- first bonus, they are tempted to spend the ful. In the first three quarters of 2017, just 1,500 money on something flash. over $2.5trn-worth of transactions were 1,000 Of course, not all deals underperform. agreed globally, according to Dealogic, a M&A universe* So it is understandable that executives 500 data provider. The total was virtually un- will tend to imagine themselves in that changed from the same period in 2016, 20010305070911131517 blessed minority that manages to make but the number in Europe, the Middle *All companies with deal their acquisition a success. After all, with- East and Africa was up by 21%. Source: S&P Global values > 5% of total enterprise out a degree of self-confidence, they Market Intelligence value, rebalanced monthly It is easy to understand why an execu- would not have become chief executives tive opts for a deal. Buying another busi- in the first place. Fund managers who be- ness looks like decisive action, and is a lot to happen to the fundamentals of the ac- lieve they can defy the odds and pick easier than coming up with a new, best- quiring company’s business. The study stocks that beat the market may also be- selling product. Furthermore, being the finds that, relative to the company’s peer lieve that they can distinguish the value- acquirer is far more appealing than being group, net profit margins fall, as do the re- adding takeover deals from the rest. the prey; better to be the butcher than the turns on capital and on equity; earnings The tough questions ought to be asked cattle. A takeover may keep activist hedge per share grow less quickly; and both debt of, and by, the non-executive directors on funds off the management’s back for a and interest expenses increase. acquiring-company boards. They should while longer. And being in charge of a As the deal is done, however, the execu- realise that executives like to build em- much bigger company is a more demand- tives always sound bullish. Costs will be pires, and to be seen to be “doing some- ing task that will surely justify (ahem) a cut, the companies will benefit from sell- thing”; they should be the resident scep- larger salary for the executives in charge. ing a wide range of products and so on; a tics. Why should they believe this But these temptations, good and bad, whole range of “synergies” will be executive’s latest idea fora deal will be an should generally be resisted. S&P Global achieved. Instead, the combined compa- exception to the rule? Market Intelligence, a research arm of the nies tend to suffer from clashes of culture Perhaps fewer deals will take place in ratings agency,has updated a study on the and teething problems as systems prove any case. A report by Willis Towers Wat- impact of deals on the acquiring com- hard to integrate. The AOL-Time Warner son, an actuary, together with the Cass pany’s share price. The study looked at merger of 2000 is perhaps the most fam- Business School, is more sanguine about M&A deals done by listed companies in ous example ofa dysfunctional deal; at the the returns from mergers than S&P is, but America’s Russell 3000 index between time, it was one of the biggest mergers in suggests that political pressures will make January 2001and August 2017; deals were corporate history. Not every deal is that it harder for deals to win approval from only included ifthey cost more than 5% of bad. But instead of two plus two equalling regulators. Rising populism means that the total enterprise value of the acquirer the promised five, all too often they add up governments may be less willingto let na- (5% of the equity value, for financial com- to three-and-a-half. tional champions be bought by foreign panies). The acquirers’ shares underper- Investors should look for a few useful firms. Protectionism aside, this is one ad- formed the market (see chart) and those warning signs ahead of a takeover. The ditional level of regulation that share- ofrival firms in the same industry. fasterthe companywasgrowingbefore the holders need not be too distressed about. That share-price performance was un- acquisition, the worse it tends to perform derstandable, in the light of what tended afterwards. Large deals perform less well Economist.com/blogs/buttonwood The Economist October 7th 2017 Finance and economics 75

2 pensions without making any progress on cord high, and, even using their sanguine nounced in the west than in the east, closing the deficit. So the game of “extend return assumptions, state and local pen- where more women work, partly a hang- and pretend” continues. sion plans are only 72% funded. A market over of the communist past. Then women But the danger ofoptimistic projections downturn could have a disastrous impact. worked almost as much as men and pen- is that, if missed, they simply create a big- The problem is most acute in areas fac- sions were tied to years worked, not in- ger long-term hole. David Crane is a cam- ing other financial problems; most starkly come. That helps explain the small pen- paigner for pension reform and a former in Puerto Rico, which has just defaultedon sion gaps among the retired in former advisertoArnoldSchwarzenegger,Califor- its debt and has a $50bn pensions deficit. Soviet countries. Such historical legacies nia’s governor from 2003 to 2011. In a In Detroit, which declared bankruptcy in must be kept in mind when projecting speech as long ago as 2010, he pointed out 2013, pensions were cut by 4.5%. Moody’s what the gaps might be in the future, says that in 1999, CalPERS (the fund that covers has downgraded the bonds of Illinois to a Ole Beier, from the OECD, a think-tank. most state employees) had assumed an level very close to “junk” status. Propor- A few recent developments, however, 8.25% long-term return, and anannual pen- tionate to its size, it has the biggest pension may aggravate the problem, notably a sion costto the state of$450m. Overthe fol- deficits ofany state. steady shift from public to private pen- lowing ten years, that average was actually As years go by, voters and legislators sions. This is vital ifstate pensions are to be $2.3bn. One reason why costs rose so fastis across the country will have to make a affordable as societies age. But unless that the state granted generous benefit in- trade-off. They can pay more taxes and cut women earn and save more, the gap will creases to its workers in 1999, based on services; or they can reduce the benefits widen. And afteryears ofprogress in many those optimistic return assumptions. they pay people who teach their children, countries, the pay differential between The danger of the current optimism is police their streets and rescue them from men and women has stopped narrowing. that the American stockmarket is at a re- fires. There will be no easy answers. 7 Add to this the growing divorce rates among the over-60s (in America they have doubled since 1990), and it is clear a storm Women’s pensions is brewing, most urgently for women en- tering retirement. Some women can count Silver and gold on spousal pensions, others may not be so lucky. Women starting their careers have most cause for concern. Their pensions will depend more than previous genera- tions’ on what they put in. Prescriptions for narrowing the gap in workforce pay are well-known. Access to Inequality between men and women is starkest in old age affordable child care, paid parental leave HE retirement-savings crisis is a than men, often preferring cash or fixed-in- and flexible working all help. Abolishing “Twomen’s crisis,” says Sallie Kraw- come investments. Mercer, a consultancy, lower retirement ages for women, as is check, co-founder of Ellevest, a financial- found that women are 67% more likely happening in most OECD countries, will advice firm for women in America. When than men to invest in a defensive fund also help. But even so, for the immediate it comes to retirement income, women are with a lower expected level of growth. So future women are likely to continue to far worse-off than men. The gender pen- women without a fixed pension tend to be have different career trajectories from sion-gap may be less well-known than the worse off. men’s, with more breaks—for raising chil- gender pay-gap, but it is in fact far larger. The gap is greatest in countries where dren and caring for the elderly—and fewer Among those retired in the EU, women workplace pensions make up a big chunk promotions. Diane Garnick, from TIAA, a on average receive 39% less in pension in- of retirement savings, or where state bene- financial-services firm, says that many come—from state and workplace pen- fits—such as social security in America— women think that so long as they put the sions—than men do (see chart). This puts are linked to lifetime contributions. In the (default) recommended share of their pay women at greater risk of old-age poverty. Netherlands, which has a long tradition of into a savings pot they are on track, even if The European Institute for Gender Equali- quasi-mandatory workplace pensions, in absolute terms the number is too low. ty, a think-tank, warned in a study in 2015 men are not only more likely to have a She suggests that part of the solution that it also makes them more likely to stay work pension pot, but it will also be twice could be foremployersto nudge women to with abusive partners. Reforms to Euro- as large, because most women work part- contribute a larger share of their pay to- pean pensions, tying benefits even closer time and retire earlier. wards their pension than men do. She esti- to individual contributions and thus in- In Germany the gap is far more pro- mates that an American woman graduate come, mean the gap may widen further. starting on the same salary as a man will The schism is primarily a reflection of need to save 18% of her salary compared the labour market. Women on average Dutch disease with a man’s 10% to achieve the same re- work fewer hours than men, in less well- Pension gender gap, % by which women’s tirement outcome over a lifetime. Mr Beier paid jobs, for fewer years. So of course average pension is lower than men’s, 2015 adds that it also makes a big difference if their workplace pensions are smaller. But 0 1020304050 pension savings continue during materni- retirement is more costly forwomen. In Eu- tyleave, thanksto (near) full maternity pay. Netherlands rope they retire on average earlier than Merely focusing on equality, however, men and live five years longer. Longer lives Germany is not enough. The chart might suggest that are not a problem ifthe state or a company Britain female pensioners in Estonia are sitting has promised to pay a fixed income until EU average pretty. Yet among the 75-plussers in the EU, death. In the EU, annuities are not allowed France none is poorer than an Estonian; and al- to discriminate on gender grounds and so Greece most nowhere is the gap between male are a better deal for women than men. But Denmark and female life-expectancy greater, mean- women also have longer periods of illness ing older women often live alone in pover- Estonia and are twice as likely to live alone in old ty or close to it. That men are not much bet- age. And they tend to be more cautious Source: Eurostat ter offis little consolation. 7 76 Finance and economics The Economist October 7th 2017

American shipping Food and taxation All at sea Fat is a fiscal-policy issue

A study suggests taxes and subsidies are bad at changing diets N RICH countries, people’s diets are The study found that the taxes and How protectionism sanka country’s getting worse and they are getting fatter. subsidies actually widened health and entire merchant fleet I Hence the increasing popularity ofa “fat fiscal inequalities. Fat taxes meant the N APRIL 1956 the world’s first container tax”, to make unhealthy food cost more. women on lower incomes paid dis- Iship—the Ideal X—set sail from New Jer- Since Hungary led the charge in 2011with proportionately more forfood—their sey. A year later in Seattle the world’s first a “chip tax” on fatty and sugary foods, habits changed less. They preferred to commercially successful airliner, Boeing’s other countries have followed. Britain is buy food they liked rather than what 707, made its maiden flight. Both develop- to join a long list next year. made nutritional sense. Taxing the food ments slashed the cost of moving cargo Since the poor both spend a higher they eat most made the poor poorer. and people. Boeing still makes half the proportion oftheir income on food and Subsidies encouraged all income world’s airliners. But America’s shipping tend to eat less healthily,they are the groups to buy more fruit and vegetables. fleet, 17% of the global total in 1960, ac- main targets ofsuch taxes. In France, for But those on higher incomes proved counts for just 0.4% today. instance, adult obesity is seen in over 20% more responsive and so benefited most. Blame a 1920 law known as the Jones ofhouseholds with monthly incomes Interestingly, richer folkwere also more Act, which decrees that trade between do- under €1,500 ($1,765) compared with less likely to buy the subsidised healthy food mestic ports be carried by American- than10% ofthose who earn over €3,000. and then spend the savings they had flagged and -built ships, at least 75% owned Punishing consumers, however, is accrued on yet more healthy food. But and crewed by American citizens. After politically painful. So “thin subsidies” poorer women, ifthey responded to Hurricane Irma, a shortage of Jones-Act have been gaining ground. But data on lower prices, often used the money saved ships led President Donald Trump on Sep- the impact ofsuch policies are scarce. A to buy unhealthy items or something else tember 28th to waive the rules for ten days recent study on the distributional im- entirely. Once the nutritional price poli- to resupply Puerto Rico. This fuelled calls pacts offat taxes and thin subsidies from cies were applied, the average share of to repeal the law completely. researchers at the universities ofOklaho- budget spent on healthy food actually Like most forms of protectionism, the ma and Grenoble suggests policymakers increased forthe better-off. The reverse Jones Act hits consumers hard. A lack of should be wary.It looked at the daily was true forthe poor. The long-term foreign competition drives up the cost of food purchases ofwomen in France over benefits ofa healthier diet are harder to coastal transport. Building a cargo ship in three days. Each day the women were grasp than the immediate boost ofa tasty America can cost five times as much as in asked to shop from a list of180 items, treat. Taxes and subsidies do not change China or Korea, says Basil Karatzas, a ship- with prices adjusted daily as taxes and that. Other strategies are needed as well— ping consultant. And the cost of operating subsidies were applied. notably education. an American-flagged and -crewed vessel is double that offoreign ones, reckons Amer- ica’s Department ofTransportation. Inflated sea-freight rates push most car- go onto lorries, trains and aircraft, even though these are pricier and produce up to 145 times as many carbon emissions. So whereas 40% of Europe’s domestic freight goes by sea, just 2% does in America. Lack- ing overland routes, Alaska, Guam, Hawaii and Puerto Rico are hardest hit. Hawaiian cattle ranchers, for instance, regularly fly their animals to mainland America. A re- cent report by the Government Develop- ment Bank for Puerto Rico found that the Jones Act inflated transport costs for im- ports to twice the level ofnearby islands. Jones-Act shipowners retort that the rulesare to help producers, notconsumers. Rail firms lobbied for the 1920 law, out of The proof is in the pudding fear that an excess offoreign ships from the first world war was flooding the market. National security was also cited. German economic historian (and former journalist are loosening the rules protecting their submarine warfare, it was argued, showed at The Economist) notes that the laws also fleets. Not America. In January, the Obama the need for a merchant fleet built and made American containerlines less able to administration tried to get rid ofall exemp- crewed by Americans. But the law has vir- compete on international routes. Drawn tions to the Jones Act. Mr Trump overruled tually wiped out American shipping. Be- by profits at home they underinvested in that decision in May, but has said any fur- tween 2000 and 2016 the fleet of private- their foreign operations, and fell behind therwaivers will be hard because ofthe in- sector Jones-Act ships fell from 193 to 91. their foreign rivals because they lacked the fluence in Congress of lobbyists from the Britain binned its Jones-Act equivalent in same scale. sailors’ unions and shipowners. Yet dereg- 1849. Its fleet today has over three times the Recognising the harm to their domestic ulation is part of his platform. The Jones tonnage of America’s. Marc Levinson, an fleets, countries from Australia to China Act would be a good place to start. 7 The Economist October 7th 2017 Finance and economics 77

Tax havens financial technology. Itmakesa substantial Out of sight portion of its profits from selling trading Buried treasure Share of global wealth held in tax havens, % platforms to other firms. Daniel Donghui Li, Geely’s chief financial officer, says 50 Switzerland Geely hopes to expand Saxo’s technol- 40 ogies into Asia. Besides facilitating this ex- Other Europe pansion, Geely does not intend to change how Saxo operates, let alone change its Vast wealth is salted away offshore. But 30 business model to finance car sales. whose? And where? 20 Asia Geely is not the first Chinese firm to WITZERLAND, which developed cross- United take control of a European bank. In Sep- Sborder wealth-management in the States* 10 tember Legend, the largest shareholder of 1920s, was once in a league of its own as a Lenovo Computers, announced that it 0 tax haven. Since the 1980s, however, tax- 200103050709111315 would acquire 89.9% of Banque Inter- dodgers have been spoilt for choice: they Source: ’Who owns the wealth *Includes nationale à Luxembourg, the oldestprivate can hide assets anywhere from the Baha- in tax havens?’, Annette Alstadsaeter, Panama and the bank in the Grand Duchy, from a Qatari mas to Hong Kong. The percentage of glo- Niels Johannesen, Gabriel Zucman Cayman Islands company. Legend said it wanted to provide bal wealth held offshore has increased dra- banking services to companies taking part matically. But it has been hard to say how Mr Zucman thinks tax havens should in China’s flagship “Belt and Road” project much that is, and who owns it. be forced to be more transparent, and that to build a latter-day SilkRoad to Europe. Few offshore centres used to disclose institutions that facilitate tax evasion Other Chinese firms have bought such data. But in 2016 many authorised the should face stifferpenalties. Fines are often smaller stakes in European banks. In May Bank for International Settlements (BIS) to seen as the cost of doing business and are HNA Group, a part-owner of Hainan Air- make banking statistics publicly available. small compared with profits. Threatening lines, increased its holding in Deutsche Using these data, a new study by Annette to withdraw banking licences would be a Bank to 9.9%, becoming its largest share- Alstadsaeter, Niels Johannesen and Gabri- stronger deterrent. “There’s a strong de- holder. Fosun, a bigconsumergroup, owns el Zucman, three economists, concludes mand from all over the world for tax-eva- 24% of Millennium BCP, Portugal’s largest that taxhavens hoard wealth equivalent to sion services,” he says. “Without large listed bank. Unlike Geely, however, Le- about 10% of global GDP. This average enough sanctions, there will always be a gend, HNA and Fosun have experience in masks big variations. Russian assets worth supply to meet that demand.” 7 the Chinese financial sector. 50% of GDP are held offshore; countries After 2014 Chinese companies had such as Venezuela, Saudi Arabia and the sharply increased their direct investment United Arab Emirates climb into the Chinese acquisitions in foreign companies (see chart). Large 60-70% range. Britain and continental Eu- firms made high-profile acquisitions of rope come in at 15%, but Scandinavia at Freezers to finance property, sports teams, film companies only a few per cent. and otherassetswith tenuousconnections One conclusion is that high tax rates, to their core activities. Concerns over capi- like those in Denmark or Sweden, do not tal outflow and corporate debt led the Chi- drive people offshore. Rather, higher off- nese government to introduce regulations shore wealth is correlated with factors limiting outward investment. A Chinese carmakeragrees to buy a such as political and economic instability Geely’s purchase ofSaxo Banksuggests Danish bank and an abundance ofnatural resources. that Chinese companies are gradually re- Proximity to Switzerland also remains COMPANY that moves up the value gaining their appetites for foreign deals, a good indicator. But assets held there have Achain from refrigerator parts to cars is even outside their core businesses. Accord- declined since the financial crisis (see impressive but not that surprising. A car ing to Edward Tse, chairman ofGao Feng, a chart), whereas those in Hong Kong grew company that buys an investment bank is firm that advises on the Chinese market, sixfold from 2007 to 2015. The territory audacious. But Zhejiang Geely Holding the Chinese regulations were primarily di- now ranks second behind Switzerland. Mr Group, a conglomerate based in Hang- rected at a few companies that “splashed Zucman attributes this to foreign pressure zhou, China, did not become big by paring cash” on unwise deals. Geely, seen as hav- on Swiss banks following recent scandals, its ambitions. Having successfully made ing already successfully swallowed one coupled with a surge ofwealth in Asia. the fridge-parts-to-cars transition at home, prestigious foreign firm, may worry the au- Accounting for offshore holdings sug- it went global in 2010. It acquired Volvo, a thorities less. 7 gests wealth inequality is even greater Swedish carmaker, from Ford of America. than was thought. In Britain, France, and Now Geely is back in Scandinavia for an- Spain the top 0.01% of households stash otheracquisition. This time it is buying one Staying in 30-40% of their wealth in tax havens. In ofDenmark’s biggest banks. China, FDI outflows to the rest of the world, $bn Russia, most of it goes there. In America, Saxo Bank announced on October 2nd the share of wealth held by the richest that Geely would acquire 51.5% of its 80 0.01% is as high today as in early 20th-cen- shares. It will spend over $800m on the tury Europe. Including offshore data in- deal, which still requires regulatory ap- 60 creases the wealth share ofthe super-rich. proval. Sampo Group, a Finnish insurance Yet plenty of data are still missing. A company,will acquire19.9% of Saxo shares 40 few big centres, including Panama and Sin- for €265m ($311m), and Kim Fournais, gapore, still do not disclose these statistics. Saxo’s co-founder and chiefexecutive, will 20 The BIS data also cover only bank deposits, retain 25.7%. The sellers are Sinar Mas, an not the securities in which most offshore Indonesian conglomerate, and TPG,an wealth is held. Researchers made esti- American private-equity firm. 0 2013 14 15 16 17 mates to plug the gap, but their figures are Saxo was an early adopter of online se- likely to be conservative. curities trading and still invests heavily in Source: OECD 78 Finance and economics The Economist October 7th 2017 Free exchange Manias, panics and ICOs

Crypto-coin mania illustrates the crazy and not-so-crazy sides ofbubbles profits, and in which easy, risk-free money is a rarity. But econo- mists have learned that efficiency is a somewhat loose constraint on markets. The discounted value of dividends, for instance, va- ries by much less over time than stockmarket indices, meaning that people’s views ofthe state ofthe world gyrate more than his- tory suggests they should. Markets are better at setting prices for individual stocks than in aggregate—in Paul Samuelson’s words, they are “micro-efficient and macro-inefficient”. Yet that may be because individual stocks are more likely to provide well-in- formed investors with opportunities fora quickno-risk profit. The ICO craze certainly appears to entail a departure from rea- sonable values. Such deviations can happen when taking the pessimistic side of a bet is difficult—shorting stocks, for instance (ie, selling securities the investor does not own in the hope the price will fall). In some accounts of the tech boom of the 1990s, the small float of many new tech stocks made shorting them nearly impossible; as issuance increased, however, bears could have their say, and markets tanked. Housing, too, is famously hard to short; in the global crisis those few financiers who found vehicles to bet against mortgage-backed securities eventually made a fortune. There are some opportunities to short cryptocur- VERYmarket mania reaches a point when pitches to would-be rencies, but essentially none for ICO tokens (something those in- Einvestors enter the realm of the surreal. So it goes for “initial tending to buy might reflect on, ifreflection is their thing). coin offerings”, or ICOs. A new one by a firm called POW invites Human quirks also play a role. Robert Shiller, who helped Facebook users to claim tokens for nothing; when they later be- create the subfield now known as behavioural finance (and won come convertible into other tokens, the first to take advantage of a Nobel prize), reckons that ideas about markets spread like an the offercould “become worth $124bn…making them the richest epidemic. At any point in time, multiple stories about the future person on Earth”, the blurb says. Not a bad return for no money are potentially true, and have evidence supporting or undermin- invested and no riskborne. However bizarre, bubbles are hard to ingthem. Sometimes, particularstoriesbecome infectious. Inves- resist: no one wants to be the only one of their friends left out. tors under their sway hear good news and are deaf to the bad— They can also be financially ruinous. But gambling on a craze, and spread the bullish bug to others. This pushes up prices, bol- even a highly dubious one, can be about more than blind greed. stering the bulls. An ICO may be a consequential innovation, so The ICO boom is an outgrowth of the emerging, occasionally early entrants will make a mint. But it may be that regulators will inscrutable world of cryptocurrencies. These are a form of mon- prevent them becoming more than a curiosity (both China and ey (bitcoin and ether are examples) used in transactions which South Korea have banned them). Worsening news for ICOs could are recorded on a distributed public ledger called a blockchain. make pessimistic stories the next virus. An ICO is a scheme to raise funds for an enterprise written into a contract on a blockchain. To buy in, punters use cryptocurrency Cryptos through the tulips to pay for tokens. Those tokens become the working currency Viral optimism may be especially common in the winner-takes- within the new enterprise. A new social network, for instance, all contests so frequent within digital markets. Platform-based might fund itself through an ICO, then allow users to spend their firms (which aim to provide a digital space within which other tokens on goods or services on the network once it is up and run- enterprises can do business) or social networks grow more valu- ning. In successful projects, demand for tokens should rise and able as they gain users. People want to be where everyone else is. early investors should profit. ICOs resemble both a new form of In such cases, one of many contenders eventually dominates, crowdfunding, and a technological leapfrog over the regulations and those with a stake in its success, whether shares or tokens, that hem in more orthodox funding strategies. They are also all reap vastrewards. Butbecause investorslackperfectforesight, the the rage. Ether, the currency used on the ethereum blockchain, is levels at which markets value nearly all contending firms will, in up by more than 2,400% against the dollar over the past year and hindsight, appear to have been obviously bubbly. In the same boasts a market capitalisation of nearly $28bn. ICOshavesofar way,the value of the winning firm, which looked laughably high raised nearly $2bn in 2017. during the bubble, will later look reasonable. One or two of the This looks like irrationality in action, bound to end in tears. ICOs—and cryptocurrencies themselves—stand to follow such a Why, then, should the party continue? Manias are as old as fi- path, if they come into wide use. Think a crypto version of Goo- nance, and economists have devoted plenty of time to studying gle (and pity those holding tokens forcrypto-AltaVista). them. Though often blamed on easy credit, human nature alone Bursts of investor enthusiasm sometimes (if not always) spur can goad a raging bull. As Charles Kindleberger explained in his experimentation and investment, laying a foundation for future book“Manias, Panics and Crashes”, enthusiasm for new markets growth. Caution isneeded, however. Markets are not perfectly ef- or technologies frequently results in excessive optimism, which ficient. But they are usually efficient enough to punish those who ultimately collides with reality in a spectacular crash. mistake a bet on one version ofthe future fora sure thing. 7 That seems at odds with the idea of an efficient market, in which asset prices reflect the discounted value ofexpected future Economist.com/blogs/freeexchange EXPERIENCE AVIATION AS IT WAS MEANT TO BE

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Science and technology The Economist October 7th 2017 81

The 2017 Nobel science prizes Also in this section Jet lagged in Stockholm 82 The virtue of uprightness 83 Migration and scientific productivity 83 Bird personalities 84 How ships cause storms This year’s awards are forbody clocks, gravitational waves and a cool way to study protein structure OBEL week, a round of lectures and time when gene sequencing was in its in- than half of those awarded for physics Nceremonies held every December in fancy, this was remarkable enough. Dr Hall since 1985 have been given for work done Stockholm, which climaxes with the and Dr Rosbash then went on to measure more than two decades beforehand. This award of the prizes themselves and a sub- the concentration in fly brains of the pro- year’s, though, was different. It went to sequent banquet, is a leisurely affair. Since tein this gene encodes. They discovered Rainer Weiss of the Massachusetts Insti- prizewinners come from all over the that the protein’s concentration cycles up tute of Technology, and Barry Barish and world, that is a good thing. It gives them and down over the course of 24 hours, Kip Thorne of the California Institute of time to recover from their jet lag before peaking at night. They also measured lev- Technology, all ofwhom were involved in they meet the King of Sweden, and the els of the messenger molecule produced the detection, justtwo yearsago, of gravita- medals and cheques are handed over. This by period genes, which carries the recipe tional waves. year, three of the prizewinners may partic- for the protein to a cell’s protein-making Such waves are one ofthe many predic- ularly appreciate that, for they are some of machinery. That, too, cyclesdaily—peaking tions of Albert Einstein’s century-old the- the scientists who have helped explain a few hours before the protein does. ory of relativity. As Einstein realised, gravi- why jet lag exists in the first place. The crucial part of the story is that the ty is a result of mass distorting the space Jeffrey Hall, Michael Rosbash and Mi- protein itself inhibits the action of period and time around itself. That distortion chael Young are, between them, responsi- genes. The more ofit there is, the less active modifies the paths of objects moving near- ble for working out how the endogenous the genes are. That reduces production of by. Crunch the equations which describe clocks of fruit flies—and, by extension, of the messenger molecule, which reduces this process, and they suggest that moving other organisms—run what is known as production of the protein, which permits massesshould create rippleswhich radiate the circadian rhythm. This is the internal the gene to reactivate. And so on. out into the universe. cycle (circa is the Latin for “about” and dies Lots of other genes and proteins are in- Spotting such susurrations requires the Latin for “day”) that matches the volved as well—many of which were also sensitive machines. All three laureates body’s physiology to the alternation of discovered by Dr Hall, Dr Rosbash and Dr worked on an American gravitational- light and darkness caused by Earth’s rota- Young. Some of these serve to link the wave detector called LIGO, which was tion. It controls, among other things, sleep clockto information from the eyes, permit- completed in 2002. LIGO works by split- patterns. Hence the discovery, once jet en- ting it to stay in synchrony with the sun. ting a laser beam in two and sending the gines made rapid travel across time zones But it is the underlying cycle of period gene daughter beams up and down a pair of possible, that someone flying from, say, activity, regulated by the messenger mole- tunnels, each 4km long, which are set at London to New York, will take several days cule and the protein, that is the actual pen- right angles to each other. Any passing to adjust to New Yorksolar time. dulum ofthe biological clock. gravitational wave should stretch and DrHall and DrRosbash worked at Bran- compress the two arms in different ways, deis University, in Massachusetts. Dr A matter of great gravity causing infinitesimal changes in the time it Young operated separately, at Rockefeller The physics prizewinners broke records takes the laser beams to traverse them. In University, in New York. Their first step, in about time in a different way. Despite the order to confirm that it really is seeing a 1984, was to isolate a fruit-fly gene called admonition in Alfred Nobel’s will, which gravitational wave the machine has two period, which had previously been found set up the prizes, that they should be given such pairs of tunnels—one in Washington to help control circadian rhythms. At a forworkdone overthe previousyear, more state and the other in Louisiana. A gravita-1 82 Science and technology The Economist October 7th 2017

2 tional wave, as opposed to some transient The virtue of uprightness local disturbance, will appear almost (but not quite) simultaneously in both. Despite its sensitivity, LIGO’s initial run Atten-shun! came up empty-handed. It was only after a series of upgrades, starting in 2010, that it Standing up produces sharperminds became sensitive enough to detect the waves finally and unambiguously. The FFICE desks at which you stand are test requires participants (in this case 50 first—prizewinning—spot, in 2015 is reck- Oall the rage. Abundant evidence university students) to state the printed oned to have been the consequence oftwo suggests that sitting down for long peri- colour ofwords that are themselves the black holes colliding 1.3bn light years from ods is bad forhealth, and that working names ofcolours. In some cases, the Earth. Since then, more discoveries have standing up is thus better foryou. But is it meaning ofthe word and the colour in been made. A few days before the Nobel better for the job? A piece ofresearch just which it is printed are the same. In others, award, LIGO announced the detection of published in Psychological Science by they are different (eg, the word “blue” its fourthgravitational wave. And more de- Yaniv Mama ofAriel University,in Israel, printed in yellow ink). Decades ofexperi- tectors are coming online. The fourth de- and his colleagues, suggests it might be. ence have shown that it takes a volunteer tection was aided by a European instru- Standing takes more effortthan sitting longer to state the colour ofthe ink when ment, VIRGO, based in Italy.Other devices does, and might therefore be expected to it is different from the meaning of the are under construction in India and Japan. require more mental attention. The mus- word than it does when they are identi- A space-based system called LISA,with cles involved have to be monitored and cal, and that the gap can be increased still “arms” millions ofkilometres long (and, as fine-tuned constantly by the brain. Psy- furtherby imposing other mental de- a result, much higher sensitivity) is sched- chological experiments suggest that mands at the same time. uled forlaunch in the 2030s. attention is a finite resource. Standing The upshot was that those who were But this year’s physics prize honours might thus be expected to reduce the standing when they tookthe test did more than just another confirmation of amount ofit available to be given else- significantly better at it than those who Einstein’s cleverness. Up until now,astron- where. A counter-hypothesis, though, is were sitting. The gap between the two omers have had to rely on the electromag- that standing creates mild stress—and scores ofthe standing volunteers was netic spectrum—from radio waves, experiments have also shown that, when about100 milliseconds. Between those through visible light, to gamma radia- people are under stress, their cognitive sitting, it was about120 milliseconds. The tion—to gaze at the universe. The detector performance improves. old army order of“stand to attention” designed and built by Dr Weiss, Dr Barish, Todistinguish between the two, Dr thus seems literally, as well as figuratively, Dr Thorne and several hundred other sci- Mama put some volunteers through true. And office workers who choose to entists offers a new window on the world, what is known as the Stroop test while stand may be increasing their output as and could help astronomers see things, they were standing or sitting. The Stroop well as their well-being. like black-hole collisions or the state of the universe shortly after the Big Bang, that electromagnetism cannot.

Into the freezer The chemistry prize went to Jacques Dubo- chet of Lausanne University, in Switzer- land, Joachim FrankofColumbia Universi- ty,in New York, and Richard Henderson of the Laboratory for Molecular Biology, in Cambridge, Britain. Each contributed to the development of cryoelectron micros- copy, a technique that permits the shapes of biological molecules, such as proteins, to be seen without many of the difficulties involved in preparing them for older tech- niques, such as X-ray crystallography or conventional electron microscopy. Dr Dubochet invented a way offreezing samplesthathasproved crucial to the tech- An upstanding British gentleman nique. A sample—say, a protein of inter- est—is suspended in water and dripped onto a thin metal mesh. This mesh is then In 1990, aftermore than 15 yearsofeffort, he those molecules that determine their func- plunged into liquid ethane, at a tempera- became the first to use it to produce a pic- tion, finding out exactly what the shapes ture of around -180°C. The speed of plung- ture of a protein, bacteriorhodopsin, that are is crucial forresearchers. Forinstance, it ing is crucial. Do it too slowly and the wa- was as detailed as X-ray crystallography allows drugs to be designed deliberately to ter in the sample will turn into ice crystals can provide. interact with molecules rather than simply that destroy the protein molecules. If done Dr Frank’s contribution was mathemat- guessing what chemicals might act as fast enough, though, the water turns not to ical. He developed a method for deducing drugs and screening them by the million. ice, but into a glassy state that preserves the the three-dimensional structures of pro- Whether cryoelectron microscopy real- proteins forstudy. teins from the flat snapshots that a cryo- ly counts as chemistry might be debated. Dr Henderson turned to this technique electron microscope produces. The up- Physicists would have a case for claiming it when a protein he wastryingto prepare for shot, after years of refinement, is a new for themselves. But wherever it truly fits X-ray crystallography would not crystal- and better way of examining biological within the taxonomy of science, it is, in lise, and could not, therefore, be examined. molecules. Since it is often the shapes of more ways than one, a cool invention. 7 The Economist October 7th 2017 Science and technology 83

Scientific productivity Centre, in Brussels, suggests thatthese peri- patetic individuals certainly do benefit the Open borders, countries that host them. Dr Wagner and Dr Jonkers used regres- better science sion analysis, a statistical technique, to look for correlations between a country’s spending on research and development (R&D), the flow ofscientists in and out ofit, Migratory researchers produce more and the quality of the science produced by influential workthan stick-in-the-muds its researchers (as indicated by the number CIENCE is an international affair. Re- ofcitations they received). The pair discov- Ssearchers from different countries fre- ered that places with large numbers of sci- quently collaborate with each other, a pro- entists coming and going did indeed pro- cess made ever easier by the rise of duce papers that were more highly cited electronic communications. Sometimes, (see chart). They found no such relation- they actually change country to do so. Ma- ship between a country’s R&D spending rie Curie moved from Poland to France. and its scientific impact. High-spending Guglielmo Marconi moved from Italy to countries produced more papers, but pro- Britain. Nikola Tesla moved from Austria- portionately no more of the highly cited Hungary to America. ones than countries which spent less. Those are famous historical examples, One notable outlier, the United States, but these days such migration is common- was ranked highly for scientific impact by place. Presumably, all the gadding about the analysis, despite scoring poorly on leads to better research. But scientists do openness. But, compared with the others not like to work on presumption, so two on the list, the United States is both huge studies published in Nature this weekhave and has a large home-grown scientific tested the idea. Both conclude that yes, it workforce that is mobile between the probably does. member states ofthe union. Cassidy Sugimoto of Indiana Universi- The best analogy to this that Dr Wagner Animal behaviour ty, in Bloomington, and her colleagues and Dr Jonkers could come up with was looked at papers listed in “Web ofScience”, the European Union. This has more people J’y suis. J’y reste a database that tracks how often an article than the United States (510m compared is cited by another. They restricted their with 320m), also permits unfettered travel analysis to studies published between between its members and, like the Ameri- 2008 (the first year for which the database can federal government, has research pro- held complete listings of a paper’s authors grammes that provide cash for scientists Birds do not adjust to theirhabitats. and their institutional affiliations) and from different institutions to collaborate. They choose wisely in the first place 2015. That narrowed the field to around According to Dr Wagnerand DrJonkers, EU 14m papers, on one ormore ofwhich some scientists published around 40% of the top N 2015 a paper published in the Proceed- 16m different researchers had been listed tenth of the world’s most-cited papers in Iings of the National Academy of Sciences as an author. Dr Sugimoto classified re- 2014, while America produced around reported on the personality types of peo- searchers whose country of affiliation re- 35%. Per head, that is a victory for the Yan- ple living in various London boroughs. Ex- mained unchanged during the period kees. But the EU’s share of those highly troverts, the researchers who wrote it had studied as “non-mobile”. This was true of cited papers has risen since 2000, while discovered, favoured Richmond, Wands- 96% of them. The remaining 4%, who had America’s is in decline. worth and Lambeth. Those who were changed country at least once, Dr Sugi- Manypoliticianshave done a good deal most open to experience clustered in Hack- moto classed as “mobile”. ofhead-scratching over how to get the best ney and Islington. People in Barnet and She then looked at the number of cita- scientific bang for their buck. Though it Lewisham scored lower than average on tions each scholar’s published papers had may be an unpopular message in some emotional stability. received. More influential work would be countries, these two studies suggest that What this study did not address was expected to garner more citations. Thus re- an open door foreggheads will help. 7 whether someone’s home range reflects searchers’ citation records are commonly their personality traits or imposes them. In regarded as proxy measurements for the otherwords, iswhatisgoingon “nature” or quality of the science they produce. She Abroad effect No. published, ‘000 “nurture”? However, in a piece of research and her colleagues found that, whatever Impact of scientific papers, 2013 just published in the Proceedingsofthe Roy- 1 100 400 800 their country of origin, mobile researchers Impact* al Society, Benedikt Holtmann of Otago produced more highly cited works than 2.0 University, in New Zealand, and his col- Switzerland did theirnon-mobile peers. The boost in ci- United leagues have plugged that gap—at least, tations ranged from 10.8% forNorth Ameri- 1.5 States they have plugged it for dunnocks. can scholars up to 172.8% for scientists from Britain Personality is not a prerogative of peo- eastern Europe. Italy ple. Most vertebrates in which the matter 1.0 Germany Dr Sugimoto’s analysis does not, admit- China has been studied show personality types tedly, showwhetherhigh citation isa result France Japan of some sort. The presumption is that, in a of moving country or merely a conse- 0.5 diverse world, different personalities will quence ofonly the brightest and best mak- Russia best fit different social and environmental ing such moves. But the second paper, by 0 niches—exactly what seems to be happen- Caroline Wagner of Ohio State University, 2.0 1.5 1.0 0.5 0+– 0.5 1.0 1.5 2.0 2.5 ing in London. in Columbus, and Koen Jonkers of the Openness (index of migration and co-authorship) The dunnock, known to some as the Source: *Index based on field-weighted citations European Commission’s Joint Research Nature hedge sparrow, is a European bird. It has, 1 84 Science and technology The Economist October 7th 2017

2 though, been introduced to New Zealand ery breeding season, and repeated the pro- ately outside those lanes. Nor does it seem and has thrived there. It is a well-studied cess over the course ofthree seasons. plausible that the ships themselves (admit- species, and among the facts that have A particular bird’s flight distance (ie, tedly made of metal, and also the tallest emerged about it is that individual birds how closely it could be approached before structures on what is otherwise a flat sur- do, indeed, have distinct personalities. In it departed) was, they found, constant face) are responsible for attracting all the particular, some are measurably bolder within a breeding season. From season to extra strikes involved. Though the area of and more tolerant of potential threats, season most birds got a little bolder—pre- the lanes is small compared with the such as nearby human beings, than others. sumably as they learnt more about the whole ocean, it is vast compared with the The team’s research area was the Bo- world and what they could safely get away area actually occupied by vessels. Most of tanic Garden in Dunedin, the city where with. Butthisincrease in boldnesswith age the extra bolts are hitting the sea rather the university is based. This is open to the was small compared with the different than craft sailing across it. public, but some areas are more frequent- starting points of bold and timid birds ed by visitors than others. Dunnocks have when they first arrived in a territory. It did Particle accelerator small territories, so it was possible to mea- not, therefore, much affect the fact that, on The most likely explanation is particulate sure the amount of human disturbance in average, birds’ flight distances were in- pollution emitted by the ships using the a given territory with reasonable preci- versely correlated with the level of human shipping lanes. Marine diesel burned off- sion. And, by ringing each ofthe dunnocks disturbance in their territories. This was a shore is generally high in sulphur, and its in the garden with colour-coded bands it consequence of disturbed territories being combustion produces soluble oxides of was possible to identify individuals by settled by bold birds, and undisturbed ter- that element which act as nuclei for the sight. Altogether, the researchers looked at ritories by shy ones. condensation of cloud-forming droplets. 99 ofthem. In the case of dunnocks, then, nature Typical marine clouds in unpolluted areas They worked out a bird’s level of threat wins over nurture. Dr Holtmann was able are composed of large droplets and do not tolerance by the simple expedient of hav- to show that personalities match circum- rise to high altitude, but Dr Thornton and ing one of their number (as far as possible stances, rather than being created by them. his team reckon that smaller droplets, of the same person each time) walk towards Dunnocks can recognise which places suit the sort that condense around oxides of it, and then measuring how close that indi- them best, and choose to settle in them sulphur, might more easily be carried up- vidual could get before the bird flew away. shortly after they fledge. Most likely,that is ward by convection—forming, as they rose, They did this several times foreach bird ev- happening in London boroughs, too. 7 into towering storm clouds that would act as nurseries oflightning bolts. As to what can be done about this extra Meteorology lightning, change may already be in hand. Atthe moment, standard “bunker” fuel has Brimstone and fire an average sulphur content of 2.7%. From 2020 that should fall to 0.5% if refiners and shipowners obey rules being introduced by the International Maritime Organisa- tion, the body responsible for trying to im- pose order on the world’s shipping. Ships are also being sailed more effi- Pollution from ships is changing maritime weather ciently, often by slowing them down, ODERN, broad-beamed merchant straits to Singapore, positively glows with which reduces the amount of fuel con- Mvessels are well able to withstand the lightning. (Its westward extension to the sumed per nautical mile. That is how rough and tumble ofthe waves, but sailors Suez canal was outside the study area.) So Maersk Line—one of the world’s biggest still prefer to avoid storms at sea if they do the lanes from Singapore and the west- container-ship operators—has cut its fleet’s can. Containers may come loose in heavy ern part of Malaysia that head north-east fuel consumption by 42% since 2007. weather and there is always a chance of across the South China Sea. On top of this, ship propulsion is be- lightning knocking out communications. It Neither changes in vertical wind shear coming more efficient, as heat-recycling istherefore ironicthatsome stormsmay be nor differences in horizontal air move- systems and new types ofengine are intro- caused by ships themselves. That, at least, ments seem likely to be causing this con- duced. In a few decades, therefore, the is the conclusion reached by Joel Thornton centration of thunderstorms, for other storminess of shipping lanes may have re- ofthe University ofWashington, in Seattle, measurements suggest that these weather- turned to normal. In the meantime, for any and his colleagues in a paper just pub- modifying phenomena are the same in- who may doubt humanity’s ability to af- lished in Geophysical Research Letters. They side shipping lanes as they are in neigh- fect the weather, Dr Thornton’s work pro- demonstrate that lightning strikes the Indi- bouring parts of the atmosphere immedi- vides strong evidence that it can. 7 an Ocean and the South China Sea almost twice as often along shipping lanes as it South China does other areas ofthese waters. Sea Dr Thornton and his team considered INDIA 1.5bn strikes recorded in this part of the world by the World Wide Lightning Loca- Malacca Straits tion Network (an international collabora- SRI LANKA tion led by DrThornton’s colleague, Robert Holzworth) between 2005 and 2016. As the MALAYSIA map shows, those strikes that happened Lightning density overthe ocean were concentrated in places Annual average 2005-16 INDIAN Singapore most plied by ships. In particular, the ship- Less More OCEAN ping lane that passes from the south of Sri Lanka to the northern entrance of the Source: World Wide Lightning INDONESIA Straits of Malacca, and thence down the Location Network Books and arts The Economist October 7th 2017 85

Also in this section 86 19th-century Britain... 86 ...and its decadent high point 87 Hong Kong’s history 87 Architecture and politics 88 Johnson: The long view

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Ulysses S. Grant nimity at Appomattox in 1865 was part of that political calculation: he allowed Lee History has its eyes on him and his men to return home with dignity, keeping some possessions like horses, and without fear oftreason charges. The defining issues of Grant’s presiden- cy, from 1869 to 1877, became the reintegra- tion of the Union and the maintenance of civil rightsforblacks. On these, he excelled. America’s views ofits18th president are changing, thanks to his civil-rights record Intolerant of unreconstructed white terro- N 1948, a survey of historians ranked Grant. rism, including the Colfax massacre of at IUlysses S. Grant as the second-worst By Ron Chernow. Penguin Press; least 73 (and perhaps many more) blacks in American president. Corruption had bad- 1,104 pages; $40. To be published in 1873, he ordered federal authorities in the ly tarred his administration, just as it had Britain by Head of Zeus in November; £30 South to take the strongest possible mea- that ofthe man at the bottom, Warren Har- sures to stamp out violence. He helped ding. But recent surveys have been kinder. Grant may have been America’s most push through the 15th Amendment, which Grant now lands in the middle, thanks to improbable president. His early military gave male citizens ofall colours the right to his extraordinarily progressive work on career showed flashes of brilliance before vote. “To Grant more than any other man race relations. “Treat the Negro as a citizen he resigned from a post in California amid the Negro owes his enfranchisement,” and a voter—as he is, and must remain,” he accusations, almost certainly justified, of wrote Frederick Douglass, a black leader told Congress in1874, close to a century be- drunkenness. He then failed at various and a frequent White House guest. It did fore the South would finally consent to do- business ventures, a lifelong tendency that not stop there. Grant named blacks, Jews ing so. The victorious general in the civil accompanied a penchantfortrustingswin- and native Americans to federal positions. war, Grant tried to see that the principles dlers. Not long before the civil war he was Small wonder,then, thathe hasrisen in the his men had fought for endured. virtually broke, walking the streets of St presidential pantheon, while Woodrow Ron Chernow’s 1,100-page biography Louis in shabby clothing selling firewood. Wilson, who segregated much of the civil may crown Grant’s restoration. The author War brought salvation. The Union service in the early 20th century,has sunk. of defining books on George Washington army was afflicted with generals who hesi- But Grant’s record in the White House and Alexander Hamilton—the latter tated to engage, or failed to follow up victo- remains mixed. His appointments were formed the basis for a hit Broadway musi- ries by chasing vulnerable opponents. Not “brilliant and disastrous”. Corruption in cal, after Lin-Manuel Miranda read it on Grant. “I can’t spare this man; he fights,” the form of gold speculation and whiskey- holiday—MrChernowarguespersuasively Lincoln supposedly said of him, a year be- tax evasion reached deep into his adminis- that Grant has been badly misunderstood. fore the general engineered a landmark tration, a sign of the oncoming Gilded Age. The corruption in his administration never victory at Vicksburg, Mississippi, in 1863. In foreign policy,he showed a peculiar ob- touched him—the soul of integrity—perso- Robert E. Lee, his chief opponent, con- session with annexing the modern-day nally.Sometimes portrayed as an ignorant curred: “He is not a retreating man.” Dominican Republic. But he did notch up a drunk, he was in fact a profound thinker Lee has been lionised by those nostal- major achievement: settling American with a sensitivity to suffering that under- gic for the South’s “Lost Cause”. Mr Cher- claims over Confederate sympathies lay his kindness to vanquished armies and now argues that “however brilliant Lee among the British, who had built the CSS people of other races. His bibulous reputa- was as a tactician, Grant surpassed him in Alabama, a ship that destroyed many Un- tion was exaggerated by his opponents, Mr grand strategy.” Far from embracing blunt ion commercial and naval vessels. The set- Chernow believes, and indeed with disci- butchery,as critics maintain, Grant saw the tlement, achieved through an internation- pline and the support of his beloved wife, political dimensions of the war and pa- al panel of arbitrators, may have averted a he abstained from drinking almost fully tiently crafted its endgame, even if it was trans-Atlantic war and, says Mr Chernow, during his presidency. painfully bloody. His legendary magna- “launched a new fraternal relationship of1 86 Books and arts The Economist October 7th 2017

2 great consequence”. Peak Britannia Grant’s push for racial equality did not endure, of course. The North wearied of the expense of keeping federal troops in Scratch beneath the surface the South, and the disputed election to choose Grant’s successor, in 1876, resulted in a deal to end Reconstruction. The Klan rose viciously again. Would things have The Age of Decadence: Britain 1880 to been different had Lincoln lived, his full 1914. By Simon Heffer. Random House presidencyfollowed directlybyeight years Books; 897 pages; £30 of Grant, without an interruption for the retrograde Andrew Johnson? It is unknow- N the late Victorian and early Edwardi- able. In a remarkably pithy memoir, writ- Ian period of1880-1914, at least (see ten while he was dying, Grant forecast this: previous article), Britain had a swagger in “As time passes, people, even of the South, its step. Youcould see it in Queen Victo- will begin to wonder how it was possible ria’s Diamond Jubilee of1897 and Edward that their ancestors ever fought for or justi- VII’s coronation in1902, or hear it in the fied institutions which acknowledged the music ofEdward Elgar. You could detect it right of property in man.” Imperfect the in the objects ofeveryday life: coins of 18th president may have been, but he was gold and silver, books bound in leather certainly far-sighted. 7 embossed with gold, stamps doubling as works ofart. The middle classes lived in solid contentment, with enough space to 19th-century Britain bring up a family and enough servants to lighten the domestic drudgery.No won- A hard-won der the generation shattered by the first world war and buffeted by the Depres- century sion, then by the rise ofcommunism and Can you see the end of Empire, dear? fascism, looked backon the Edwardian era as an enchanted long-ago, when ridiculing as prigs and bores the Victorian Victorious Century: The United Kingdom, civilised people were forever taking tea giants who had built up the economic on the vicarage lawn. and moral capital which they lived off. 1800-1906. By David Cannadine. Allen Lane; And yet even these years hinted at Mr Hefferis himselfa bit guilty of 602 pages; £30. To be published in America Britain’s mortality as the world’s most self-indulgence. He devotes too much by Viking in February 2018; $40 powerful country.Those who only know space to subjects that catch his imagina- N THE 19th century, Britain’s old enemy Simon Hefferfrom his somewhat bilious tion, and says too little about an impor- IFrance was vanquished. Britain was in- writings in the Daily Mail might be tant part ofBritain’s decadence: the way dustrialising faster than its European tempted to ignore his bookon this per- its obsession with the fripperies of aristo- neighbours, while preserving its monar- iod. Resist the temptation. Mr Heffer cratic life diverted its attention from chy and parliamentary system. It slowly combines a scholar’s command ofthe industry and commerce. He is silent grew more democratic and added more primary literature with a journalist’s eye about the United States despite the fact patches to its imperial map. Iron, steel, cot- fordetail. He writes with admirable that these years saw America replacing ton and steam enriched Britons at home as sensitivity about both music and liter- Britain as the world’s biggest economy. globalisation tookoff. ature: a better account ofElgar or Arnold There is surely no better illustration of By mid-century two-fifths of traded Bennett would be hard to find. He does a Britain’s decadence than the entrepre- manufactured goods were produced in the brilliant job ofexposing the rot beneath neurial vigour ofthe likes ofJohn D. United Kingdom. A quarter of global trade the glittering surface oflate Victorian and Rockefellerand Andrew Carnegie. flowed through the country’s ports. In 1851 Edwardian Britain. Yet Mr Heffer’sfaults are minor com- Britons had an average income 65% higher The ruling class became hoggishly pared with his virtues: He writes with than the average German and 30% higher self-indulgent: Mr Hefferlacerates Ed- such exuberance—indeed with such than the average American. In 1900 Britain ward VII for his habit ofsponging off his Edwardian swagger—that he leaves the governed around a quarter of the world’s friends and debauching their wives. At reader looking forward to his next vol- people, with military spending under 4% the same time the intellectual elite— ume, on the first world war and the of GDP. Prime ministers of the era gave particularly the Bloomsbury set—took to breakdown ofthe liberal world order. their names to Melbourne, Wellington, Palmerston North in New Zealand, Port Stanley in the Falklands and Salisbury, ner of Chartism, and more than 1m Irish from 1885 to 1902. Each had to deal with un- now Harare, Zimbabwe. Georgetown, starved in potato famines. Later, Britons rest. Liverpool curbed civil freedoms, Guyana and Victoria, Seychelles were worried about the newly united United while Salisbury expanded the empire and named after the century’s monarchs. States and Germany overtaking their econ- tried to rally Britain for Queen Victoria’s But to many subjects it did not feel so omy. Politicians of the 1880s had to deal 1897 Diamond Jubilee. Rudyard Kipling glorious. As David Cannadine shrewdly with Irish anger against landlords, fuelled saw only pessimism: “Lo, all our pomp of identifies in “Victorious Century”, his vol- by a new and sometimes violent national- yesterday is one with Nineveh and Tyre!” ume in the Penguin History of Britain se- ism, and mass strikes by trade unions, no Imperial doubt lay just beneath the jin- ries, economic turmoil often fuelled politi- longer banned. goism. Humiliations in Afghanistan, India, cal discontent. The 1820s, 1830s and 1840s The century’s most successful prime Jamaica, South Africa and Sudan came de- were marked by severe slumps. Luddites ministers, both Tories, each won four elec- cade by decade, and the best known war rioted against technology, ordinary people tions: Lord Liverpool wasin office from 1812 poem marked another one, Tennyson’s protested forpolitical rights under the ban- to 1827 and Lord Salisbury discontinuously “Charge ofthe Light Brigade”. He and other1 The Economist October 7th 2017 Books and arts 87

2 poetsfound inspiration from the decline of tered by government directives. “Money,” electronics production, and then finance. faith: in 1851 half the country still went to Cowperthwaite said, should be left “to Migrants found work in the expanding in- church. Arthur Clough and Matthew Ar- fructify in the pockets oftaxpayers”. dustries, becoming a cog in a productive nold wrestled with their doubts in print, Cowperthwaite’s ability to resist bigger engine rather than merely a cost. and by 1900 agnosticism and indifference government was born in a lost era. He was When Cowperthwaite stood down in were gaining sway. educated in classics and economics at a 1971 his tenure was reckoned a huge suc- Mr Cannadine seems right to argue that time when the insights ofAdam Smith pre- cess, but that provided only limited protec- pessimism is the key to understanding the vailed. That gave him the foundation to de- tion for his policies. The embargo on data Victorians, with the 1880s and 1890s mark- bate with free-spending colleagues influ- collection was reversed by his successor. ing the high tide of both their arrogance enced by John Maynard Keynes. Subsequent administrations, both British and their fears (see box, previous page). In1945, he arrived in a Hong Kong in ru- and Chinese, whittled away the restraints Their moral panics make more sense in ins from a brutal Japanese occupation. A on government intervention. this light, explaining why laws against combined military-colonial administra- One persistent objection to limited gov- gross indecency (in effect, homosexuality) tion engaged heavily in economic manage- ernment particularly rankled Cowperth- were passed in 1885. Mr Cannadine offers a ment, and Cowperthwaite’s early jobs in- waite—that it was callous. He was con- comprehensive analysis, in particular, of cluded managingthe trade in foodand raw vinced that “the rapid growth of the high politics. Some of the big characters of materials and administering price con- economy…produces a rapid and substan- the age are lost—Dickens and Brunel are trols, roles that defined a heavy govern- tial redistribution ofincome [and] makes it somewhat absent—but he knits together menthand. Buthe knewthatthe territory’s possible to assist more generously those the often diverging grand imperial, nation- lack of natural resources meant that post- who are not, from misfortune temporary al and social histories with skill. 7 crisis prosperity depended on its ability to or permanent, sharing in the general ad- attract entrepreneurs and capital. vance. The history [of Hong Kong] demon- That meant government’s role was to strates this conclusively.” As that history Hong Kong provide freedom rather than help. Re- becomes increasingly remote, a biography quests by industry for subsidies were rou- of a key architect becomes ever more valu- The resistance tinely rejected. So too was deficit govern- able. There are few other examples. 7 ment financing, which could merely push costs to a future generation and make the territory vulnerable to financial upheaval. Architecture Some of his ideas were radical: to ensure that temporary fluctuations in business Architect of Prosperity: Sir John Crooked timber conditions were not used to justify govern- Cowperthwaite and the Making of Hong ment controls, he banned the collection of Kong. By Neil Monnery. London Publishing macroeconomic statistics. Partnership; 337 pages; £24.50 “We suffer a great deal today from the URING the 1960s, governments were bogus certainties and precisions of the Four Walls and a Roof: The Complex Nature respondingto political unrest and eco- pseudo-sciences which include all the so- D of a Simple Profession. By Reinier de Graaf. nomic challenges with nationalisation, cial sciences including economics,” was Harvard University Press; 528 pages; $35 and centralised planning and public spending his blunt appraisal. “I myself tend to mis- £27.95 (financed by heavy taxes and debt). There trust the judgment of anyone not involved was intense pressure for Sir John Cow- in the actual process of risk-taking.” This IS name may not be familiar, but Rei- perthwaite, the financial secretary of Hong faith was rewarded. As industries such as Hnier de Graaf’s architecture practice, Kong, to join the crowd. cotton spinning, enamelware and wigs de- the Office of Metropolitan Architecture Civil servants in Whitehall had been clined and Cowperthwaite declined to of- (OMA), designed the CCTV building in urging their counterparts in Hong Kong to fer assistance, businesses shifted their at- Beijingand the Prada Foundation in Milan. introduce high taxes for some time. Locals tention to promising areas such as toy and Its co-founder Rem Koolhaas is a classic demanded spending to address a lack of “starchitect”. Mr De Graaf is known in pro- housing for crowds of poor immigrants fessional circles for his bleakly humorous fleeing the horrors of post-revolutionary lectures on architecture as a social act. China, and a territory-wide shortage of His first book—part essay-collection, drinkable water. Meanwhile, the territo- part diary—is thus something of a revela- ry’s export-driven economy was threat- tion. It covers some familiar ground, such ened by rising global tariffs, prompting de- as the frictions between the utopian ten- mands for public incentives to reorient dencies in 20th-century architecture and production towards the domestic market. the realities of real estate and realpolitik. A new biography of Cowperthwaite by But he has produced an original and even Neil Monnery, a former management con- occasionally hilarious book about losing sultant, tells of a man who replied to these ideals and finding them again. demands with a qualified “no”, and in the In the early part of the 21st century ar- process became that most unusual of chitects were again given the opportunity things: a bureaucrat hero to libertarians. to create master plans for whole districts His approach would subsequently be la- rather than single buildings, in a way they belled “positive non-interventionism”, had not been since the 1960s or 1970s. At meaning governance stopping just short of the book’s core are diary entries describing laissez-faire. Public housing would be his travails in designing such plans for Lon- funded, but only for tiny flats; reservoirs don, Dubai and, especially, Moscow. would be built, but users would be In the Russian capital, Mr De Graaf and charged. Much of the rest was left to indi- his team are drawn by the idea ofrevisiting viduals and businesses to sort out, unfet- Not pictured: the invisible hand the Naukograd—the special urban parks1 88 Books and arts The Economist October 7th 2017

2 for research and development that sus- chitect is the ability to observe not only ur- nald Trump the president railed against in- tained the scientific prowess ofthe Soviets. ban scenarios but individuals. In 2013 Mr ept governments, Donald Trump the prop- Invited to sit on the council that was osten- De Graaf called the Russian client repre- erty developer played them expertly to sibly organising the design competition he sentative only to hear hurried apologies— win permits and subsidies: “If indeed the was taking part in, he initially declined, and sirens in the background. The next day public sector is dysfunctional then Trump saying it would be unethical. As he slowly the news described another raid by agents is the monster it created.” realised the competition did not operate investigating fraud on the project. Over the Mr De Graaf cannot give easy answers under normal rules, he accepted the posi- next months he looked on wryly as the to the tough questions about architecture’s tion, to get closer to winning the project he grand vision was slowly trashed and key public purpose; there are none. He is better and his team had worked so hard on. Mr figures were indicted. Comparing demo- at skewering lazy ideas, like the fad for in- De Graaf leads his team through bewilder- cratic systems with authoritarian ones, he ternet-connected buildings, and at high- ing negotiations, and the process gradually wonders “which is more time-consuming: lighting the ideological struggles over the unravels into farce as buildingbegins with- our lengthy procedures to arrive at deci- builtenvironment. He deftlyshowsthat ar- out an agreed master plan. sions or their lengthy procedures to undo chitecture cannot be better or more pure One of the underrated skills of the ar- them.” Meanwhile he notes that while Do- than the flawed humans who make it. 7 Johnson Give evolution enough time

High stakes in a new bookarguing that language is not 200,000 years old, but almost 2m PEECH leaves no fossils, so palaeo- has been near. Next comes the “icon”, a Santhropologists have no direct evi- non-arbitrarybutintentional sign, such as dence for the emergence of the quintes- a drawing of a hoofprint to represent a sential human trait: language. Many horse. Homo erectus seemed to value scholars work on the topic nonetheless, stones resembling things like a phallus but few of their findings have achieved and a fertile woman. This indicates ab- consensus. straction and “displacement”, where an On one thing, at least, most agree: object is made to represent something not though animals communicate, only hu- physically present. mans have true language, with the power Then, Mr Everett reckons, icons devel- to organise complexthoughts into a string oped into “symbols”—some of them spo- of words, often about absent or abstract ken, arbitrary sounds that, unlike icons, things. And most scholars also reckon had lost any connection to their referent that Homo sapiens is the only species ever (as “cat” sounds nothing like a cat). Ges- to have had such language. They think it ture and intonation would have been cru- must have emerged somewhere between cial to making these symbols understood 200,000 and 50,000 years ago. and agreed upon. All the while, the brain Now Daniel Everett, of Bentley Uni- and speech organs were evolving to han- versity in Massachusetts, has, in “How dle more and more complex utterances. Language Began”, published a broadside When Homo erectus began using sev- against that idea. He thinks that Homo eral symbols one after the other in a more erectus, Homo sapiens’s predecessor, had predictable pattern (but not yet recur- somethingthatcould be called language— MrEverett published, in 2005, an article sively), Mr Everett thinks he could be said and not just grunting proto-speech. This claiming that an Amazonian tribe he had to be using human language. The linguist would make language not 200,000 years lived with for years, the Pirahã, had no re- points to circumstantial evidence: Homo old, but something like 1.9m. cursion. This led the press to crown Mr Ev- erectus would have needed itto build rafts At issue is more than chronology. erett as the anti-Chomsky: Mr Chomsky or boats and plan seaborne voyages to Noam Chomsky has proposed that one has spent his careeratMIT, focusingon the- reach places like Flores, an Indonesian is- human developed, through one genetic ory. He is caustic and imperious with op- land 24km from the nearest land, where mutation, an ability called “Merge”, ponents. MrEverettlived in the jungle with tools from that era have been found. about 50,000 years ago. “Merge” allows his family and several different tribes, The intellectual and philosophical two linguistic units to be joined into a sin- learning their languages. He went as a mis- stakesin the debate are high. Iflanguage is gle one, such as a complex noun phrase sionary, only to renounce his Christianity, a recent great leap forward in Homo sapi- (the house and the hill becoming the house quite publicly, lateron. Mr Chomsky is not ens, this implies that all human languages on the hill) or a complex sentence (Sally known forconceding error. are fundamentallysimilar, while marking loves Lucy becoming part of Bill knows Mr Everett claims that recursion is nei- a sharp breakbetween humans and other that Sally loves Lucy). The mind can fur- ther necessary nor sufficient for human animals. But if language is an invention ther merge and manipulate the new units language. Homo erectus, he thinks, proba- relying on general-purpose parts of hu- to make even more complex ones. This, bly really did talk something like “Me Tar- mans’ brains, in interaction with local cul- called recursion, is what Mr Chomsky zan, you Jane”—but with this he could do ture over a million-plus years, then hu- calls the language faculty “narrowly de- quite a lot. Mr Everett proposes that lan- man languages may be rather different fined”. Other elements, like advances in guage required a series of “signs” of ad- from each other, and more continuous auditory processing, he thinks, are shared vancingcomplexity. The firstisthe “index”, with the abilities of animals and distant with animals, or are also used fornon-lin- a non-arbitrary and non-intentional sign, ancestors. The argument isn’t just about guistic purposes. like a hoofprint that makes clear a horse language, but about human nature. Courses 89

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The Economist October 7th 2017 92 Economic and financial indicators The Economist October 7th 2017

Economic data % change on year ago Budget Interest Industrial Current-account balance balance rates, % Gross domestic product production Consumer prices Unemployment latest 12 % of GDP % of GDP 10-year gov't Currency units, per $ latest qtr* 2017† latest latest 2017† rate, % months, $bn 2017† 2017† bonds, latest Oct 4th year ago United States +2.2 Q2 +3.1 +2.2 +1.5 Aug +1.9 Aug +2.0 4.4 Aug -460.9 Q2 -2.5 -3.4 2.33 - - China +6.9 Q2 +7.0 +6.8 +6.0 Aug +1.8 Aug +1.7 4.0 Q2§ +155.3 Q2 +1.4 -3.9 3.62§§ 6.64 6.67 Japan +1.4 Q2 +2.5 +1.5 +5.4 Aug +0.6 Aug +0.5 2.8 Aug +189.8 Jul +3.6 -4.5 0.08 113 103 Britain +1.5 Q2 +1.2 +1.5 +0.4 Jul +2.9 Aug +2.7 4.3 Jun†† -128.9 Q2 -3.6 -3.6 1.35 0.75 0.78 Canada +3.7 Q2 +4.5 +2.8 +7.4 Jul +1.4 Aug +1.7 6.2 Aug -45.0 Q2 -2.6 -2.0 2.12 1.25 1.32 Euro area +2.3 Q2 +2.6 +2.1 +3.2 Jul +1.5 Sep +1.5 9.1 Aug +362.1 Jul +3.1 -1.3 0.45 0.85 0.90 Austria +2.6 Q2 +0.4 +2.3 +5.7 Jul +2.1 Aug +2.1 5.6 Aug +6.1 Q2 +2.1 -1.2 0.61 0.85 0.90 Belgium +1.5 Q2 +1.7 +1.6 +3.9 Jul +2.0 Sep +2.1 7.3 Aug -4.2 Mar +0.6 -2.0 0.73 0.85 0.90 France +1.8 Q2 +2.2 +1.7 +3.7 Jul +1.0 Sep +1.1 9.8 Aug -31.0 Jul -1.3 -3.1 0.75 0.85 0.90 Germany +2.1 Q2 +2.5 +2.1 +4.0 Jul +1.8 Sep +1.7 3.6 Aug‡ +274.1 Jul +8.0 +0.7 0.45 0.85 0.90 Greece +0.7 Q2 +2.2 +1.0 +1.7 Jul +0.9 Aug +1.3 21.2 Jun -0.7 Jul -1.3 -1.4 5.61 0.85 0.90 Italy +1.5 Q2 +1.4 +1.4 +4.4 Jul +1.1 Sep +1.3 11.2 Aug +51.2 Jul +2.5 -2.3 2.26 0.85 0.90 Netherlands +3.3 Q2 +6.3 +2.7 +3.0 Jul +1.4 Aug +1.3 5.9 Aug +76.0 Q2 +10.0 +0.6 0.58 0.85 0.90 Spain +3.1 Q2 +3.5 +3.1 +2.0 Jul +1.8 Sep +2.0 17.1 Aug +23.1 Jul +1.4 -3.3 1.71 0.85 0.90 Czech Republic +3.4 Q2 +10.3 +4.5 +3.2 Jul +2.5 Aug +2.4 2.9 Aug‡ +1.7 Q2 +0.9 -0.1 1.34 22.1 24.2 Denmark +1.9 Q2 +2.8 +2.2 -2.4 Jul +1.5 Aug +1.0 4.5 Jul +26.0 Jul +8.2 -0.4 0.56 6.33 6.67 Norway +0.2 Q2 +4.7 +1.9 -1.6 Jul +1.3 Aug +2.0 4.2 Jul‡‡ +16.6 Q2 +5.4 +4.2 1.64 7.98 8.00 Poland +4.6 Q2 +4.5 +4.3 +8.7 Aug +2.2 Sep +1.8 7.0 Aug§ -2.5 Jul -0.6 -2.0 3.39 3.67 3.85 Russia +2.5 Q2 na +1.8 +1.5 Aug +3.3 Aug +4.0 4.9 Aug§ +36.1 Q2 +2.5 -2.1 8.13 57.9 62.5 Sweden +3.0 Q2 +5.2 +3.1 +5.3 Jul +2.1 Aug +1.9 6.0 Aug§ +22.5 Q2 +4.4 +0.9 0.72 8.13 8.61 Switzerland +0.3 Q2 +1.1 +0.9 +2.9 Q2 +0.5 Aug +0.5 3.2 Aug +68.9 Q2 +9.9 +0.7 0.02 0.97 0.98 Turkey +5.1 Q2 na +4.9 +25.6 Jul +11.2 Sep +10.7 10.2 Jun§ -37.1 Jul -4.5 -2.0 11.02 3.58 3.05 Australia +1.8 Q2 +3.3 +2.4 +0.8 Q2 +1.9 Q2 +2.1 5.6 Aug -21.8 Q2 -1.5 -1.8 2.81 1.28 1.31 Hong Kong +3.8 Q2 +4.1 +3.1 +0.4 Q2 +1.9 Aug +1.6 3.1 Aug‡‡ +15.0 Q2 +4.2 +0.9 1.72 7.81 7.76 India +5.7 Q2 +4.1 +6.7 +1.2 Jul +3.4 Aug +3.5 5.0 2015 -29.2 Q2 -1.4 -3.2 6.70 65.5 66.5 Indonesia +5.0 Q2 na +5.2 +1.4 Jul +3.7 Sep +3.9 5.3 Q1§ -14.2 Q2 -1.7 -2.4 6.44 13,541 12,982 Malaysia +5.8 Q2 na +5.4 +6.0 Jul +3.7 Aug +3.9 3.5 Jul§ +8.1 Q2 +2.3 -3.0 3.94 4.24 4.13 Pakistan +5.7 2017** na +5.7 +13.0 Jul +3.9 Sep +3.9 5.9 2015 -12.1 Q2 -4.5 -5.9 8.20††† 105 104 Philippines +6.5 Q2 +7.0 +6.6 -1.1 Jul +3.4 Sep +3.0 5.6 Q3§ -0.8 Jun +0.1 -2.7 4.66 51.1 48.3 Singapore +2.9 Q2 +2.2 +2.9 +19.1 Aug +0.4 Aug +0.7 2.2 Q2 +59.0 Q2 +19.7 -1.0 2.13 1.36 1.37 South Korea +2.7 Q2 +2.4 +2.8 +2.7 Aug +2.1 Sep +2.0 3.6 Aug§ +83.1 Aug +5.6 +0.9 2.37 1,145 1,108 Taiwan +2.1 Q2 +0.5 +2.2 +3.2 Aug +1.0 Aug +0.6 3.8 Aug +70.7 Q2 +13.2 -0.1 1.04 30.4 31.4 Thailand +3.7 Q2 +5.4 +3.5 +3.7 Aug +0.9 Sep +0.7 1.1 Aug§ +44.9 Q2 +11.4 -2.5 2.23 33.5 34.7 Argentina +2.7 Q2 +2.8 +2.7 -2.5 Oct +23.1 Aug‡ +25.2 8.7 Q2§ -19.7 Q2 -3.4 -6.2 5.65 17.4 15.2 Brazil +0.3 Q2 +1.0 +0.7 +4.0 Aug +2.5 Aug +3.5 12.6 Aug§ -13.5 Aug -0.8 -8.0 8.76 3.15 3.22 Chile +0.9 Q2 +3.0 +1.3 +5.1 Aug +1.9 Aug +2.2 6.6 Aug§‡‡ -5.6 Q2 -1.7 -3.0 4.45 635 663 Colombia +1.3 Q2 +3.0 +1.7 +6.2 Jul +3.9 Aug +4.0 9.1 Aug§ -12.4 Q2 -3.7 -3.3 6.49 2,954 2,969 Mexico +1.8 Q2 +2.3 +2.2 -1.6 Jul +6.7 Aug +5.9 3.3 Aug -17.6 Q2 -1.8 -1.9 6.93 18.2 19.2 Venezuela -8.8 Q4~ -6.2 -9.3 +0.8 Sep na +720 7.3 Apr§ -17.8 Q3~ -1.2 -19.5 9.58 10.1 9.99 Egypt +4.9 Q2 na +3.8 +40.0 Jul +31.9 Aug +26.9 12.0 Q2§ -15.6 Q2 -6.0 -10.8 na 17.7 8.88 Israel +3.9 Q2 +2.4 +3.6 +2.6 Jul -0.1 Aug +0.4 4.1 Aug +10.7 Q2 +3.5 -2.5 1.76 3.53 3.78 Saudi Arabia +1.7 2016 na -0.5 na -0.1 Aug +1.1 5.6 2016 +7.6 Q2 +0.5 -7.5 3.68 3.75 3.75 South Africa +1.1 Q2 +2.5 +0.7 -0.5 Jul +4.8 Aug +5.3 27.7 Q2§ -7.9 Q2 -2.9 -3.2 8.62 13.7 13.7 Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. ~2014 **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. †††Dollar-denominated bonds. The Economist October 7th 2017 Economic and financial indicators 93

Markets % change on The Economist poll of forecasters, October averages (previous month’s, if changed) Dec 30th 2016 Real GDP, % change Consumer prices Current account Index one in local in $ Low/high range average % change % of GDP Oct 4th week currency terms 2017 2018 2017 2018 2017 2018 2017 2018 United States (DJIA) 22,661.6 +1.4 +14.7 +14.7 Australia 2.2/2.9 2.4/3.2 2.4 (2.3) 2.8 (2.7) 2.1 2.3 -1.5 (-1.4) -1.8 (-2.1) China (SSEA) 3,506.7 +0.1 +7.9 +12.9 Brazil 0.2/1.2 1.5/3.1 0.7 (0.6) 2.2 (2.1) 3.5 (3.7) 3.9 (4.2) -0.8 -1.7 (-1.4) Japan (Nikkei 225) 20,626.7 +1.8 +7.9 +11.7 Britain 1.2/1.7 0.7/1.7 1.5 1.3 2.7 2.6 -3.6 (-3.4) -3.1 (-3.0) Britain (FTSE 100) 7,467.6 +2.1 +4.5 +12.4 Canada 1.9/3.2 1.8/2.6 2.8 (2.6) 2.2 (2.0) 1.7 1.9 (1.8) -2.6 -2.3 Canada (S&P TSX) 15,721.0 +0.7 +2.8 +10.6 China 6.6/6.8 5.8/6.9 6.8 6.4 (6.5) 1.7 (1.8) 2.2 1.4 (1.5) 1.4 (1.5) Euro area (FTSE Euro 100) 1,228.9 +1.0 +10.5 +23.2 France 1.5/1.8 1.6/1.9 1.7 (1.6) 1.8 (1.7) 1.1 (1.2) 1.2 -1.3 (-1.2) -1.4 (-1.1) Euro area (EURO STOXX 50) 3,594.9 +1.1 +9.3 +21.8 Germany 2.0/2.3 1.6/2.5 2.1 1.9 1.7 (1.6) 1.5 8.0 7.7 (7.6) Austria (ATX) 3,309.6 +0.5 +26.4 +40.9 India 6.0/7.3 6.9/7.8 6.7 (7.0) 7.3 (7.5) 3.5 (3.6) 4.3 (4.4) -1.4 (-1.2) -1.6 (-1.5) Belgium (Bel 20) 4,044.4 +1.4 +12.1 +25.1 Italy 1.3/1.5 0.9/1.5 1.4 (1.3) 1.1 1.3 1.1 2.5 (2.4) 2.1 France (CAC 40) 5,363.2 +1.5 +10.3 +23.0 Japan 1.2/1.8 0.6/2.1 1.5 (1.6) 1.2 (1.3) 0.5 0.8 3.6 3.5 (3.6) Germany (DAX)* 12,970.5 +2.5 +13.0 +26.0 Greece (Athex Comp) 750.7 +1.9 +16.6 +30.1 Russia 1.3/2.5 1.3/3.3 1.8 (1.7) 2.0 (1.9) 4.0 (4.2) 4.0 (4.2) 2.5 (2.7) 2.0 (2.1) Italy (FTSE/MIB) 22,456.4 -0.7 +16.8 +30.2 Spain 3.0/3.2 2.3/3.2 3.1 2.7 2.0 (1.9) 1.3 1.4 (1.5) 1.4 (1.7) Netherlands (AEX) 541.7 +2.0 +12.1 +25.0 United States 2.0/2.4 1.9/2.9 2.2 (2.1) 2.3 2.0 (1.9) 2.0 -2.5 (-2.4) -2.5 Spain (Madrid SE) 1,005.5 -4.0 +6.6 +18.8 Euro area 2.0/2.2 1.6/2.4 2.1 (2.0) 1.9 (1.8) 1.5 1.2 (1.3) 3.1 (3.2) 2.9 (3.1) Czech Republic (PX) 1,052.5 +0.8 +14.2 +33.1 Sources: Bank of America, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Decision Economics, Deutsche Bank, Denmark (OMXCB) 941.9 +1.7 +18.0 +31.4 EIU, Goldman Sachs, HSBC Securities, ING, Itaú BBA, JPMorgan, Morgan Stanley, RBS, Royal Bank of Canada, Schroders, Scotiabank, Société Générale, Standard Chartered, UBS. For more countries, go to: Economist.com/markets Hungary (BUX) 37,923.2 +1.8 +18.5 +30.8 Norway (OSEAX) 861.2 +0.5 +12.6 +22.0 Poland (WIG) 63,825.7 +0.4 +23.3 +40.7 Other markets The Economist commodity-price index Russia (RTS, $ terms) 1,137.1 +0.9 -1.3 -1.3 2005=100 % change on % change on Sweden (OMXS30) 1,651.1 +1.7 +8.8 +22.0 Dec 30th 2016 one one Switzerland (SMI) 9,284.0 +2.0 +12.9 +17.8 Index one in local in $ Sep 26th Oct 3rd* month year Turkey (BIST) 104,547.8 +3.3 +33.8 +31.8 Oct 4th week currency terms Dollar Index Australia (All Ord.) 5,719.6 -0.1 nil +8.6 United States (S&P 500) 2,537.7 +1.2 +13.4 +13.4 All Items 146.3 145.5 -1.3 +6.6 Hong Kong (Hang Seng) 28,379.2 +2.7 +29.0 +28.1 United States (NAScomp) 6,534.6 +1.3 +21.4 +21.4 Food 151.0 149.4 +0.5 -3.1 India (BSE) 31,671.7 +1.6 +18.9 +24.2 China (SSEB, $ terms) 361.6 +0.7 +5.8 +5.8 Indonesia (JSX) 5,951.5 +1.5 +12.4 +12.3 Japan (Topix) 1,684.6 +1.2 +10.9 +14.8 Industrials Malaysia (KLSE) 1,761.8 -0.1 +7.3 +13.9 Europe (FTSEurofirst 300) 1,533.4 +1.2 +7.4 +19.7 All 141.5 141.5 -3.2 +19.7 Pakistan (KSE) 40,461.0 -4.3 -15.4 -16.2 World, dev'd (MSCI) 2,009.6 +1.1 +14.8 +14.8 Nfa† 131.6 129.3 -4.9 +3.3 Singapore (STI) 3,236.7 nil +12.4 +19.2 Emerging markets (MSCI) 1,097.0 +1.7 +27.2 +27.2 Metals 145.7 146.8 -2.5 +27.3 South Korea (KOSPI) 2,394.5 +0.9 +18.2 +24.6 World, all (MSCI) 489.6 +1.2 +16.1 +16.1 Sterling Index Taiwan (TWI) 10,469.4 +1.4 +13.1 +19.8 World bonds (Citigroup) 936.6 -0.1 +6.0 +6.0 All items 198.3 199.8 -2.9 +2.6 Thailand (SET) 1,687.8 +1.0 +9.4 +17.4 EMBI+ (JPMorgan) 839.2 +0.4 +8.7 +8.7 Argentina (MERV) 26,474.2 +4.8 +56.5 +42.6 Hedge funds (HFRX) 1,256.8§ +0.2 +4.4 +4.4 Euro Index Brazil (BVSP) 76,762.9 +4.0 +27.5 +32.6 Volatility, US (VIX) 9.7 +9.9 +14.0 (levels) All items 154.6 154.0 +0.2 +1.2 Chile (IGPA) 27,246.4 +2.9 +31.4 +39.8 CDSs, Eur (iTRAXX)† 54.3 -5.5 -24.7 -16.0 Gold Colombia (IGBC) 11,080.1 -0.1 +9.6 +11.7 CDSs, N Am (CDX)† 55.5 -5.8 -18.1 -18.1 $ per oz 1,301.3 1,274.2 -4.7 -0.7 Mexico (IPC) 50,565.3 +0.8 +10.8 +25.3 Carbon trading (EU ETS) € 6.9 -0.1 +5.0 +17.1 West Texas Intermediate Venezuela (IBC) 539,055.1 +16.2 1,600 na Sources: IHS Markit; Thomson Reuters. *Total return index. $ per barrel 51.9 50.4 +3.6 +3.6 Egypt (EGX 30) 13,882.0 +1.0 +12.5 +15.3 †Credit-default-swap spreads, basis points. §Sep 29th. Israel (TA-125) 1,305.5 +1.1 +2.2 +12.1 Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO; Indicators for more countries and additional ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Saudi Arabia (Tadawul) 7,285.8 +0.7 +0.7 +0.7 Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional South Africa (JSE AS) 56,750.0 +2.8 +12.0 +12.8 series, go to: Economist.com/indicators †Non-food agriculturals. 94 Obituary Hugh Hefner The Economist October 7th 2017

one, and laid it out in long editorials over months and years. This meant he had to defend it against lounging sneerers like William F. Buckley, who flung words like “latitudinarianism” at him on TV. Well, he could be an intellectual too, showing in the more literary pages of Playboy—with offer- ings from Vladimir Nabokov, Ray Brad- bury, John Updike and Jack Kerouac and interviews with Orson Welles and Martin Luther King, among many others—that he was on the very cutting edge ofculture.

Black-satin corsets What other philosophers really disliked was that he made money from it. A lot of money. The first-ever run of Playboy, with Marilyn Monroe clothed on the cover and inside naked, sold out overnight. It was the coup ofa lifetime. By1958, profitswere $4m a year. He branched outinto PlayboyEnter- prises: clubs and casinos across the world, films, cable, digital. His bunny logo was on cufflinksand shirts. The 1970swere hisbest years, when he moved from Chicago to the Playboy Mansion in Los Angeles and flew in a blackPlayboy jet with attendants in ul- tra-brief black leather. The 1980s, when he Living the dream lost gambling licences in London and At- lantic City and was dogged by scandals, were rocky, and in 1988 he gave up control of his empire. Playboy’s circulation fell to lessthan 1m. Butbythen he wasso rich that he could go on living his big boy’s dream, wearinghis captain’s hat in bed and parad- Hugh Hefner, founderofthe Playboy empire, died on September27th, aged 91 ing with armfuls of giggling conquests HENEVER Hugh Hefner mentioned rebellion. He started it in 1953, with bor- clad, to his orders, in “lingerie or less”. Wthat his strict Methodist mother had rowed money, as a pleasure primer for He backed civil rights of most sorts. wanted him to be a missionary, he got a big young urban males just like him. It was Feminists, though, were the enemy. They laugh. He got a bigger one when he said he dedicated to the pursuit of happiness and seemed to want women to be asexual, answered: “Mom, I was.” His listeners the American dream: if you worked hard, when the point of his crusade was to cele- were thinking of the missionary position, you too could claim your prize of big hi-fi brate their wonderful differences: as dis- no doubt, and the hundreds of women he rigs, fine wines and bed-ready girls. He played by those Bunny Girls who staffed had conquered with that irresistible satur- picked those himself in seigneurial fash- his clubs and casinos, so cute in those nine charm. But he was absolutely serious. ion; sometimes, in the photos, his pipe black-satin corsets that made their breasts As the man who brought sexual liberation would be perched in an ashtray beside bigger, those big ears and fluffy tails. (All to America in the form of clubs, casinos, them. He liked his Playmates to resemble a Hef’s idea; he loved to have a menagerie at Bunny Girls and naked centrefolds, he too pretty girl next door, to show that nice girls hand.) They were free, too, to turn any club was a preacher and a prophet. But instead liked sex too, in or out of marriage. If you member down, except for Number One of “Thou shalt not”, the creed of Puritan doubted it, you only had to read the Kinsey keyholders. And he refused to run pornog- killjoys down the centuries, his was “Free- report of 1948, which had let the sunshine raphy, even in the 70s when, during the dom!”—and the loud tootingofa sports car, in on the hyperactive sex lives of the citi- “Pubic Wars”, Penthouse did. Short of real accessorised with beauties, driving at zenry. What was this hypocritical hangup smut, why cover up such objects of desire? speed through America’s drearily con- America had, this bugaboo of“sin”? To many he was a priapic horror, but to formist suburbs and its herds of sacred Sex was fun. Whether it was morally himself he was a romantic. Playboy was cows. Blessed is the rebel, he cried; no pro- good or bad wasn’t the point. The morality really a boy-girl romance magazine. The gress without him. depended on the situation. All that stuff first pin-ups he fell for at 14 were tasteful (At this point Hef in his wolfish prime aside, sex was also the beginning of civili- drawings of nudes from Esquire. He was a would pop another Dexedrine, take a cou- sation, the life force. It should be celebrat- virgin on his first marriage, and tried it ple of puffs on his ever-present pipe, spin ed. Yet America had swarmed since its twice more, but he liked variety. His career round on his giant revolving bed and dic- foundation with censors, prigs, prudes and was a quest for beauty as well as freedom, tate the next para to his eager secretary. Hef bluenoses intent on sexual repression. To he said, and Marilyn gloriously topped in his dotage would retie his silk dressing keep down a natural drive led to deviancy and tailed it. He never met her, or paid her gown, shuffle into his velvet slippers and and crime, even witch-burnings, even for those photographs, but he forked out get one ofhis nubile assistants to adjust his mass madness (at least as he understood $75,000 to get the crypt in Woodlawn right hearing aid, since too much Viagra—“the Cotton Mather, or Catholic medieval Eu- beside hers. To spend eternity together fountain ofyouth!”—had made him deaf.) rope). And it was tyranny, pure and simple. was the sweetest thought. And she, of Playboy magazine was the voice of his This was his philosophy. He called it course, would feel the same. 7 © 2017 Koch Industries, Inc. World’s First “Self-Driving” Database

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