China: the Global Grown-Up Doing Brexit the Hard Way the Six Sects Of

China: the global grown-up

Doing Brexit the hard way

The six sects of shareholder value

Neuroscience’s faulty toolkit JANUARY 21ST–27TH 2017 Contents The Economist January 21st 2017 3

5 The world this week China 33 Geopolitics Leaders The new Davos man 7 A Trump White House 34 Aircraft-carriers The 45th president A symbol of power 8 African politics 36 Banyan A dismal dynast Forbidden City rifts 8 Britain and the EU A hard road Middle East and Africa 10 Regulating car emissions 37 The African Union Brexit Theresa May promises a Road outrage Continental dog’s breakfast “truly global Britain” outside 11 The legacy of gendercide 38 Qat-farming in Ethiopia the European Union. Is that Too many single men Green business boom plausible? Leader, page 8. The 45th president 39 Mozambique defaults Britain opts for a clean break What is Donald Trump likely Letters Boats and a scandal with Europe. Negotiations will to achieve in power? Leader, still be tricky, page 46. The 12 On Theresa May, the split 39 Bahrain page 7. The drama of the prime minister’s maximalist infinitive, Disney, An unhappy isle transition is over, and the Brexit supposes immigration missiles, steel, Flashman 40 Terrorism in Tunisia new president’s team is largely cuts. That is a mistake: Jihadists go home in place. Now for the drama Bagehot, page 48. How the of government, pages14-19. Briefing City hopes to survive the hard Both economics and politics 14 The Trump administration Europe road ahead, page 63. Donald could confound Republican A helluva handover 41 Turkey’s all-powerful Trump suggests a trade deal tax plans: Free exchange, with Britain, page 47 18 Peter Navarro president page 64. California, America’s Iron constitution richest state, is leading the Free-trader turned 42 Emigration from eastern fight against federal power, game-changer Europe page 21 The old countries United States 43 The European Parliament 21 Emboldened states A shift to the right The Economist online California steaming 43 Reform in Russia Daily analysis and opinion to 22 Women’s rights Listen, liberal supplement the print edition, plus March nemesis 44 Russian propaganda audio and video, and a daily chart 22 Asian-American voters Economist.com Putin’s puppets Bull in a China shop E-mail: newsletters and 45 Charlemagne 23 Chelsea Manning Europe and Trump mobile edition The long commute Gendercide The war on baby Economist.com/email 24 Lexington girls is winding down, but its Print edition: available online by Presidential history Britain effects will be felt for decades: 7pm London time each Thursday 46 Brexit leader, page11. If baby girls Economist.com/print Doing it the hard way are safer, thank urbanisation, Audio edition: available online The Americas economics and soap operas, 47 Trade with America page 49 to download each Friday 25 El Salvador The art of the deal Economist.com/audioedition Unhappy anniversary 48 Bagehot 26 Argentina Let the work permits flow Tango in trouble 28 Cuban migrants Special no more International 49 Gendercide The war on girls wanes Volume 422 Number 9024 Asia Published since September1843 50 Girls in South Korea to take part in "a severe contest between 29 Chinese influence in From curse to blessing intelligence, which presses forward, and South-East Asia an unworthy, timid ignorance obstructing our progress." The giant’s client Editorial offices in London and also: 30 Thai education Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago, Not rocket science Lima, Mexico City, Moscow, Mumbai, Nairobi, Turkey Recep Tayyip Erdogan New Delhi, New York, Paris, San Francisco, 31 Street vendors in Mumbai may soon have the executive São Paulo, Seoul, Shanghai, Singapore, Tokyo, Stabbed in the snack presidency he has long Washington DC 31 Australian politics sought, page 41 Going for gold 32 Pakistan’s economy Roads to nowhere 1 Contents continues overleaf 4 Contents The Economist January 21st 2017

Business Science and technology 51 Cigarette companies 65 Modelling brains Plucky strike Does not compute 52 Fiat Chrysler 66 Panda genetics Gas puzzlers Hey, dude. Give me six! 53 Samsung 67 Solar physics and Heir of disapproval palaeontology 54 Luxottica Set in stone An eye-catching deal 68 Submarine warfare 54 Rolls-Royce Torpedo junction Xi at Davos China’s president Weathering the storm Neuroscience A paper casts seeks to portray his country as doubt on the tactics that 56 India’s IT firms Books and arts a rock of stability in a troubled Reboot scientists use to infer how the world. His timing, at least, is 69 America in Laos brain works, page 65 faultless, page 33. China’s 57 Tata Sons A great place to have a war aircraft-carrier programme Chandra’s challenge 70 Emile Zola disappears says a lot about its ambitions, 58 Schumpeter Accuser accused Subscription service page 34. Why Cambodia has Shareholder value For our latest subscription offers, visit 70 Joys of smoking Economist.com/offers embraced China, and what Naughty, but nice For subscription service, please contact by that means for the region, telephone, fax, web or mail at the details Finance and economics 70 AIDS in America page 29 provided below: 59 Italy’s bank rescue Chronicles of death foretold North America Saving Siena 71 Elbphilharmonie The Economist Subscription Center P.O. Box 46978, St. Louis, MO 63146-6978 60 Finance in Cyprus Hamburg makes waves Telephone: +1 800 456 6086 Facsimile: +1 866 856 8075 Bank from the brink 72 Johnson E-mail: [email protected] 60 Ukraine’s economy Mr Zhou and pinyin Latin America & Mexico The other war The Economist Subscription Center P.O. Box 46979, St. Louis, MO 63146-6979 61 Buttonwood 76 Economic and financial Telephone: +1 636 449 5702 Facsimile: +1 636 449 5703 Zombie companies indicators E-mail: [email protected] Statistics on 42 economies, 62 Indonesian capital flows Subscription for 1 year (51 issues) Nerves on edge plus a closer look at new United States US $158.25 (plus tax) 62 American finance passenger-car registrations Canada CA $158.25 (plus tax) Not with a bang Latin America US $289 (plus tax) Diesel cars To stop carmakers 63 Brexit Obituary bending the rules, Europe must Lost passports 78 Clare Hollingworth Principal commercial offices: get tougher: leader, page10. 63 Inequality A journalist sniffing the 25 St James’s Street, London sw1a 1hg Fiat Chrysler Automobiles is in Tel: +44 20 7830 7000 The eight richest breezes regulators’ headlights over Rue de l’Athénée 32 emissions, page 52 64 Free exchange 1206 Geneva, Switzerland American tax reform Tel: +4122 566 2470 750 3rd Avenue, 5th Floor, New York, NY10017 Tel: +1212 5410500 1301Cityplaza Four, 12 Taikoo Wan Road, Taikoo Shing, Hong Kong Tel: +852 2585 3888 Other commercial offices: Chicago, Dubai, Frankfurt, Los Angeles, Paris, San Francisco and Singapore

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An avalanche hit a hotel in the Rodrigo Duterte, the president Two people were killed in Politics Abruzzo region ofcentral Italy. ofthe Philippines, mulled Israel in clashes between Around 30 people were inside. imposing martial law ifneces- police and residents ofa Bed- The avalanche was apparently sary to advance his homicidal ouin village that the authori- triggered by one ofthree earth- campaign against drugs. ties are trying to demolish. quakes that struckthe region this week. Earthquakes in the No preferential treatment same area last year killed more BarackObama ended the than 300 people. 22-year-old “wet foot, dry foot” policy, under which Cubans Germany’s federal court who landed on American soil rejected an attempt to ban the were permitted to stay. Cu- neo-Nazi National Democratic bans who try to get into the Party. German states sub- United States will now be mitted a petition to ban it in treated like other migrants. Mr 2013, citingits racist, anti-Semit- Obama’s decision is in keeping After hard, soft and then red, ic platform. The court found with his policy ofnormalising white and blue, Theresa May that although the party “pur- relations with the communist announced a “clean” Brexit. In sues aims contrary to the government ofCuba. A high court in Egypt upheld a her most important speech yet constitution”, it does not pose ruling that prevented the on the issue, Britain’s prime a threat to democracy. The wave ofviolence in Bra- government from handing minister set out a position for zil’s prisons continued with sovereignty oftwo islands in quitting the EU that includes Davos man the deaths ofat least 30 people the Red Sea to Saudi Arabia. leaving the single market and at a jail. Some ofthe inmates The government’s proposal to customs union. Mrs May said were decapitated in a fight hand the uninhabited islands she would seekthe best pos- between gangs. About140 to the Saudis, who had asked sible trade terms with Europe people have died in prison Egypt to protect them in the and be a “good neighbour”, violence so farthis year. 1950s, sparked street protests but that no deal would be last year. better than a bad deal for Colombia will begin peace Britain. Donald Trump held negotiations in February with Clemency for Chelsea out the promise ofa trade the ELN, the country’s second- In one ofhis final actions as agreement with America after largest guerrilla group. It made president, BarackObama praising Britain’s Brexit choice. peace with the largest, the commuted the sentence hand- FARC, last year. ed down to Chelsea Man- Germany’s chancellor, Angela ning, a formerintelligence Merkel, responded to Mrs In a speech at the World An Italian court sentenced in analyst, for passing secret May’s Brexit speech with Economic Forum in Davos, absentia eight formerofficials documents to WikiLeaks. In vows to hold the EU together China’s leader, Xi Jinping, ofSouth American military 2013 Ms Manning (Bradley and blockany British “cherry- defended globalisation and regimes to life in prison for Manning as she was known picking” in the negotiations. said trade wars produced no their role in the disappearance then) was sentenced to 35 Jean-Claude Juncker, the presi- winners. His remarks ap- of23 Italians during the 1970s years. As a convict she began dent ofthe European Commis- peared to be aimed at Donald and 1980s. The officials partici- her transition from a male to a sion, promised to workfora Trump, who has threatened to pated in Operation Condor, a female. Supporters praise her fairdeal forboth sides, saying: impose huge tariffson Chinese campaign ofpersecution and as a whistle-blower, but her “We are not in a hostile mood.” products. Mr Xi was the first murder by halfa dozen gov- critics insist she put American Chinese president to attend ernments against their leftist and allied lives at risk. Northern Ireland’s Assembly the event. opponents. collapsed amid a scandal Last year was the hottest since involving the first minister’s Australia, China and Malaysia Crisis action data started to be collected in handling ofa renewable- abandoned the search for Having lost an election, Yahya 1880 and the third consecutive heating programme that could MH370, a Malaysian airliner Jammeh missed a deadline to year ofrecord global warming, cost taxpayers £490m that disappeared in the south- step down as president ofthe according to America’s Nation- ($600m). Elections fora new ern Indian Ocean in 2014 with Gambia to make way for his al Oceanic and Atmospheric Assembly on March 2nd might 239 people on board. Debris successor, Adama Barrow. Administration. The average come to be used as a proxy poll from the plane has washed up Neighbouring west African temperature over land and sea on Brexit: the province voted to in Africa, but the crash site has countries have called on Mr was 58.69oF (14.8oC), 0.07oF remain in the EU. never been located. Jammeh to go. Senegal moved (0.04oC) above 2015’saverage. troops towards its border in The European Parliament Hun Sen, the prime minister of preparation for a possible Donald Trump prepared for elected a new president. Cambodia, launched a law- intervention. his inauguration on January Antonio Tajani, an Italian suit against Sam Rainsy, an 20th as America’s 45th presi- conservative from the Euro- exiled opposition leader, for In Nigeria an air-force jet dent. Mr Trump told a newspa- pean People’s Party, will re- defamation. Mr Sam Rainsy operating against Boko Haram, per that because ofthe celebra- place Germany’s Martin claims that Mr Hun Sen is a jihadist group, mistakenly tions he would take the Schulz. Under his leadership, trying to destroy his party to bombed a refugee camp killing weekend offand Day One of the parliament will have the prevent it winning elections at least 76 people. Aid workers his administration would start final say on approving Brexit. scheduled fornext year. were among the dead. on Monday January 23rd. 1 6 The world this week The Economist January 21st 2017

chionne, said “We don’t be- market to impose stringent pany’s report on the accident, Business long to a class ofcriminals.” licensing terms on patents for allowing it to start clearing its chips in mobile phones. backlog ofsatellite launches Having sweetened its offer, Consumer prices in Britain for fee-paying customers and British American Tobacco rose by1.6% in December, a big Another profit warning from cargo missions to the Interna- secured a deal to gain full bounce from 1.2% in November Pearson caused its share price tional Space Station. control ofReynolds for $49bn, and the highest figure fortwo to plunge by 30%. The academ- creating the world’s biggest years. Costlier transport con- ic publisher is facing a decline Reversal of fortunes listed cigarette company. Reyn- tributed to the spike. Rising in demand forits textbooks in ExxonMobil agreed to pay olds is based in the American inflation is an unwelcome America, partly because ofthe $6.6bn forseveral oil firms market, which is again looking conundrum forthe Bankof rise ofservices that let students owned by the Bass family in alluring after years ofcostly England. Its governor, Mark rent the books. Fort Worth, the latestin a flurry litigation and falling demand. Carney, noted that higher ofdeals to snap up energy The volume ofcigarettes sold prices could dampen consum- assets in Texas as oil prices in America has fallen sharply er spending and slow eco- Net income rebound. Meanwhile, Saudi in the past decade, but overall nomic growth, meaning future Q4 2016, $bn Arabia said it would soon start retail sales in the industry have interest-rate decisions might 02468 accepting tenders foran risen thanks to population move “in either direction”. JPMorgan Chase expansion ofsolar and wind growth and new products, Wells Fargo powerin the country that will such as e-cigarettes. In South Korea a court rejected Bank of America cost up to $50bn. The collapse prosecutors’ request to arrest Citigroup ofthe oil price two years ago That vision thing Lee Jae-yong, the vice-chair- Goldman Sachs tore a hole in the kingdom’s Luxottica, an Italian maker of man ofSamsung Electronics, Morgan Stanley finances. It now hopes to get fashionable eyeware, agreed to on allegations ofbribery relat- 30% ofits power from renew- Source: Company reports merge with Essilor, a French ed to an influence-peddling ables by 2030. company that produces lenses. scandal that has rocked the A surge in trading after the The €46bn ($49bn) transaction country. Prosecutors allege election ofDonald Trump China’s footballing authorities is one ofthe biggest cross- that money paid by Mr Lee to a helped America’s big banks capped the number offoreign border deals in the EU to date. friend ofSouth Korea’s presi- reap big profits in the fourth players that clubs can field in a The merger had long been dent was intended as a bribe to quarter. Many investors adjust- match to three per team, down resisted by Luxottica’s founder, help win a merger oftwo ed their portfolios when Mr from five, as part ofa series of Leonardo Del Vecchio, who Samsung affiliates. Mr Lee Trump’svictory heightened measures to fosterthe devel- built his firm up into a global denies that. The prosecutors expectations ofinterest-rate opment oflocal Chinese tal- behemoth that owns the Oak- are still pressing their case. rise and ofcuts in regulations ent. The news came as Xi ley and Ray-Ban brands and and taxes. Jinping, China’s president, supplies designer frames for America’s Federal Trade extolled the virtues ofglobal- Chanel, Prada and others. Commission lodged an anti- SpaceX sent its first rocket into isation at the annual gabfest at trust lawsuit against orbit since an explosion on a Davos. In a vindication ofthe strategy Qualcomm, accusing it of launch pad last September pursued by Britain’s Serious abusing its commanding posi- grounded its fleet. The govern- Other economic data and news Fraud Office, Rolls-Royce tion in the semiconductor ment has accepted the com- can be found on page 76-77 settled claims dating from 1989 to 2013 that it had bribed officials in various countries in order to win contracts. The engineering company will pay penalties totalling £671m ($809m) to regulators in Amer- ica, Brazil and Britain. Most of that goes to the SFO, which pushed fora deferred prosecution agreement, still a novel concept under British law.

Fiat Chrysler Automobiles’ share price was left bruised by an allegation from America’s Environmental Protection Agency that it had used software in 104,000 diesel cars to let them exceed legal limits on nitrogen-oxide emissions. The EPA did not go as faras to say that FCA had cheated in emissions tests; that transgression has cost Volkswagen billions in ﬁnes. FCA strongly denied the claim; its boss, Sergio Mar- Leaders The Economist January 21st 2017 7 The 45th president

What is Donald Trump likely to achieve in power? UCH of the time, argues hance the productive potential ofthe economy. MDavid Runciman, a British That is not the only danger. If prices start to rise faster, pres- academic, politics matters little sure will mount on the Federal Reserve to increase interest to most people. Then, suddenly, rates. The dollar will soar and countries that have amassed it matters all too much. Donald large dollar debts, many of them emerging markets, may well Trump’s term as America’s 45th buckle. One wayoranother, anyresultinginstability will blow president, which is due to begin back into America. If the Trump administration reacts to wid- with the inauguration on Janu- ening trade deficits with extra tariffs and non-tariff barriers, ary 20th, stands to be one ofthose moments. then the instability will only be exacerbated. Should Mr Itisextraordinaryhowlittle American votersand the world Trump right from the start set out to engage foreign exporters at large feel they know about what Mr Trump intends. Those from countries such as China, Germany and Mexico in a con- who back him are awaiting the biggest shake-up in Washing- flict over trade, he would do grave harm to the global regime ton, DC, in half a century—though their optimism is an act of that America itselfcreated after the second world war. faith. Those who oppose him are convinced there will be cha- Just as Mr Trump underestimates the fragility of the global os and ruin on an epoch-changing scale—though their despair economic system, so too does he misread geopolitics. Even be- is guesswork. All that just about everyone can agree on is that fore taking office, Mr Trump has hacked away at the decades- Mr Trump promises to be an entirely new sort of American old, largely bipartisan cloth ofAmerican foreign policy. He has president. The question is, what sort? casually disparaged the value of the European Union, which his predecessors always nurtured as a source of stability. He Inside the West Wig has compared Angela Merkel, Germany’s chancellor and the You may be tempted to conclude that it is simply too soon to closest ofallies, unfavourably to Vladimir Putin, Russia’s presi- tell. But there is enough information—from the campaign, the dent and an old foe. He has savaged Mexico, whose prosperity months since his victory and his life as a property developer and goodwill mattergreatlyto America’ssouthern states. And, and entertainer—to take a view of what kind of person Mr most recklessly, he has begun to pull apart America’s carefully Trump is and how he means to fill the office first occupied by stitched dealings with the rising superpower, China—imperil- George Washington. There is also evidence from the team he ling the most important bilateral relationship ofall. has picked, which includes a mix of wealthy businessmen, The idea running through Mr Trump’sdiplomacy is that re- generals and Republican activists (see pages14-18). lationsbetween statesfollowthe artofthe deal. Mr Trump acts For sure, Mr Trump is changeable. He will tell the New York as ifhe can get what he wants from sovereign states by picking Times that climate change is man-made in one breath and pro- fights that he is then willing to settle—at a price, naturally. His mise coal country that he will reopen its mines in the next. But mistake is to think that countries are like businesses. In fact, that does not mean, as some suggest, that you must always America cannot walk away from China in search of another shut out what the president says and wait to see what he does. superpower to deal with over the South China Sea. Doubts When a president speaks, no easy distinction is to be made that have been sown cannot be uprooted, as if the game had between word and deed. When Mr Trump says that NATO is all along been a harmless exercise in price discovery. Alliances obsolete, as he did to two European journalists last week, he that take decades to build can be weakened in months. makes its obsolescence more likely, even if he takes no action. Dealings between sovereign states tend towards anarchy— Moreover, Mr Trump has long held certain beliefs and atti- because, ultimately, there is no global government to impose tudes that sketch out the lines of a possible presidency. They order and no means of coercion but war. For as long as Mr suggest that the almost boundless Trumpian optimism on dis- Trump is unravelling the order that America created, and from play among American businesspeople deserves to be tem- which it gains so much, he is getting his country a terrible deal. pered by fears about trade protection and geopolitics, as well asquestionsabouthowMrTrump will run hisadministration. Hair Force One Start with the optimism. Since November’s election the So troubling is this prospect that it raises one further question. S&P500 index is up by 6%, to reach record highs. Surveys show How will Mr Trump’s White House work? On the one hand thatbusinessconfidence hassoared. Both reflecthopes thatMr you have party stalwarts, including the vice-president, Mike Trump will cutcorporate taxes, leadingcompaniesto bring for- Pence; the chief of staff, Reince Priebus; and congressional Re- eign profits back home. A boom in domestic spending should publicans, led by Paul Ryan and Mitch McConnell. On the oth- follow which, combined with investment in infrastructure er are the agitators—particularly Steve Bannon, Peter Navarro and a programme of deregulation, will lift the economy and and Michael Flynn. The titanic struggle between normal poli- boost wages. tics and insurgency, mediated by MrTrump’sdaughter, Ivanka, Done well, tax reform would confer lasting benefits (see and son-in-law, Jared Kushner, will determine just how revolu- Free exchange), as would a thoughtful and carefully designed tionary this presidency is. programme of infrastructure investment and deregulation. As Mr Trump assumes power, the world is on edge. From But ifsuch programmes are poorly executed, there is the riskof the Oval Office, presidents can do a modest amount of good. a sugar-rush as capital chases opportunities that do little to en- Sadly, they can also do immense harm. 7 8 Leaders The Economist January 21st 2017

African politics A dismal dynast

Africa’s top bureaucrat, Nkosazana Dlamini-Zuma, wants to be South Africa’s next president. Bad idea N MANYways the African Un- powered byhotair. By2063, when none ofitsboosters will still Iion (AU) is outdoing its Euro- be in power, it hopes that Africa will be rich, peaceful, corrup- pean counterpart. It has never tion-free and enjoying the benefits of “transformative leader- presided over a continental cur- ship in all fields”. In the shorter term, Ms Dlamini-Zuma has rency crisis. No member state is called for a shared currency, a central bank and a “continental threatening to quit. And you government” to tie together states that barely trade with one could walk from Cairo to Cape another. None of this is happening. She also wants to intro- Town without meeting anyone duce a single African passport letting citizens move freely who complains about the overweening bossiness of the Afri- across the continent by 2018. A splendid idea, but for now the can superstate. Butthisislargelybecause theAU, unlike the EU, AU issues them only to heads ofstate and senior AU officials. is irrelevant to most people’s lives. That is a pity. Ms Dlamini-Zuma has also failed to grapple with Africa’s Before 2002, when it was called the Organisation ofAfrican conflicts. AU troops have done a creditable job in Somalia, but Unity, it was dismissed as a talking-shop for dictators. For the promises from AU members to send troops to quell fighting or next decade, it was led by diplomats from small countries, repression in Burundi and South Sudan remain unkept. Under picked by member states precisely because they had so little Ms Dlamini-Zuma, the AU has condemned blatant coups, but clout. Butthen, in 2012, a heavyweightstepped in to run the AU its monitors have approved elections that were far from free commission. Nkosazana Dlamini-Zuma, a veteran of the anti- and fair. Knowing that African leaders find the International apartheid struggle and a woman who had held three impor- Criminal Court too muscular, she backs an African alternative tant cabinet posts in South Africa, was expected to inject more that explicitly grants immunity to incumbent rulers. vigour and ambition into the AU. As she prepares to hand over to an as-yet unnamed successor this month, it is worth assess- From the Union to the Union Buildings ing her record (see page 37). This is the opposite of what South Africa needs. Under Mr This matters for two reasons. First, because Africa’s forum Zuma, corruption has metastasised. Ruling-party bigwigs dole for tackling regional problems needs to work better. Second, out contracts to each other and demand slices of businesses because Ms Dlamini-Zuma apparently wants to be the next built by others. Investors are scared, growth is slow and public presidentofSouth Africa. Herexperience atthe AU, supporters services, especially schools, are woeful. South Africa needs a claim, makes her the best-qualified successor to President Ja- graft-busting president: someone to break the networks of pa- cob Zuma, who happens to be her ex-husband. tronage that stretch to the top. Instead, Mr Zuma, who is ac- Running the ill-funded AU is hard, but even so, nothing she cused of 783 counts of corruption, is paving the way for his ex- has achieved there suggests that she deserves to run her coun- wife, whom he expects to protect him. Herfamily ties and time try.Her flagship policy,Agenda 2063, is like a balloon ride over at the AU suggest that Ms Dlamini-Zuma is the last person to the Serengeti, offering pleasant views of a distant horizon and help Africa’s most advanced economy fulfil its potential. 7

Britain and the European Union A hard road

The government promises a “truly global Britain” afterBrexit. Is that plausible? ALF a year after choosing gration and shake offthe authority ofthe EU’s judges. Exchange rate HBrexit, Britons have learned Mrs May declared that this course represents no retreat, but $ per £ what they voted for. The single- rather that it will be the making of a “truly global Britain”. Es- 1.5 THERESA MAY’S SPEECH EU 1.4 word result of June’s referen- capingthe shackles ofthe will leave the country “more out- 1.3 dum—“Leave”—followed a cam- ward-looking than ever before”. Her rhetoric was rousing. But 1.2 BREXIT VOTE paign boasting copious (incom- as the negotiations drag on, it will become clear that her vision JJASONDJ patible) benefits: taking back is riven with tensions and unresolved choices. 2016 2017 control of immigration, ending payments into the European Union budget, rolling back for- Definitely maybe eign courts’ jurisdiction and trading with the continent as free- Mrs May’s speech was substantial and direct—welcome after ly as ever. On January 17th Theresa May at last acknowledged months in which herstatements on Brexit had been Delphic to that leaving the EU would involve trade-offs, and indicated the point of evasion. Although she plans to leave the single some of the choices she would make. She will pursue a “hard market, Mrs May wants “the freest possible” trade deal with Brexit” (rebranded “clean” by its advocates), taking Britain out the EU, including privileged access for industries such as cars of the EU’s single market in order to reclaim control of immi- and finance (see page 46). In order to be able to strike its own 1 10 Leaders The Economist January 21st 2017

2 trade deals outside Europe, Britain will also leave the EU’s cus- Her undiplomatic threats ring hollow. Everyone will lose if toms union (freeing itself from the common external tariff), there is no agreement, but nobody will lose as much as Britain. butwill aim to keep itsbenefitsin some areas. The government The country is in no position to bully its way to a cushy deal will consider making some payments into the EU budget, but and EU leaders in no mood to offerone. the “vast” contributions of the past will end. Mrs May would MrsMay’swayforBritain to come outon top, even if itloses like a trade agreement with the EU to be wrapped up within access to markets in Europe, is for the country to open itself up two years, meaningthatthere isno need fora formaltransition to the world. In rediscovering its past as a trading nation, Brit- arrangement; she suggests a phasing-in period, whose length ain can become a sort of Singapore-on-Thames, free of the could vary by sector. Parliament will get a vote on the final dead hand ofan over-regulated EU. Long touted by some liber- deal, though by then it will be too late for it to change much. al Brexiteers, the idea has a certain devil-may-care appeal. The pound rose on the discovery that Mrs Maybe had a Yet if Mrs May is to turn Britain into a freewheeling, laissez- plan after all. Sympathetic newspapers compared her steel to faire economy, she will have to sacrifice some of her own con- that of Margaret Thatcher (perhaps forgetting that the single victions. She has interpreted the Brexit vote as a roar by those market was one of the Iron Lady’s proudest achievements). left behind by globalisation. On their behalf, she has railed Yet, for her plan to succeed, Mrs May must overcome several against employers who break the “social contract” by hiring obstacles—not least her own contradictory impulses. foreignersratherthan traininglocals. UnderMrsMay, Britain, a The essential taskwill be to get the EU to agree to the sort of beacon for investment, risks becoming less attractive to for- deal she set out this week. When it comes to the single market eigners, not more. The minimum wage is rising. She wants to and customs union, European leaders have made clear their vet foreign takeovers ofBritish firms. Above all, the promise to opposition to “cherry-picking”. A tailored transition plan may “control” immigration looks like a euphemism for reducing it get the same bleak response. And the EU has never concluded (see Bagehot). Forced to choose on a visit to India, Mrs May put a trade agreement in two years, let alone a deep one. continued restrictions on student visas before a trade deal. Mrs May would retort that Britain will get a good deal be- The Economist opposed Brexit. IfBritain has to leave the sin- cause its negotiating position is strong. In her speech, after dis- gle market and the customs union, we would urge the globalis- tancing herself from Donald Trump’s Eurobashing, she ing side of Mrs May to prevail over the side that would put up warned that the EU would be committing “an act of calami- barriers. But for this, Mrs May will have to abandon views to tous self-harm” if it tried to punish Britain with a bad deal. which, as home secretary, she has long held firm. Britain is Europeans would miss London’s financial markets; they might heading out of the EU, and it will survive. But the chances are also lose access to British intelligence, which has “already that it will be a poorer, more inward-looking place—its draw- saved countless lives” across the continent. bridge up, its influence diminished. 7

Regulating car emissions Road outrage

To stop carmakers bending the rules, Europe must get much tougher MERICA’S system of cor- in penalties and costs; six ofits executives were indicted by the Aporate justice has many Department of Justice this month. Fiat Chrysler Automobiles flaws. The size of the fines it (FCA) is the latest carmaker to fall foul of American enforcers. slaps on firms is arbitrary. Its ha- On January 12th the Environmental Protection Agency (EPA) bitual use of deferred-prosecu- accused the firm, whose chairman is a director of The Econo- tion agreements (a practice that mist’s parent company, of using software to manipulate mea- is spreading to Britain; this week sured NOx emissions on 104,000 vehicles. The agency Rolls-Royce, an engineering stopped short of calling the software a “defeat device”, but firm, was fined for bribery—see page 54) means that too many FCA, which denies any wrongdoing, must convince the EPA cases are settled rather than thrashed out in court. But even that it is acting within the rules (see page 52). crude justice can be better than none. To see why, look at Eu- rope’s flaccid approach to the emissions scandal that engulfed A gargantuan grey area Volkswagen (VW) in 2015 and now threatens others. Life ismuch easier in Europe, where the regulations are pliable Diesel-engined vehicles belch out poisonous nitrogen-ox- to the point ofmeaninglessness. The gentle motoring required ide (NOx) gases. Limits have been imposed around the world in official emissions tests is far removed from the revving and on these toxicfumes. Butthe extra costofmakingengines com- braking of real driving. Tests are also conducted at high tem- pliant, and the adverse impact that this has on performance peratures, at which cars perform better. On the road, emission and fuel efficiency, tempt carmakers to flout the rules. That is controls in some cars turn off at temperatures of 17°C and be- easier to get away with in Europe than in America, where the low, ostensibly to protect the engine from the chill. (In Ameri- regulations are tighter and enforcement is more rigorous. ca there is also a recognition that there should be a cold-start American agencies were the ones to uncover VW’s use of a exemption, but it kicks in below 3°C.) Some cars spew up to 15 “defeat device”, a bit of software that reduced NOx emissions times more noxious gases on the road than under test condi- when its cars were being officially tested, and turned itself off tions. Damningly, VW felt able to conclude that, under the on the roads. The German carmaker faces a bill of over $20bn European emissions regime, it had done nothing wrong. 1 The Economist January 21st 2017 Leaders 11

2 Even if the rules were tighter, enforcement would be a pro- one way or another, Europe’s love affairwith diesel is souring. blem. Diesel-engined vehicles, which make up around half This week the city of Oslo used new powers to ban diesel cars the traffic on the continent’s roads, are central to the financial temporarily in order to improve air quality. Paris, Madrid and health of many European carmakers. That gives the national Athens are set to ban diesels altogetherby 2025. The fallingcost agencies which conduct tests a reason to look the other way. ofbattery-powered cars may offera greener alternative. Another incentive lies in the battle against climate change, be- Europe is getting stricter. A new test that better mirrors driv- cause complyingwith NOxemissions regulation adds to costs. ing conditions on real roads will start to be rolled out later this In the hugely competitive market for small cars, a higher price year. To reduce the risk of manipulated results, regulators will can steer consumers towards petrol cars, which are less effi- examine vehicles on the road as well as under test conditions. cient than diesel engines and hence produce more carbon di- But EU member states have already won an exemption, mean- oxide, the main greenhouse gas. ing that NOx emissions will be allowed to exceed the official Neither is a good reason to avoid getting much tougher. It is test limit for years. And the tests will still be conducted by na- true that Europe’s carmakers have more at stake than Ameri- tional agencies. The exemption should go. To beefup enforce- ca’s. But so do Europe’s citizens. NOx emissions cause the pre- ment, Europe should hand more oversight to the EU. For the mature deaths of an estimated 72,000 Europeans a year. And sake ofEuropeans’ lungs, it is past time to get tough. 7

The legacy of gendercide Too many single men

The waron baby girls is winding down, but its effects will be felt fordecades FEW years ago it looked like age, all of them containing too few women, a huge number of Athe curse that would never men will struggle to find partners. Some will import foreign lift. In China, north India and brides, thereby unbalancing the sex ratio in other, poorer other parts of Asia, ever more countries. A great many will remain single. Some women will girls were being destroyed by benefit from being more in demand. But the consequences are their parents. Many were de- bad forsocietiesasa whole, because young, single, sex-starved tected in utero by ultrasound men are dangerous. Stable relationships calm them down. scans and aborted; others died Some studies (though not all) suggest that more unattached young as a result of neglect; some were murdered. In 2010 this men means more crime, more rape and more chance of politi- newspaper put a pair of empty pink shoes on the cover and cal violence. The worst-affected districts will be poor, rural called it gendercide. In retrospect, we were too pessimistic. To- ones, because eligible women will leave them to find hus- day more girls are quietly being allowed to survive. bands in the cities. Parts ofAsia could come to resemble Amer- Gendercide happens where families are small and the de- ica’s Wild West. (Many polygamous societies already do: think sire for sons is overwhelming. In places where women are ex- of Sudan or northern Nigeria, where rich men marry several pected to move out oftheirparents’ homes upon marriage and women and leave poor men with none.) into their husbands’ households, raising a girl can seem like an There are no easy answers. Historians note that rulers used act of pure charity. So many parents have avoided it that, by to deal with surpluses of young men by sending them off to one careful estimate, at least 130m girls and women are miss- war, but such a cure would obviously be worse than the dis- ingworldwide. Itisasifthe entire female population ofBritain, ease. Some saygovernmentsshould tolerate a largersex indus- France, Germany and Spain had been wiped out. try. Prostitution is often lawless and exploitative, but it would Fortunately, pro-girl evangelising and economic growth be less so if governments legalised and regulated it. One Chi- have at last begun to reverse this terrible trend (see page 49). nese academic has suggested allowing polyandry (ie, letting Now that women are more likely than before to earn good women take more than one husband). In the mostunbalanced money, parents see girls as more valuable. And the craving for areas something like this may happen, regardless ofthe law. boyshasdiminished asparentsrealise thattheywill be hard to marry off (since there are too few brides to go around). So the Don’t just do something imbalance between girls and boys at birth is diminishing in Above all, governments should be cautious and humble. several countries, including China and India. In South Korea, When trying to strong-arm demography, they have an awful where a highly unnatural 115 boys were being born for every record. China’s one-child policy, though recently relaxed, has 100 girls two decades ago, there is no longer any evidence of aggravated the national sex imbalance—and been coercive, sex selection—and some that parents prefergirls. brutal and less effective than its admirers claim. Without it, the This is wonderful news, and it will be still more wonderful birth rate in China would have fallen too—perhaps just as fast. if the progress continues. Ending the war on baby girls would Bad policies often outlast the ills they are supposed to remedy. not only cut abortions, which are controversial in themselves It will be for Asian societies to deal with the excess male and can entail medical complications, especially in poor coun- lump they have created. It would help if they did not look tries. It would also show that girls and women are valued. Yet down on bachelors: some make it hard for unmarried people gendercide will leave an awful legacy. Today’s problem is a to get hold of contraceptives. But whatever policymakers do shortage ofgirls; tomorrow’s will be an excess ofyoung men. now, the sex imbalance will cause trouble fordecades. The old As cohort after cohort of young Asians reach marriageable preference forboys will hurt men and women alike. 7 12 Letters The Economist January 21st 2017

Conservative thought Defending the split infinitive enough. But as the missile flies, presence among the old British Pyongyang is closer to Berlin muskets, swords and maps. On Yourleader on a “dithering” “Researchers demonstrated than San Francisco. the wall outside was a plaque Theresa May recognised that how wirelessly to hacka car” is ANDY LADICK with a quote from Flash: “Ka- comparisons ofthe current absurdly unnatural syntax Washougal, Washington bul might not be Hyde Parkbut British prime minister with (“Breaching-point”, December at least it was safe forthe pre- Margaret Thatcher are difficult 24th). It encourages a Dumping grounds sent.” Well, not anymore. The because Thatcher only came misreading where “wirelessly” Afghan government closed into her own in her second goes with “how” (as in “how “Men ofsteel, house ofcards” this haunt for journalists, term (“Theresa Maybe”, Janu- frequently”). “Demonstrated (January 7th) wondered diplomats, fixers and shady ary 7th). Ifso much ofour how to wirelessly hacka car” whether cheap Chinese steel characters a few years ago after political horizon looks unfa- expresses what was meant. imports into America are an increase in attacks on for- miliar it is because we are The Economist has advocated “really so terrible” ifthey eigners. I’m sure Flash found reluctant to recognise all those evidence-based inquiry and benefit American firms that another appropriate watering second-term Thatcherite chick- intellectual freedom since1843. consume steel. The problem is hole. ens that have come home to Why submit to an adverb- this: it is market forces that TOM BOWMAN roost. The shift from manufac- positioning policy founded on generate the new technologies, National Public Radio’s Penta- turing to services; the indiffer- dogmatism? The need for products and improvements in gon correspondent ence ofcentral government clarity should overrule efficiency that bring benefits to Alexandria, Virginia towards the regions; the trans- superstitious dread ofthe split consumers; but when govern- ferofwealth from poor to rich; infinitive. ments decide production and William Boot, the brilliant the creation ofan unemploy- GEOFFREY PULLUM capacity levels, profits suffer creation ofEvelyn Waugh in able underclass that generates Professor of general linguistics and innovation is stymied. “Scoop”, his satire on newspa- demand fora resented migrant University of Edinburgh In recent years China, faced pers and British imperial poli- workforce to fill the skills gap; with chronic overcapacity in tics during the grubby1930s, the failure ofeducation to The Magic Kingdom steel because ofstagnating was an amiable eccentric who consider how knowledge demand at home, pushed steel succeeded in spite ofhimself. advances in the wider world; Walt Disney World makes the exports to around120m Flashman may have been the neglect ofobvious housing inauthentic believable (“Yes- tonnes. These exports were closer to the reality ofthe needs; the unaddressed pro- terdayland”, December 24th). sold at a significant loss, of empire than Boot, but Boot is blem oflow productivity and In just one day you can stroll $25bn on an annualised basis, more endearing, and success- the accompanying tendency through an idyllic time that according to data from the fully ran a counter-revolution. ofBritain to become an ancien really never was (Main Street, China Iron and Steel Associa- ANDERS OUROM régime rentier economy. USA), casually explore Mars tion. This prompted the col- Vancouver Thoughtful Conservatives (Mission Space) and go on lapse in the price ofsteel, know that the seeds ofthese safariforwhite rhinos (Kili- causing American steelmakers malaises were sown by their manjaro Safaris). The experi- to curb their capacity to pro- party 30 years ago. They know ence is so accomplished that duce it. In this context the that not one ofthese issues has the visitor has no time for industry rightly sought trade a root cause in Britain’s mem- reflection, or to consider the actions to protect itselffrom bership ofthe EU. Perhaps remarkable infrastructure unfairtrade practices. “Theresa Maybe” is a thought- underground where employ- So, yes to global trade and ful Conservative. Maybe that is ees change into their costumes. the benefits it brings. But ex- why she is dithering. The seamless gradient change porting unsustainable domes- PETER HAYDON in music and aesthetics make tic losses to harm the sustain- London the transition from Tomorrow- ability ofthe same industry in land to Mickey’s Toontown another country is not free or The best comparison ofMrs Fair not just easy,but almost fairtrade. For example, were As the late, great, Christopher May would be to Harold natural. Perhaps there is hope, China to start dumping mil- Hitchens once said on discov- Wilson, a consummate poli- as the quote from Jean-Jacques lions ofsmartphones into the ering a friend ofhis had also tician who was brilliant at Rousseau displayed inside the American market at a price fallen forthat arch-cad Harry manipulating his rivals and Land Pavilion at EPCOT sug- below cost I would be sur- Flashman, one can recognise a manoeuvring them into impo- gests: “Nature never deceives prised ifApple sat idly by. confirmed addict and fellow- tence, usually by appointing us; it is always we who deceive NICOLA DAVIDSON sufferer. As someone who also them to jobs beyond their ourselves.” Vice-president likes to re-read Flashmans in abilities. The unfortunate BRENT WARSHAW ArcelorMittal the places they are set, it is my consequence ofthis was that Fairfield, Connecticut London beliefthat your correspondent many ofthe most important is a terminal case. Huzzah! RICHARD CARTER jobs in the land were put into North Korea’s reach A rake and a scoundrel the hands oftotal incompe- London 7 tents. Wilson was so occupied America’s defence budget I liked your piece about how with clever party politics that represents 72% oftotal NATO Harry Flashman, a fictional he had little time to govern the spending, but this is mislead- globetrotter, would have made Letters are welcome and should be addressed to the Editor at country. Mrs May appears to ing, you say, because the figure a great journalist (“The cad as The Economist, 25 St James’s Street, be purposefully striding down “reflects America’s global correspondent”, December London sw1A 1hg the same blind alley. reach” as well as protecting the 24th). When I stayed at the E-mail: [email protected] CHRIS WRIGHT North Atlantic (“Alliesand GandamackLodge in Kabul, More letters are available at: Economist.com/letters Dieburg, Germany interests”, December17th). Fair Flashman was a looming Executive Focus 13

INTERNATIONAL GRAINS COUNCIL

EXECUTIVE DIRECTOR (United Nations Under Secretary-General level) Applications are invited for the post of Executive Director of the International Grains Council (IGC), which will fall vacant on 1 February 2018. The Executive Director is the chief administrative officer and head of the Secretariat of the International Grains Council. The IGC is an intergovernmental commodity body based in London. Its multinational Secretariat administers the Grains Trade Convention, 1995 and the Food Assistance Convention. The IGC’s activities are primarily focused on providing, for the benefi t of member governments and subscribers, an independent source of information and analysis of world market developments in grains, rice and oilseeds. The Council also monitors changes in national grain policies, conducts surveys of the international grains industry and fosters co-operation between governments and the industry. (For more information about the IGC see www.igc.int). Candidates should have a solid knowledge of the world grain economy as well as international agricultural and food policy issues; sound capabilities in the area of market and economic analysis; extensive administrative and managerial experience at an appropriately senior level; experience in working with government representatives and relevant international organisations; excellent communication skills in English, the working language of the Council and, at least one of the other three official languages of the Council (French, Russian or Spanish) would be desirable.

Applicants must be citizens of a country which is a member* of the International Grains Council. Interested individuals should apply directly to the email address below. Applicants should indicate whether the application is being sponsored by their government.

Remuneration will be in line with the United Nations Under Secretary-General level applicable in London, where the position is based.

Letters of application and a curriculum vitae in English should be sent by email to:

Mr. Aly Toure, IGC Chairman Email: [email protected]

The closing date for applications is 10 March 2017.

* Members of IGC are: Algeria, Argentina, Australia, Canada, Côte d’Ivoire, Cuba, Egypt, European Union, India, Iran, Iraq, Japan, Kazakhstan, Kenya, Korea (Rep), Morocco, Norway, Pakistan, Russian Federation, Saudi Arabia, South Africa, Switzerland, Tunisia, Turkey, Ukraine, United States, Vatican City.

The Banque centrale du Luxembourg / Eurosystem is seeking a Head of Economics and Research Department (m/f)

Job description: The incumbent will lead and coordinate a team of economists analysing economic developments in Luxembourg and the euro area, conducting research on topics pertaining to central banking, including monetary policy, and analysing public fi nances, with a particular focus on Luxembourg. His/her responsibilities will also include representing the Bank in high level national and international meetings. The incumbent will report directly to the Governor. Main tasks and responsibilities: • Provide advice to the Governor on monetary policy and to Management in general in terms of economic analysis and research; • Develop the department’s work programme, with a particular emphasis on the strategic direction of its research activities; • Organize, supervise and assess the department’s work, in particular its contribution to the BCL’s economic publications and to the department’s research output; • Develop research partnerships with universities, research institutes, think tanks and other central banks. Your profile: • PhD in economics or M.A. in economics with extensive experience in research and economic analysis; • Experience in conducting and supervising research related to central banking with a strong publication record; • Solid knowledge of the Eurosystem’s monetary policy framework; • Excellent command of English. French or German will be considered as an advantage; • Ability to communicate with peers, managers and policymakers; strong sense of efficiency, organization and time management. To apply, please email your cv and motivation letter to [email protected] before February 15, 2017. The Economist January 21st 2017 14 Brieﬁng The Trump administration The Economist January 21st 2017

Also in this section 18 Peter Navarro’s economics

sought to bring about his victory over Hil- lary Clinton (though she won the popular vote by almost 3m ballots). Yet amid the protests, the launch of a Senate investigation into Russia’s hacking and nerves jangling in the United States and elsewhere at the prospect of President Trump, the transition has been chugging along fairly smoothly. The markets have responded with a “Trump bump”, exploring record highs in expectation of tax cuts and deregulation. Mr Trump has named most of his senior team, including cabinet secretaries and top White House aides, and their Sen- ate confirmation hearings are well under way. These are even more of a formality than usual, thanks to a recent change to the Senate’s rules, instigated by a former Democratic senator, Harry Reid, which allows cabinet appointments to be approved by a simple majority. As the Repub- licans control both congressional houses, even Mr Trump’s most divisive nominees—such as Senator Jeff Sessions from Alabama, his choice for attorney-general, an immigration hawk dogged by historical allegations of racism—appear to be breez- ing through. Tom Price, a doctor and congressman from Georgia who is Mr Trump’s pick for health secretary, is touted by Democrats as the likeliest faller; he is in trouble over legislation he proposed that would have ben- efited a medical-kit firm in which he owned shares. But as the Democrats main- lydislike DrPrice because he isthe putative assassin of Barack Obama’s health-care re- A helluva handover form, and Republicans like him for the same reason, he will probably get a pass. “There are two people responsible for the direction we are heading in,” says Senator John Barrasso, a Republican from Wyo- WASHINGTON, DC ming, approvingly. “Donald Trump, who The drama ofthe transition is over, and the new president’s team is largely in place. won the election, and Harry Reid, for Now forthe drama ofgovernment changing the Senate rule. This has allowed OLED up in Trump Tower, the New Mr Trump’s post-election behaviour the president-elect to nominate patriots, HYork citadel he seems reluctant to has been every bit as belligerent as it was not parrots.” leave, Donald Trump detected a tsunami during the campaign. In his victory speech Indeed, Mr Trump’s cabinet picks have ofexcitement in the national capital before he said it was time to “bind the wounds of been solidly conservative, with a strong his inauguration on January 20th. “People division”; he has ever since been insulting strain of small-governmentism. At least are pouring into Washington in record and threatening people on Twitter, at a rate three of his nominees appear to have numbers,” he tweeted. In fact the mood in of roughly one attack every two days. His mixed feelings about whether their future Washington, DC, where MrTrump won 4% targetshave included Meryl Streep, Boeing, departments should even exist. ofthe vote on November8th, wasmore ob- a union boss in Indiana, “so-called A-list Rick Perry, Mr Trump’s choice to lead viously one of apathy and disdain for his celebrities” who refused to perform at his the Department ofEnergy, pledged to abol- upcoming jamboree. Even the scalpers inauguration, Toyota and the “distorted ish that agency when campaigning for the were unhappy, having reportedly overesti- and inaccurate” media, whose job it will presidency in 2011. Ben Carson, a right- mated people’s willingness to shell out to be to hold his administration to account. winger with little management experi- see Mr Trump sworn in as the 45th presi- He enters the White House as by far the ence, whom Mr Trump has chosen to head dent. Some 200,000 protesters are expect- most unpopular new president of recent his Department of Housing and Urban De- ed to attend an anti-Trump march the day times. It does not help that America’s intel- velopment, once wrote that “entrusting afterthe inauguration (see page 22). ligence agencies believe Russian hackers the government” to look after housing 1 The Economist January 21st 2017 Briefing The Trump administration 15

2 policy was “downright dangerous”. As at- UN’s Paris Agreement on climate, which Gary Cohn, the head of his National Eco- torney-general of Oklahoma Scott Pruitt, Mr Trump has vowed to “cancel”. Plainly, nomic Council. For his commerce secre- picked to lead the Environmental Protec- Mr Pruitt’s brief will be to carry on doing tary, Mr Trump has picked Wilbur Ross, a tion Agency, has sued the EPA 14 times, what he was doing—with the power of the billionaire businessman who is also a pro- partly in an attempt to foil the Clean Power federal government behind him. tectionist, having made a fortune by buy- Plan, MrObama’smain effortto cutAmeri- The disavowal of climate science re- ing and turning around stricken American ca’s greenhouse-gas emissions. flects a wider disdain forexpert opinion. A steel and textiles mills, which he argues re- small illustration of this, with potentially quire stifferprotective tariffs. Climate of opinion large consequences forAmerican children, Reflecting Mr Trump’s outsider status, That all three are climate-change sceptics is is that Mr Trump hasdiscussed appointing around half his appointees are non-politi- no coincidence. So, to varying degrees, are RobertF. Kennedyjunior, a lawyerand pro- cians, including perhaps the most impor- almost all the politicians in Mr Trump’sad- ponent of a bogus theory linking vaccines tant, Mr Bannon and Mr Trump’s other ministration (see graphic). Reince Priebus, and autism, to chair a vaccine-safety com- main adviser, Jared Kushner, his 36-year- his chief of staff, recently summarised his mission. Abiggerillustration isthat the one old son-in-law. Ascion ofa billionaire New boss’s view of climate science as mostly “a academic economist on MrTrump’ssenior York property developer, and a reformed bunch of bunk”. Mr Trump’s dishevelled economic team, Peter Navarro, is a protec- metropolitan liberal, Mr Kushner is in chief strategist, Steve Bannon, a self-de- tionist with a maverick aversion to trade some ways similar to Mr Trump. He is mar- scribed nationalist populist, has similar deficits (see next article). ried to Mr Trump’s daughter, Ivanka, who views, with a twist. Mr Trump has de- The team is dominated by bankers and is expected to take on many of the usual scribed climate change asa hoaxperpetrat- businessmen, including two Goldman duties of a White House consort, and is as ed by the Chinese; Mr Bannon blames a Sachs alumni, Steven Mnuchin, Mr ruthless as he is influential. Governor conspiracy of shadowy “globalists” for the Trump’s choice for treasury secretary, and Chris Christie of New Jersey, whom Mr 1

C A B I N E T O You’re hired! - L E t h V E L e Donald Trump’s proposed O F p o r F I C s s e cabinet-level and senior T I A i t n White House officials* E L i o i o N S † n r (and family) B I s C A BUDGET E MICK MULVANEY TREASURY Congressman, TRADE H STEVE MNUCHIN ROBERT Director of national T fiscal intelligence DEFENCE Formerly with LIGHTHIZER JAMES MATTIS conservative Trade lawyer, UN AMBASSADOR DAN COATS Goldman Sachs, Former ambassador Retired movie producer protectionist NIKKI HALEY general, aka Governor to Germany, senator INTERIOR JUSTICE from Indiana RYAN ZINKE JEFF SESSIONS “Mad Dog” of South Carolina Homeland-security adviser Congressman, Senator from THOMAS BOSSERT from Montana Alabama, early George W. Bush former Navy SEAL Trump supporter ENVIRONMENT security aide SCOTT PRUITT Central Attorney-general Intelligence Agency HEALTH of Oklahoma, SMALL BUSINESS TOM PRICE STATE self-described MIKE POMPEO REX TILLERSON LINDA McMAHON Congressman leading advocate Congressman from Kansas Oilman, cosy with Wrestling and doctor, hates against EPA entrepreneur Vladimir Putin National-security adviser National Trade “Obamacare” MIKE FLYNN Council COMMERCE LABOUR Ex-lieutenant general, PETER NAVARRO WILBUR ROSS headed Defence Academic ANDREW PUZDER economist “King of bankruptcy”, Fast-food executive, Intelligence Agency investor, helped opposed to raising National Economic Mr Trump avoid minimum wage CHIEF OF STAFF Council personal bankruptcy HOUSING REINCE PRIEBUS GARY COHN BEN CARSON VICE-PRESIDENT Head of Republican President, TRANSPORTATION Retired neurosurgeon MIKE PENCE National Goldman Sachs ELAINE CHAO Has what Committee Chief strategist Labour secretary ENERGY STEVE BANNON RICK PERRY Mr Trump lacks: Breitbart News, which Regulatory tsar Public-liaison under George CARL ICAHN adviser W. Bush, married Ex-governor Washington he called “the platform experience for the alt-right” Billionaire ANTHONY to Senate Majority of Texas, once activist SCARAMUCCI Leader vowed to abolish shareholder Financier the agency

Cyber-security Counsellor RUDY GIULIANI Senior adviser KELLYANNE CONWAY Former New York JARED KUSHNER Trump-campaign manager City mayor Son-in-law HOMELAND SECURITY AGRICULTURE FAMILY Trump Organisation JOHN KELLY VETERANS AFFAIRS EDUCATION SONNY PERDUE Donald Eric Retired general, in DAVID SHULKIN BETSY DEVOS Former governor First Lady “First Daughter” charge of building Billionaire, fan of Melania Ivanka Trump Trump Doctor, current of Georgia Trump Trump junior Son Son the “wall” undersecretary at VA school vouchers Requires Senate approval CABINET-LEVEL PICKS, % Male White Gov. experience Ex-generals Billionaires Non-politician Donald Trump 82% 86% 55% 9% 14% Military Barack Obama 65 52 87 4 Business and finance nil Climate-change sceptic George W. Bush 83 74 96 4 nil Sources: Bloomberg; The Economist Picture credits: AFP; AP; Bloomberg; EPA; Getty Images; Reuters *At January 19th 2017 Still to be announced: †Chairman of the Council of Economic Advisers 16 Brieﬁng The Trump administration The Economist January 21st 2017

2 Kushner axed as head ofthe transition, can pingly partisan and Islamophobic—or as attest to that. Terrible ratings Colin Powell put it, “right-wing nutty”—at- The fact that many of Mr Trump’s picks Pre-inauguration favourable ratings tacks on Mr Obama, Mrs Clinton and Mus- are plutocrats reflects his preference for of presidents-elect, % lims. Even if paired with a more emotion- pragmatists over pointy-heads, as well as 80 ally stable commander-in-chief, Mr Flynn his belief that moneymaking is a transfera- would be a concern. ble skill. That was the underlying logic of 60 Yet the biggest uncertainty surrounding his own candidacy. He also likes tough 40 Mr Trump’s cabinet concerns less the cali- guys, ideally in uniform, hence his selec- bre of its members than the agenda they tion of three former generals: James Mattis 20 will pursue. It is hard to exaggerate how di- and John Kelly,both formermarines, at, re- vided his team is on the big policy ques- spectively, the Pentagon and the Depart- Bill George Barack Donald 0 tions. Some members of the economic ment of Homeland Security, and Michael Clinton W. Bush Obama Trump team, including Mr Mnuchin, who will be Flynn, his national-security adviser. Mr (1993) (2001) (2009) (2017) primarily busy with Mr Trump’spromised Source: Gallup Trump assured a crowd in Ohio that his tax cuts, and Mr Cohn, who will play a co- cabinet would include the “greatest killers ordinating and shaping role, are broadly in you’ve ever seen”. ment: Rex Tillerson, the former boss of Ex- favour of free trade. Yet the likeliest archi- His nominees’ ability to look the part, xon Mobil, whom he has tapped to be sec- tects of Mr Trump’s trade policy, Mr Ross, Hollywood-style, is indeed said to be an retary of state. This was at first denounced Mr Bannon and Mr Navarro, are economic important consideration for Mr Trump. as further evidence of Mr Trump’s strange nationalists. “He’s very aesthetic,” one of his advisers crush on Vladimir Putin’s regime, with Similarly, Mr Mattis and Mr Tillerson told the Washington Post. “You can come which Mr Tillerson has done a lot of busi- appear to hold mainstream conservative with somebody who is very qualified for ness, as well as his climate-change scepti- views; both say it behoves the United the job, but if they don’t look the part, cism. That may be right on both counts. In States to uphold international rules, ideal- they’re not going anywhere.” In the case of his confirmation hearing, Mr Tillerson ly by working through traditional alliances the stern Mr Kelly and craggy-faced Mr called for better relations with Russia and such as NATO. Mr Trump, however, has Mattis—whose nickname, “Mad Dog”, Mr was, at best, vague about what steps he suggested that NATO could be “obsolete”. Trump enunciates with relish—this ap- would take to counter global warming. Yet Mr Tillerson also said that America should pears to have worked out well. he appeared more measured in his view of not quit the UN’s Paris accord on climate the world than some of Mr Trump’s other change; MrTrump hasboth vowed to “can- Divided and ruling advisers, including Mr Bannon and Mr cel” the agreement and said that he was Mr Mattis owes his moniker to his combat Flynn, who want to forge an alliance with “open-minded” about whether to honour record and fondness for scandalising civil- Russia to fight Islamist militancy. it or not. ians; it’s “fun to shoot some people”, he Mr Tillerson denounced Russia’s inva- MrTrump acknowledged the conflict in told a crowd in San Diego. Yet he owes his sion of Ukraine as an “illegal action”, a tweet: “All my cabinet nominee[s] are reputation as a commander to his thought- spoke up for NATO and said he looked for- looking good…I want them to be them- fulness, interest in history and concern for ward to working with the Senate “particu- selves and express their own thoughts, not his soldiers. “He’s perfect for Trump,” says larly on the construct of new sanctions” mine!” Was he suggesting his nominees’ Michael O’Hanlon of the Brookings Insti- against Russian aggression. He even of- views matter more than his own? Does he tution, who has worked closely with the fered a dash ofWilsonian warmth: “We are envisage them capably governing while general. “His toughness gets him through the only global superpower with the he, Mr Kushner and Mr Bannon set about the door. But he’s actually an intellectual in means and moral compass capable of making the great changes Mr Trump has Genghis Khan clothing.” MrKelly is also re- shaping the world for good.” Mr Tillerson promised? Or will this be a squabbling spected, including for the understanding appears to have the authority and judg- talking-shop of a government, over which of America’s southern neighbours he de- ment necessary to steer Mr Trump’sbellig- Mr Trump will preside watchfully, before veloped while heading the US Southern erent instincts into the realm ofrealism. swooping down on one side of an argu- Command. That was apparent in his Sen- In short, this looks like a curate’s egg of ment or another? That is how he has man- ate hearing, in which he said the border an administration. In Messrs Cohn, Kelly, aged his business; it is also the role he wall that is Mr Trump’s signature promise Mattis, Mnuchin, Perry and Tillerson, Mr played in “The Apprentice”. would not alone be sufficient to block ille- Trump has assembled a group of success- Even those familiar with Mr Trump’s gal immigration: a “physical barrier, in and ful people who appear to have at least thinking cannot say how he means to gov- ofitself, will not do the job.” some of the requisite qualities to run the ern. “Trump is a wildcard, a political black In another transition, such an array of government. That could also turn out to be swan, we don’t know how pragmatic he’ll military men would have sparked con- true of Mr Trump’s choice for education be or how dogmatic,” says Stephen Moore, cerns for the civil-military balance; Mr secretary, BetsyDeVos, a billionaire Repub- who helped write his economic policy. Yet Mattis had to obtain a waiver of a rule re- lican benefactor and advocate for school some of his team’s current preoccupations stricting former soldiers from becoming choice—though the results of her experi- offerearly clues. defence secretary. That Messrs Mattis and ments in her native Michigan are not all Kelly have nonetheless been welcomed on that impressive. Mr Carson, Mr Pruitt and Deciphering Donald Capitol Hill reflects a fear, among Republi- Mr Sessions looklike awful appointments. One is a House Republican tax proposal cans and Democrats, that it will take a Mr Flynn may be worse. A gifted intelli- that could indicate how protectionist Mr tough guy to stand up to Mr Trump. “I firm- gence officer, with a flair for institutional Trump is. Known as “borderadjustability”, ly believe that those in power deserve full reform, he was sacked as head of the De- it is central to an ambitious House Republi- candour,” said Mr Kelly when asked for his fence Intelligence Agency in 2014, alleged- can tax plan and is intended to boost ex- assurance on this. The highest-ranking offi- ly for poor management skills. Already ports by scrapping tax on foreign sales, certohavelostachildfightinginIraqorAf- critical of the president’s approach to fight- even as firms would lose the right to de- ghanistan, he is unlikely to be bullied. ing Islamist militancy, MrFlynn proceeded duct the cost of imports from their profits. This also seems to be true of Mr to get mad. He horrified former comrades An additional advantage, some of its pro- Trump’s most intriguing cabinet appoint- last year by launching several eye-pop- ponents suggest, is that border adjustabil-1

18 Brieﬁng The Trump administration The Economist January 21st 2017

2 ity could looksufficiently like an import ta- Peter Navarro riff for Mr Trump to claim that he had executed his threat to slap a tariffon Amer- Free-trader turned game-changer ican outsourcers, without causing anything like the same economic damage. Yet it seems Mr Trump’s protectionist rhetoric is in earnest. “Anytime I hear border ad- Washington, DC justment, I don’tlove it,” MrTrumptold the The head ofDonald Trump’s new National Trade Council is about to become one of Wall Street Journal on January13th. the world’s most powerfuleconomists. That’s worrying After tax cuts and new trade terms, Mr Trump’s biggest economic promise is de- HE day after Ronald Reagan won his heart came decades later, after he took an regulation. He should find quickwins in fi- Tsecond term as president in 1984, a doc- interest in China. (Like other members of nance and energy. But his pledge to scrap toral student at Harvard University pub- the incoming administration, he has been and replace Obamacare, with the many lished his second book. “The Policy Game: unavailable for interview in advance of rulesattached to it, will be a more daunting How Special Interests and Ideologues are the inauguration.) His road to China was a test of his political skills. Because Demo- Stealing America” complained that greedy long and winding one: his research inter- cratic senators could filibuster away any interest groups and misguided ideologues ests are broader than the average econo- bill to repeal the health-care programme, had led America to “a point in its history mist’s. His doctoral thesis studied the rea- the Republicans plan to starve it of money where it cannot grow and prosper”. The sons firms give to charity; his paper on this until the insurance markets that underpin solution: increase political participation remains his most cited work. He has it collapse. Many think that, presented and swap ideology forpragmatism. worked extensively on energy policy. In with a fait accompli, the Democrats would On January 20th that student, now a 2000 or so he began studying online edu- grudgingly support whatever alternative professor, will enter the White House as cation, and wasan early adopteroftechno- scheme they are offered. But Mr Trumpap- part of a populist insurgency. Peter Na- logical aids in his own teaching, says Frank pears unconvinced by this, and he is prob- varro, a China-bashing eccentric who will Harris, one ofhis formerstudents. ably right to be. lead the new National Trade Council, has Two themes emerge from Mr Navarro’s Slow starvation of Obamacare would emerged as the brains behind Donald zigzagging research, which, since 1989, he ensure many hard-luck stories, for which Trump’s brawn on trade. Lauded as a “vi- has pursued at the University of Califor- the Republicans would be blamed. An al- sionary” by Mr Trump, Mr Navarro may nia, Irvine. The first is a preference for real- ternative ploy would be to make relatively soon be the world’s most powerful econo- world issues over abstraction. In 2000 he footling changes to Obamacare and de- mist working outside a central bank. wrote two papers with Mr Harris on the clare victory. It would be hard to persuade He once supported free trade. An entire best way to develop wind energy. Just the Republicans in Congress to swallow chapter of“The Policy Game” extols its vir- months after the attacks of September 11th that. But as Mr Trump claimed on January tues, labellingthe protectionism ofReagan, 2001 he tried to calculate their economic 14th to be puttingthe final touchesto a plan who coerced the Japanese into reducing costs. He has written a popular bookabout that would involve “insurance for every- their car exports in 1981, as “dangerous and investing, “If It’s Raining in Brazil, Buy Star- body”, somewhat like Obamacare, and virulent”. There was a hint ofhis later scep- bucks”. He is a prolific writer, but has no unlike any Republican proposal, perhaps ticism: he called for more compensation publications in top-tier academic journals. this is what he has in mind. for workers who lose their jobs to foreign The second theme is his interest in the competition, and stricter trade rules at the distribution of income. But whereas the Deal or no deal? supranational level. But one benefit of fortunes of rich and poor have gripped Besides the small matter of whether Mr such rules, he wrote, would be to provide other economists, Mr Navarro has “always Trump means to launch a trade war, a presidents with an “escape from domestic been focused on a broad swathe of the pressing foreign-policy question concerns protectionist pressures…the issue would middle”, says Richard Carson, a co-author. Russia. Mr Trump, Mr Bannon and Mr be out oftheir hands.” (Mr Carson worked with Mr Navarro on a Flynn want a better relationship with Mr It seems that Mr Navarro’s change of paper arguing that the growth of cities 1 Putin. “But what will they give up for it?” asks Nicholas Burns, a former American ambassador to NATO. Mr Trump has sig- nalled thathe mightdrop some ofthe sanctions Mr Obama placed on Russia after its intervention in Ukraine. Perhaps he would also consider scrapping American troop deployments to Poland and the Baltic states. Either step would be viewed by NATO’s European members as evidence that Mr Trump’s apparent disdain for the alliance is forreal. This need not go badly.Mr Trumpcould back-pedal on protectionism, ignore or somehow improve Obamacare and maintain America’s watchfully adversarial foot- ing with Russia. His administration could turn out as well as the markets seem to expect. But that would be largely down to Mr Trumphimself; it will not be, as some have fancifully hoped, because his administration has been saved by the better angels in his cabinet. 7 Ready to rock The Economist January 21st 2017 Briefing The Trump administration 19

2 should be tied to quality-of-life measures, mainstream Republican economist, ar- such as traffic levels and school over- Free markets and free workers 1 gued that “Asia saves too much and the crowding.) Such concerns helped to draw United States United States consumes too much.” Yet Mr Mr Navarro into politics. In the 1990s he Trump’s plan for tax cuts and infrastruc- 0 20 ran for office several times as a Democrat, ture spending, by pushing up government – Manufacturing losing every race. He seems to be enjoying employment, m deficits, would make this problem worse. his political comeback: his television ap- 100 15 What might Mr Navarro recommend in pearances can deteriorate into rumbus- office? He and Mr Hubbard say that China tious shouting matches. He is fond of hy- 200 10 should be subject to “appropriate defen- perbole. When he sends e-mails, his screen Trade deficit with sive measures”. That probably means name appears as “ComingChinaWars”. China in goods, $bn more than the retaliatory duties already 300 5 It is his recent work on China that led to imposed on some Chinese goods. Mr Na- his unlikely hiringby MrTrump. In the past varro says that Mr Trump is merely threat- decade or so Mr Navarro has penned three 400 0 ening an across-the-board tariff, in order to 1995 2000 05 10 16 books warning darkly of the dangers exact concessions from the Chinese. He Sources: US Census Bureau; BLS posed by China’s economic and military seems to think that once they comply with rise. The second, “Death by China”, be- global trade rules, the trade deficit will came a documentary in 2012. Narrated by omy in the long-term. The equation shows close and manufacturing jobs will return Martin Sheen, an actor and left-wing icon, how resources are used, not produced. to America’s shores: “The best jobs pro- the film tours communities that have suf- Were Americans unable to buy cheap gramme…is trade reform with China.” fered from competition with Chinese im- imports, they would be poorer, with less to This is a fantasy. When manufacturing ports, juxtaposing shuttered American fac- spend on other things. They would also be production moves overseas and then re- tories with shots ofChinese sweatshops. less specialised, and hence less productive, turns, productivity has usually risen in the The core allegations Mr Navarro makes at work. Lawrence Edwards and Robert interim; so far fewer jobs come back than against China are not all that controversial. Lawrence, two economists, estimate that, left. Messrs Edwards and Lawrence find He accuses China of keeping its currency under certain assumptions, by 2008 trade that even though the trade deficit in manu- cheap, a common charge until 2015, when in manufactured goods put $1,000 in the factured goods in 2010 was about two-and- China began intervening in currency mar- pockets of every American. China ac- a-half times what it was in 1998, the num- kets in the opposite direction. He deplores counted for about a quarter of that ber of lost manufacturing jobs the deficit China’s practice of forcing American firms amount. Recent work by the Council of represented rose only very slightly, from to hand over intellectual property as a con- Economic Advisers has shown that trade 2.5m to 2.7m. In any case, if China lost low- dition ofaccess to its market. He notes, cor- barriers, by raising the price of goods, tend skilled jobs, manufacturers would relocate rectly, that Chinese firms pollute the envi- to hurtthe poorestmost(see chart2). IfChi- to other low-cost emerging economies, not ronment more freely and employ workers na exploits its workers and pollutes its riv- America, says Eswar Prasad of the Brook- in far worse conditions than American ers so that poor Americans can enjoy ings Institution, a think-tank. rules allow, and produce exports which of- cheaper goods, it is not obvious that Amer- That means neitherfairerplay by China ten benefit from government subsidies. ica is getting a raw deal. nor tariffs could help many American Trade balances result primarily from workers. More productive strategies are Trading positions saving-and-investment patterns. When available. David Dollar, also of Brookings, A charitable interpretation of his views is capital flows in one direction, goods and has set out how a country could play “re- therefore that he is not a protectionist at all. services flow in the other. China’s trade sponsible hardball” with China. He recom- Rather, he simply objects to mercantilism surplus with America during the 2000s mends restrictingthe acquisition ofAmeri- on the part of the Chinese. In 2006 he esti- was a consequence mainly of the Chinese can firms by China’s state-owned mated that 41% of China’s competitive ad- buying Treasury bills, says Gordon Han- enterprises, something the Obama admin- vantage over America in manufacturing son, a trade specialist at the University of istration cautiously started doing. Such in- stemmed from unfairtrade practices. In in- California, San Diego. This was not neces- vestment flows represent artificially high terviews he has noted the similarity be- sarily benign. Ben Bernanke, a former Chinese savings rather than the invisible tween this figure and the 45% tariff Mr chairman of the Federal Reserve, suggest- hand of the market. Until now China has Trump threatens to levy on Chinese goods. ed in 2005 that it contributed to a “global invested mainly in Treasury bonds. But it is But this interpretation does not explain saving glut”. Mr Navarro sometimes hints increasingly interested in buying Ameri- Mr Navarro’s oddest views, like his opin- at this more nuanced view. A book he can technology firms. With restrictions im- ion of the trade deficit. After China joined wrote in 2010 with Glenn Hubbard, a more posed, America could demand that China the World Trade Organisation in 2001, the open up more ofits services market. trade deficit exploded at the same time as What about environmental and labour millions of manufacturing jobs vanished Tariffs as a tax 2 standards? The best way to improve those, (see chart 1). Mr Navarro claims that, as a United States, burden of tariffs* on argues Mr Prasad, would be to write trade matter of arithmetic, unbalanced trade is household income†, by decile, 2014, % deals including rules which China will responsible for a slowdown in growth 1.8 eventually have to follow. This was one since 2000. Mr Trump spouts similar lines, aim of the doomed Trans-Pacific Partner- talking about the trade deficit as if it were ship. It is a more realistic goal than return- 1.2 simply lost American wealth. ing low-skilled workto America en masse. This is dodgy economics. A deconstruc- It is possible that, in office, Mr Navarro tion ofspendingin the economy shows ex- 0.6 will lean towards these kinds of ideas. But ports as a positive and imports as a nega- there is no sign of it yet: he recently prom- tive. But the same accounting exercise also ised “a seismic and transformative shift in 0 shows government spending as a compo- Poorest Richest trade policy”. Another change of opinion nent of GDP. Few economists—and certain- 10% Income deciles 10% on trade might be too much to hope for. A ly few Republicans—would say that the Source: Council of *Taxes on imported goods man who has waited 32 years for a revolu- † biggerthe government, the richerthe econ- Economic Advisers After tax tion has probably made up his mind. 7 Supported by

The people have spoken. Who’s listening?

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Also in this section 22 Women’s rights 22 Asian-American voters 23 Chelsea Manning 24 Lexington: History lessons

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Emboldened states fornians could find themselves without health coverage. And even though Mr California steaming Trump has vowed to axe Barack Obama’s Clean PowerPlan, which would have regulated carbon emissions from power plants, California is likely to continue complying with—or even exceed—the requirements LOS ANGELES laid out in the framework. But its companies might find themselves at a competi- America’s most progressive state is set to lead the new fight against federal power tive disadvantage ifother states do not. N NOVEMBER 9th, as it started to sink But with the election of Mr Trump, whose Politicians from California and other Oin that Donald Trump would be their party controls both houses of Congress blue states plan to resist Mr Trump using president too, Californians expressed their and who plans to appoint conservatives to three main tools: legislation, litigation and anger and disappointment in different and the Supreme Court, it is Democrats who circumvention. creative ways. Some tookto the streets and find themselvesturningto the states asbul- Start with legislation. On December 5th burnt papier-mâché effigies of Mr Trump’s warks of resistance. California, America’s California’s lawmakers introduced a pack- bronzed face. Others chanted “not my most populous and progressive state, will age of laws to impede mass deportation. president” and waved signs that read “Im- lead the blue-state opposition. One bill would create a programme to migrants Make America Great” and “De- California has plumped for Democrats fund legal representation forimmigrants in port Trump”. Kevin de León and Anthony since the early 1990s—Hillary Clinton won deportation hearings. Andrew Cuomo, the Rendon, the leaders of the California Sen- by a margin of 30 percentage points. It is governor of New York, announced earlier ate and Assembly, respectively, released a one ofsixstates where Democrats hold the this month that he would launch a similar statement. governor’s mansion and both houses of fund. A recent national study found that “Today, we woke up feeling like strang- the state legislature. But Californians’ op- immigrants with legal counsel were five- ers in a foreign land, because yesterday position to Mr Trump goes beyond parti- and-a-half times more likely to avoid de- Americans expressed their views on a plu- sanship. If America’s new president hon- portation than if they represented them- ralistic and democratic society that are ours his promises to deport illegal selves. Yet only 14% of detained immi- clearly inconsistent with the values of the immigrants, repeal the Affordable Care Act grants in deportation proceedings had people ofCalifornia,” it read. “We will lead (better known as Obamacare) and relax lawyers. Gun control, health care and envi- the resistance to any effort that would environmental protections, California— ronmental policy are other areas where shred our social fabric or our constitution.” America’s largest economy—stands to lose Democrat-dominated states might focus in As Mr Trump takes residence in the White more than any other state. the coming years, says John Hudak, a fel- House, California’s lawmakers are putting More than 3m undocumented immi- low at the Brookings Institution. their words into action. grants call the Golden State home, reckons They will have plenty of examples to the Migration Policy Institute, a think-tank. The leaves are brown follow. During the Obama administration, (Texas, the second most popular state for Several states are also getting ready to chal- Texas and Oklahoma were strident advo- undocumented foreigners, has less than lenge the Trump administration in court. cates for state sovereignty. Several other half as many.) These workers make up Maura Healey, the attorney-general of states also challenged the federal govern- nearly10% ofthe workforce and contribute Massachusetts, which has a Republican ment in court and by making their own $130bn—or about 5%—of the state’s annual governor, and Eric Schneiderman, the at- laws. Indeed calls forstates’ rights and lim- output, according to a 2014 study. Health torney-general of New York, have both ex- ited federal power have been a defining Access California, a consumer advocacy pressed their willingness to square off feature of American conservatism since group, estimates that the state government against the federal government. Earlier this the New Deal, says Ilya Somin, a federal- could lose $22bn in federal funding annu- month the California State Legislature an- ism expert at George Mason University. ally if Obamacare is gutted; some 5m Cali- nounced that it had retained Eric Holder, 1 22 United States The Economist January 21st 2017

2 who served as Mr Obama’s attorney-gen- says Mr de León. The final way in which blue states can eral, as outside counsel. He will work with Some potential suits are starting to take resist Mr Trump’s policy agenda is by try- the state’s next attorney-general to bring shape. Gavin Newsom, California’s lieu- ing to get around federal policy. California suits against the federal government. Cali- tenant-governor who will run for gover- already has cap-and-trade agreements fornia’s decision to hire outside counsel is norin 2018, has said that the state could sue with foreign jurisdictions such as Québec. distinctive, but litigation as a means of under the California Environmental Qual- Mr de León says that, under the Trump ad- stalling the federal government is hardly ity Act or its federal equivalent to quash Mr ministration the state will work to expand new.In 2010 a group of mostly Republican Trump’s plans for a wall along the border such programmes. Since 2009 nine states attorneys-general filed a lawsuit to block with Mexico. The argument would rest on in the north-east have participated in the Obamacare. According to analysis by the the claim that construction of the wall Regional Greenhouse Gas Initiative, a cap- Texas Tribune, the Lone Star State sued the could upset water flows and quality as and-trade programme. Even if climate pro- Obama administration at least 48 times well as wildlife. Richard Revesz, an envi- tections are relaxed under Mr Trump, such during Mr Obama’s term. Hiring Mr Hold- ronmental-policy expert at New York Uni- an alliance could continue. er “sends a message to the administration versity’s School of Law, says Democratic On immigration, California has legisla- about the state’s resolve to defend our peo- states could also sue to slow the repeal of tion preventing local jails from holding ple, our diversity, and economic output,” the Clean Power Plan. people forextra time justso thatfederal immigration enforcement officers can deport them. So-called “sanctuary cities” in other Women’s rights states, including Chicago, New York, Seat- tle and others, have pledged to protect March nemesis their undocumented residents in similar ways. Such policies are likely to be effective at obstructing a massive dragnet; there Donald Trump may unwittingly be a revitalising force forAmerican feminism are 5,800 federal deportation agents com- F ALL the things uttered by Donald women—and a lot more besides. pared with more than 750,000 state and lo- OTrumpduring the election cam- The march grew from two unrelated cal police officers. Deporting undocu- paign, none seemed to threaten his Facebookposts into the “Women’sMarch mented immigrants without local chances ofvictory more than his admis- on Washington”, which promises to be co-operation is much more difficult. sion, on tape, that he had grabbed wom- the biggest single anti-Trumpdemonstra- Mr Trump has threatened to cut federal en “by the pussy” without their consent. tion yet. It has also spawned sister funding for jurisdictions that insist on ad- Yet Republicans—and voters—eventually marches in New York, San Francisco, hering to “sanctuary” policies, but Mr So- looked past his attitude towards women. London and dozens ofother cities. But min suggests that courts may not look Many Americans, however, remain arranging it has proved thorny.It was kindly on such an action. In 2012 the Su- worried that a Trumppresidency heralds originally called the “Million Women preme Court ruled that the federal govern- a new age ofsexism and misogyny.In the March”, until organisers were admon- ment cannot force states to bend to its days after the election, donations to ished forappropriating the name of the wishes with a financial “gun to the head”. women’s non-profit groups surged. So 1997 “Million Woman March”, which Although much about the next four years did demand forcontraception, as women focused on African-American women. is unpredictable, one thingseems clear: the worried that access to birth-control Others claimed that it too closely re- courts will be busy. 7 would be curtailed. On January 21st, the sembled the1963 “March on Washing- day after the inauguration, some ton” led by Martin Luther King Jr. The 200,000 American men and women are event’s Facebookpage is rife with com- Asian-American voters expected to turn up at a march in Wash- ments advising white women to “check ington to protest against regressive poli- their privilege”. Some women, put offby Bull in a China cies and demand equal treatment for all the bickering, decided not to attend. It is the kind ofsemantic nitpicking shop that has made progressive movements unappealing to many Americans. Yet it may have done some good: the march DIAMOND BAR, CALIFORNIA has brought together a broad coalition. A long-slumbering voterblockawakes Nearly 450 organisations, from the Coun- cil on American Islamic Relations to HE 2016 election marked a coming-out Greenpeace and the Coalition Against Tparty for conservative Chinese-Ameri- Gun Violence, have signed on as official cans, who offered Donald Trump some of partners. In addition to well-trodden his most passionate support among non- feminist concerns like the wage gap and whites. Now some are feeling the first paid parental leave, the protest platform twinges of a hangover, as their hero threat- embraces other causes—immigrant rights, ens a trade war with China and hints that ending police brutality, climate protec- he might upgrade ties with Taiwan, the is- tion—as integral to women’s progress. land that Chinese leaders call no more The organisers argue that matters of than a breakaway province. social justice and women’s rights go “My members worshipped Trump reli- hand in hand. In the comfortable Obama giously for a whole year,” says David Tian years, many liberal Americans believed Wang, a 33-year-old businessman original- feminism’s workwas mostly finished. Mr ly from Beijing, who founded “Chinese Trump’sascent banished such compla- Americans forTrump”, a group which paid cency. He may be the unifying enemy for Trump billboards in more than a dozen Still suffering they need. states and flew aerial banners over 32 cities. Perhaps most importantly, Mr Wang’s1 The Economist January 21st 2017 United States 23

2 members rallied supporters on Chinese- brave whistle-blower, and what seemed language internet forums and messaging vindictively harsh treatment, including apps includingWeChat, attractingoutsized nearly a year ofsolitary confinement. attention from media outlets and elected The cause gained added weight when, officials in places where Asian voters can the day after being sentenced, the convict swing elections, such as southern Califor- switched name and sex: something that nia. Interviewed in Diamond Bar, an afflu- would have led to an immediate discharge ent, majority-Asian city east of Los Ange- from the army in any other circumstances. les, Mr Wang remains a true believer. But The authorities allowed her to take hor- perhaps halfofhis members are anxiously mone-replacement therapy, but not to “waiting forTrump’snext move”. grow her hair. There are about 4m Chinese-Ameri- Chelsea Manning, now aged 29, was cans. Typically, mostcombined a mild pref- the most prominent name on a list ofpresi- erence for Democrats with a general wari- dential pardons and commutations, most ness of party politics. Early immigrants of which involved those serving long from southern China, Hong Kong and Tai- terms for drug offences, issued by Barack wan lacked education, clustered in inner Obama in the final hours ofhis presidency. cities and “worked in bad jobs”, making Her sentence will now end in May, after al- them prey forDemocratic politicians offer- most seven years behind bars. ing welfare, sniffs Mr Wang. Recent immi- Others are furious. Senator Tom Cot- grants from mainland China often attend- ton, a former army officer, said “We ought ed good universities, work in the not treat a traitor like a martyr.” His col- professions and “want to mingle with league Lindsey Graham, an air-force veter- white people”, he says. A big political mo- an, tweeted that Ms Manning had ment came in 2014, when Chinese-Ameri- Chelsea Manning “stabbed fellow service members in the cans mobilised against SCA5, a proposed back”. John McCain said the decision “de- amendment to California’s constitution The long commute values the courage of real whistle-blow- that would have opened the door to race- ers”. Such critics argue that Ms Manning ig- based affirmative action. Many Chinese- nored whistle-blowing criteria, such as Americans charge that race-conscious trying internal channels first, and match- school admissions hurt high-achieving ing leaks with the purported wrongdoing. Asian youngsters and favour black and The move also casts a spotlight on two BarackObama cuts short the Hispanic candidates. other cases. One is WikiLeaks’ founder, Ju- whistle-blower’s sentence Asian votes helped Phillip Chen, a lian Assange, holed up since 2012 in the Ec- young Republican of Taiwanese descent, LOPPY security at an American military uadorean embassy in London to avoid win a seat in the California state Assembly Sbase in Iraq in 2009 allowed a lowly sol- questioning in a Swedish sexual-assault in November, representing Diamond Bar dier to set off a diplomatic thunderstorm. case. WikiLeaks had said he would be will- and a swathe of nearby suburbs. For years Bradley Manning, a junior intelligence an- ing to face trial in America for leaking se- Asian-Americans, who make up about a alyst, downloaded a database ofAmerican crets if Ms Manning was pardoned. Mr As- third of his district’s registered voters, governmentfilesonto a CD (labelled “Lady sange says he will stand by that position. shunned politics, though theylonged to as- Gaga” to avoid suspicion) and uploaded The other is Edward Snowden, an intel- similate and fit in in other ways. At the re- them to WikiLeaks, a website devoted to ligence contractor who fled to Russia in cent election his own mother’s friends exposing official wrongdoing. 2013. Officials dismissed any talk of for- wondered aloud why her son, “a nice The results were explosive and the giveness for him, saying that the damage young man” with a graduate degree, was price was heavy. The hundreds of thou- he had done was far graver, and that Ms running for office. His Chinese-American sands ofleaked documents included a vid- Manning had already served a sufficient constituents admire Mr Trump’s business eo of a shocking American airstrike on in- sentence. Mr Obama said that “justice had acumen and worry about taxes, regulation nocent Iraqis, carelessly mistaken for been served”. and law and order, including a clamp- terrorists. A caustic ambassadorial cable Despite his clemency splurge, Mr down on illegal immigration. But they also describing the sybaritic lifestyle of the Tu- Obama has been mostly regarded as rather want peace between Taiwan and China, nisian presidential family may have harsh on whistle-blowers. Few expect Mr Mr Chen says, and so will be watching the sparked the Arab Spring. Trump to be lenient either. 7 new president with a wary eye. In truth, though, the leaked cables At an Asian shopping centre in Row- mostly exposed nothing more than mild land Heights the most worried are those, hypocrisy and buried literary talents. But Small mercies such as Mike Lee, a sales director from Tai- they also endangered diplomats’ sources. United States, presidential clemency Granted, wan, who backed Hillary Clinton. He fears In some countries—China and Zimbabwe, Pardons Commutations as % of total that Mr Trump will use the island asa “bar- for example—candid discussions with 0 400 800 1,200 petitions gaining chip” with China. In contrast John American officials are regarded as tanta- Barack 4.4 Lin, a businessman from southern China, mount to treason; there and elsewhere ret- Obama 3.6 does not regret his Trump vote, cast be- ribution duly followed. So too did costly cause he thinks that “generally speaking a and secret State Department efforts to pro- George 7. 6 W. Bush man has more control than a woman”. He tect, where possible, people who had mis- 0.1 scoffs at talk of a trade war: “Walmart can’t takenly trusted America’s ability to keep a Bill 19.8 survive without Chinese products.” As for conversation private. Clinton 1.1 rows over Taiwan, Mr Trump just needs Speedily arrested after leaving clues in George 10.1 time to become “more familiar with the an online conversation, the soldier was H.W. Bush 0.4 world”. Mr Lin has strong nerves, a helpful jailed for 35 years on 22 charges, including Source: Department of Justice asset forTrump fans everywhere. 7 espionage. Fans decried persecution of a 24 United States The Economist January 21st 2017 Lexington History lessons

In inauguration week, remembering an accomplished but fatally flawed president recordings are ofthe president growlingabout Jews in his government, snarling, “Generallyspeaking, youcan’ttrustthe bastards.” Blazered volunteers earnestly describe Nixon’s strong and weak points. They work hard, with one guide spending long minutes explaining Maoist China to two youngsters perched on the ca- nary-yellowsofasin a replica ofhisOval Office from around 1969. Alas for keepers of the Nixon flame, the museum—whose historical displays have become more candid over the years, notably when the complex became part of the official presidential library system in 2007—is too honest for its own good. The museum would like visitors to judge Nixon the man, which is why it includes a sculpture ofa favourite dogcurled up in an arm- chair and tours of the modest cottage where he was born, back when Yorba Linda was a rural backwater. But it ends up telling a story larger than any one individual. It reveals how close Ameri- ca’s ship of state came to being wrecked by a particularly lethal sort ofbad leader: one guided by a broken moral compass. The museum quotes one eyewitness to Watergate saying of Nixon’s resignation: “The system worked.” It nearly didn’t, though. A pilgrimage to Yorba Linda offers several troubling lessons. First, Nixon employed in his cabinet and White House AN a bad man be a good president? The potential urgency of many clever men with brilliant CVs. They did little to rein in the C this question took Lexington on a cross-country pilgrimage thugs and glinty-eyed loyalists infesting his inner circle, though to the Richard Nixon Presidential Library and Museum in Yorba some grandees did resign out of principle—notably the attorney- Linda, California. The museum, which reopened in October after general and deputy attorney-general, who both quit rather than an expensive overhaul, attempts to weigh the flaws of the 37th obey Nixon’s orders to fire a special prosecutor closing in on him president against his undoubted merits, starting with his intelli- (in the end the solicitor-general did the deed). Second, and per- gence, daunting capacity for work and a poker-player’s willing- haps unintentionally, the museum suggests that if the Supreme ness to take calculated risks in geopolitics. Court had not forced Nixon to release White House tapes of his Much thought has gone into burnishing the reputation of the ordering illegal acts, many partisans might have continued to onlypresidentto resign the office. Anewdisplayforthe selfie gen- look the other way. A striking interview, filmed in 2008, shows eration allows visitors to photograph themselves on the Great Bob Dole, a young senator back in 1973 who later became a party Wall of China next to a life-size Nixon cut-out, recalling his his- leader and presidential candidate, conceding that he tried to con- tory-makingvisitin 1972. Little-known momentsofphysical cour- vince himself that sinister aides were behind every misdeed. “I age are remembered. Carefully preserved bullets and glass frag- didn’t want to make myselfbelieve Nixon did this, that he actual- ments testify to a nearly fatal mob attack on his car while visiting ly participated,” he explains in a telling tangle ofwords. Venezuela in 1958 as Dwight Eisenhower’s vice-president—the display explains how Nixon prevented a bloodbath by ordering A piece of cake, until you get to the top his Secret Service agent to hold fire. Next, the museum records Nixon fulminating against perceived The museum hails Nixon for rallying a “silent majority” of tormentors in the press. But photographs also show him ac- Americans who felt ignored and disdained by bossy, self-dealing knowledging its reach by speaking in a newly opened West Wing elites. Captions suggest that Nixon balanced a conservative’s briefing room—a facility whose future is currently in doubt. To- wariness of big government with a pragmatist’s willingness to day, amid confected rows about “fake news”, reporters who un- wield federal authorityto heal chronicills, whetherthat involved earthed a new Watergate would start with roughly halfthe coun- desegregating schools in the South to an extent that had eluded try ready to disbelieve them. Finally, the Nixon museum shows his Democratic predecessors or creating the Environmental Pro- how the symbolic powerofthe presidency can cow dissent, even tection Agency to clean up rivers so polluted that they caught fire. in thissceptical age. Toursend with a peekinto a lovingly restored This empathy for America’s forgotten, damaged places was all Sea King helicopter used by four presidents. A reverential guide the more remarkable because—as the museum admits via filmed pointsouta chicwhite racingstripe alongthe darkgreen fuselage, interviews with aides and family members—Nixon was a brood- painted at Jacqueline Kennedy’s suggestion. He adds, lightly, that ing introvert, “suspicious” to the point ofparanoia. the aircraft is the one that carried Nixon into enforced retirement, The Watergate scandal that felled Nixon is presented in a side- and museum-goers lookno less impressed. gallery filled with sombre black, red and grey panels bearing la- Indoors, a diorama recreates that departure from the South bels like “Dirty Tricks and Political Espionage” and “Obstruction Lawn of the White House, portraying the former presidential of Justice”. In the brightly lit main halls an elegant display ex- couple in their helicopter seats and quoting Pat Nixon’s lament to plainshowNixon recorded White House conversationswith hid- her husband: “It’s so sad, it’s so sad.” The staging lends the scene den microphones, to preserve his presidency for posterity. An dignity and pathos. But the moment was not sad, it was a merited old-fashioned telephone plays such recordings as “Daddy, Do disgrace. No political leaderisan angel. Good men have been bad You Wantto Go Out to Dinner?” a 1973 call from Nixon’s daughter, presidents (cf, Jimmy Carter). But the presidency is the wrong job Julie. Walk a few yards into the Watergate gallery and the taped foran amoral man. 7 The Americas The Economist January 21st 2017 25

Also in this section 26 Last Tango in Buenos Aires 28 The end of wet foot, dry foot Bello is away

El Salvador omy for now. Arena’s party song proposes a different goal. “El Salvador will be the Unhappy anniversary tomb where the reds end up,” it prophe- sies. The clash “doesn’t allow for a vision of the country”, says Luis Mario Rodríguez of Fusades, a pro-business think-tank. About the only thing the parties agree on is SAN SALVADOR that the real point of wielding power is to enjoy the spoils. The result is what Salva- The country needs a new peace accord doreans call a “patrimonial state”, which L SALVADOR was reborn 25 years ago. war has continued. The only difference is justifies itselfthrough patronage and stifles EOn January 16th 1992 the government that now it’s between the gangs and the any institution that stands up to it. signed a peace accord with left-wing guer- government.” El Salvador is the most viol- El Salvador’s leaders now finally realise rillas at Chapultepec castle in Mexico City, ent country in the Americas, with a mur- that a new peace agreement of sorts is ending a 12-year civil war in which 75,000 der rate of 80 per 100,000 people—more needed. Mr Sánchez Cerén used the com- people died. The agreement, followed by a than 15 timesthat ofthe United States. memoration ceremony to present a special truth commission that laid bare the war’s That is not the only disappointment. envoy from the UN, Benito Andión, to “fa- atrocities and by an amnesty, was a model Afteran initial spurt, economic growth has cilitate dialogue”. Just how Mr Andión, a for reconciliation in other countries. It un- dropped to a torpid 2% or so, less than half Mexican diplomat, will interpret that is un- derpins El Salvador’s political order today. the Central American average (see chart on clear. Some suggest that his job will be to Stirring as that achievement was, the next page). Corruption isrife. Two post-war help broker a peace between the govern- festivities held to commemorate it this presidents face charges; another one died ment and the two main gangs, Barrio 18 weekfell flat. The convention centre in San last January before he could be tried. Many and Mara Salvatrucha. But the UN state- Salvador’s Zona Rosa, not far from where Salvadoreans have given up on their coun- ment on Mr Andión’s appointment says guerrillas invaded the capital in 1989, try. More than 40% want to leave within hisjob isto “addressthe keychallenges” af- prompting the first peace talks, was empti- the next year, says a new poll by the Cen- fecting El Salvador, which sounds like a er than normal forbig events. A small exhi- tral American University. That is the high- broader brief. Just as in 1992, “we need dia- bition, displaying military uniforms, guer- est level since the university started asking logue that matches today’s historical mo- rillas’ weapons and quotes about peace the question a decade ago. ment,” declared Mr Sánchez Cerén. from the likes of Confucius and John Len- A big factor behind these let-downs is non, lined the walkway to the stage. The the flaws ofthe main political parties, heirs Budget brinkmanship crowd, clad in white, seemed more inter- to the combatantsofthe civil war. Since the Gridlock has brought El Salvador to the ested in free pupusas (bean-and-cheese peace accord, the right-wing Nationalist brink of economic catastrophe. After years filled tortillas) than in the speeches. The Republican Alliance (Arena) and the leftist of slow growth and overspending, in part event ended with a confetti drop, listless Farabundo Martí National Liberation to prop up a state pension scheme, the cen- applause and a return to the food queues. Front (FMLN) have had turns in power. tral government nearly ran out of cash late The mood was downbeat because El (The current president, Salvador Sánchez last year. Blocked from long-term borrow- Salvador’s 6m people have little to cele- Cerén, a former guerrilla commander, being by the opposition, which has more brate. The dominant feeling these days is longs to the FMLN.) They renounced war, seats in congress, it stopped making “fear, not peace”, says Alejandro Marro- but failed to learn statesmanship. monthly payments to municipalities. quín, a member of a breakdancing group The antagonism between them is ab- Health workers went on strike after the that was invited to the commemoration. normal for rivals in a democratic system. government reneged on wage agreements. Having fled gang violence in greater San The FMLN still yearnsforsocialism, though It came close to a default on its debt. Salvador fouryears ago, he thinks that “the it has reconciled itself to the market econ- A deal in November between the gov-1 26 The Americas The Economist January 21st 2017

2 ernment and Arena averted disaster by al- of GDP, by one estimate. Gangs extort vast lowing the government to issue $550m of Moving too slowly sums from businesses, equivalent to 3% of new debt in exchange foragreeing to a “fis- GDP. Recently, the threat of gang violence Salvadoreans apprehended by US border cal-responsibility law”, which would cap authorities, years ending September, ’000 has emptied entire villages. In September one local government in western El Salva- borrowing and spending. But that is just a 80 stopgap. The opposition, doubting that the 60 dor set up a camp on a basketball court for government will keep its fiscal promises, 40 dozensoffamiliesthathad been ordered to has refused to approve the budget for 2017. 20 leave bygangs, the firstsettlementfor inter- Anothercrisis looms. “Weare playingwith 0 nally displaced people since the civil war. fire,” says Alex Segovia, an economist. 2002 04 06 08 10 12 14 16 The FMLN government, which tries to The quarrel is partly about how to re- El Salvador, GDP, % change on a year earlier seem as tough on criminals as is the oppo- duce the budget deficit, which was an esti- 10 sition, claims that its recent crackdown is mated 4% of GDP last year. The FMLN working. Security forces have killed 900 wants to liftthe government’s low revenue 5 gangmembersoverthe pasttwo years. The + by raising income tax and levying one on 0 government has largely cut off mobile- property. Arena pushes mainly for spend- – phone contact between imprisoned gang- ing cuts. The parties have yet to agree on a 5 sters and their confederates on the outside, 1992 95 2000 05 10 16* needed reform ofpensions. A “negotiating who operate the extortion business and Sources: Department of Homeland Security; IMF *Estimate table” set up last April has so far failed to carryoutmurders. The numberofmurders come up with a solution. The government dropped by 20% last year to 5,278. has called in the IMF, which may now bro- server in San Salvador. With a trade deficit Mara Salvatrucha and a faction of Bar- ker a resolution to the crisis. of nearly 20% of GDP, El Salvador depends rio 18, perhaps weakened by the govern- A budget deal, if it happens, would un- on remittances from 2m Salvadoreans liv- ment’s offensive, have recently proposed a lock just one of the many manacles on the ingin the United States. Its biggest firms are dialogue with the government and offered economy. El Salvador’s use of the strong consumer-oriented conglomerates that to lay down their arms. Barrio 18 even of- dollar as its currency keeps prices stable mainly live offthe American bounty. fered to give up extortion. The FMLN has so but holds back exports. A lethargic bu- Nothing constrains the economy more farrejected negotiation. reaucracy is another obstacle: shipping than crime, which deters investment and Critics contend that the government’s goods from El Salvadorto the United States drives young workers out of the country. mano dura (iron-fist) policies have wors- is no faster than from Vietnam, says an ob- The cost of violence and insecurity is 16% ened conditions in prisons, which were already appalling. They say that the killing of gangsters by police amounts to state-spon- Argentina sored murder. Such brutality will provoke more violence, believes José Luis Sanz, di- Tango in trouble rector ofEl Faro, a digital newspaper. BUENOS AIRES The accidental attorney-general The flat-footed economy is pulling dancers offthe floor When the state does something right, it is HEN couples tango outdoors in event, a forerunner to the tango that usually in spite of the main parties rather WBuenos Aires, it is usually to cadge mixes Cuban, African and European than because of them. The process of ap- coins from tourists. A recent display, influences. In tango’s heyday, some 70 pointing people to such sensitive jobs as outside the city hall, had a new purpose: years ago, milongas attracted thousands prosecutor and high-court judge is de- to draw attention to the plight ofthe ofdancers. Club Huracán in the city’s signed to ensure that only creatures of the city’s milongas, tango events where the south had seven dance floors. Some cling political parties get them. On occasion, dancers’ only audience is other dancers. to tradition. A man must invite a woman though, less pliant candidates slip through. Perhaps150 milongas take place week- to dance with a cabeceo (nod). Ifshe Such is the case with Douglas Meléndez, ly in dance halls and community centres accepts, the pair will dance anti-clock- attorney-general since 2016, who startled across the capital, either in the afternoons wise to a tanda, or set of three or four Salvadoreans by pursuing corruption or after midnight. “They are the heart of songs. A cortina, a few seconds ofmusic, cases against figures of both parties. One the tango,” says Julio Bassan, president of signals the end ofa set, during which the FMLN ex-president, Mauricio Funes, has the Association ofMilonga Organisers man escorts his partner backto her seat. taken refuge in Nicaragua. Antonio Saca, (AOM). And they are in trouble. Few milongas are so conservative who governed until 2009 as a member of With a weakeconomy and high in- now. Young milongueros prefermodern Arena, is in jail awaiting trial on charges flation cutting into incomes, attendance tango, which mixes the music ofclassical that he helped embezzle $246m of public fell by as much as halflast year, Mr Bas- composers like Carlos Gardel, who died money, roughly 1% of GDP. “To see a presi- san reckons; 17 milongas closed. “When in 1935, with electronic beats. But the dent in handcuffs was like something out there’s so much uncertainty, the first young come less often. In an age of dat- of a film,” says Roberto Burgos of DTJ, an thing that people cut backon is recrea- ing apps, fewer find mates in milongas. NGO that promotes good government. The tion,” says Jimena Salzman, who runs Tango itselfis in no danger. Glitzy constitutional court has also shown an in- the Milonga de las Morochas (“Milonga shows are a daily event in Buenos Aires. dependent streak by challenging political ofthe Dark-Haired Women”). She char- But campaigners say neighbourhood parties’ abuses. Such checks on power are ges an entrance fee of100 pesos ($6.25), milongas are tango’s spiritual home. On El Salvador’sbesthope forcleaningup gov- the cost ofa cinema ticket. That puts December 7th the city council passed a ernment and modernising politics. some people off. “I love to dance, but I “milonga promotion law”. It sets up a But the ruling party has responded to need to eat,” says Augustín Rodrigo, a registry and offers tax exemptions and defiance with threats and abuse. Demon- teacher, who has reduced his daily tango- 9m pesos a year offinancial aid from the strators encouraged by the FMLN have ing to twice a week. budget. Like it or not, taxpayers will help been issuingdeath threats against constitu- A milonga is a dance as well as an keep milongas alive. tional judges, says Sidney Blanco, who sits on the court. 1 The world belongs to people with something to say.

We’ve all had our fill of politicians who waffle their way around the important issues and say nothing. Which is why, like them or hate them, people with guts get heard. They make the twitter timeline, the Brexit referendum and become the next President of the United States. And, whether they’re brands or businesses, the same is also true. Whether you want to reach government, investors, lobbyists or journalists, you need to have the pluck to say something clearly, even if it is going to put a few celebrity noses out of joint. At Thoburns we go beyond PR and advertising and look at different ways to say interesting things; our approach is to bring a provocative mind, and a different perspective and create more than a little fun on the way. Why not email Pepper Sells at [email protected] and see if we can help your organization find its voice.

Inﬂuence Creativity Relationships

thoburns.com 28 The Americas The Economist January 21st 2017

2 Independent-minded officials survive other countries in Central America’s political persecution will still have a right in office thanks largely to backingfrom out- “northern triangle”, Guatemala and Hon- to asylum. Others can apply forthe 20,000 side powers such as the United States. Pho- duras, with nearly $750m a year. Authori- migrant visas available to the country’s tos of Mr Meléndez in the company of for- sation to spend that money in El Salvador citizens each year. eign ambassadors send the message that probably would have been withheld had American conservatives have slam- he is not alone, notes Mr Burgos. American the government shut Mr Meléndez down. med Mr Obama’s wet foot, dry foot rever- support forthe attorney-general is part ofa Salvadoreans expect that assistance to sal, and his simultaneous decision to stop broader programme to improve govern- continue under the Trump presidency. Its giving Cuban doctors who defect from a ance, investment conditions and law en- aim, after all, is to slow down immigration. third country fast-track entry to the United forcement in El Salvador, to weaken the That is encouraging. But something is States, as his final betrayal of the Cuban lure of emigration to the United States. El wrong when outsiders show more of the people. The regime has become more re- Salvadoris a beneficiary ofthe Alliance for political will needed to reform El Salvador pressive since he unfroze relations, they Prosperity, which provides it and the two than do the country’s own politicians. 7 maintain. Arrests of dissidents, for example, have increased. Defenders of Mr Obama’s thaw point Cuban migrants out that the government now uses short- term detention rather than long jail sen- Special no more tences to discourage its opponents. The number of political prisoners has fallen sharply. Although Mr Trump has complained that the United States gets “nothing” from its new relationship with Cuba, HAVANA AND MEXICO CITY it has led to co-operation in such areas as drug-trafficking and cyber-crime. The end ofwet foot, dry foot In Havana, the reaction to Mr Obama’s MONG a group of young men gathered dollars for tickets and in bribes and fees to gambit is mixed. Cuba’s government, Ain a tin-roofed telephone-repair shop people-smugglers to reach the United which saw the wet foot, dry foot policy as in Havana, the topic of conversation is States’ southern border. One popularroute an insult and a cause of a damaging brain how to leave Cuba. The easiest way, they started with a flight to Ecuador, followed drain, is pleased. Some ordinary folk think now reckon, is to marry a European. That is by a perilous land journey through Central the change is justified. Wet foot, dry foot because on January12th, in one of his final America. Some Cubans still venture into was just “another way to implement the acts as president, BarackObama ended the leaky boats to cross the Florida Strait. blockade”, said a well-dressed woman 22-year-old “wet foot, dry foot” policy, Mr Obama’s abrupt decision to end the who would not give her name. Barbara Iz- which allowed Cubans who land on wet foot, dry foot policy leaves some—no quierdo, a housewife whose brother went American soil to stay in the country; those one is sure how many—stranded en route to the United States 15 years ago, admits caught at sea were sent home. That shuts to the United States. More than 500 are in that most Cubans leave for financial rea- off the main escape route for Cubans in southern Mexico, waiting for documenta- sons, not political ones. search ofa better life. tion from the Mexican government that But many Cubans, living on monthly Mr Obama’s decision looks like an at- would allow them to journey to the Amer- incomes of $50-200, are crestfallen. “We tempt to protect one of his few foreign- ican border. They will now be treated just don’t live, we survive,” says a young man policy successes: his agreement with like others clamouring for admission, who works in property. He had hoped to Cuba’s president, Raúl Castro, in Decem- though the United States says it will try to leave and then to return to “build some- ber2014 to restore diplomaticrelations and give them humanitarian assistance. thingformyself”. He mustnowwaitforthe loosen an economic embargo imposed on Nearly half a million people were government to allow greater economic the island by the United States in 1960. Do- caught tryingto enterthe United States ille- and political freedom. The death last No- nald Trump, who will become the Ameri- gally in fiscal 2015 (down from 1.8m in vember of Fidel Castro, the leader of the can president on January 20th, has said 2000). They face detention until they are Cuban revolution, and Raúl Castro’s plan contradictory things about the rapproche- sent back. About a third were from Central to step down as president next year, may ment with Cuba, but his more recent com- America’s “northern triangle”, where gov- help bring change. Ambitious Cubans, de- ments have been negative. Some members ernments are less repressive than in Cuba nied the prospect ofescaping to the United of his transition team are fierce opponents but violence is farworse. Cubans who face States, may now push harder for that. 7 ofthe normalisation policy. Mr Trump’s administration may thus try to undo the rapprochement with Cuba, which includes freer travel and better tele- coms links with the island. The wet foot, dry foot decision makes that harder. Mr Trump does not like immigration; he will find it awkward to reverse a decision that makes it more difficult. It will also be tricky to justify reopening automatic asylum for Cubans but not for citizens of countries that are even more repressive. Fearing that the United States would shut its Cubans-only entrance, many Cu- bans rushed to its borders. In fiscal year 2016, which ended in September, 56,000 arrived, more than double the number of two years before. Many paid thousands of Floating to Florida is now futile Asia The Economist January 21st 2017 29

Also in this section 30 Thailand’s rotten schools 31 Mumbai’s hawkers under attack 31 An expenses scandal in Australia 32 Roads to nowhere in Pakistan

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

Chinese influence in South-East Asia infrastructure and hydropower. Others hold at least 369,000 hectares of land con- The giant’s client cessions on which they grow sugar, rubber, paper and other crops. The government is often willing to bend the rules forChinese firms. One is developing a luxury resort inside a national PHNOM PENH park on the edges of Sihanoukville, the country’s main port. Another has won de- Why Cambodia has embraced China, and what that means forthe region velopment rights over some 20% of Cam- AMBODIAisa thin piece ofham be- the Khmers Rouges, who displaced Lon bodia’s coastline. Human-rights groups al- “C tween two fat pieces ofbread,” says Nol in 1975 and then murdered around 2m lege that fishermen who had lived in the a former Cambodian minister, as he stirs a of their countrymen. China continued to area forgenerations were summarily evict- glass of iced coffee. To Cambodia’s west is support the Khmers Rouges even after the ed, taken inland and told that they were Thailand, which has more than four times Vietnamese invasion pushed them out. now farmers. as many people; the two countries have a But once Mr Hun Sen, a defector from the Each side gets somethingout ofthe rela- dormant but unsettled border dispute. To KhmersRougessheltered byVietnam, fully tionship. For Cambodia, the most obvious the eastisVietnam, nearlysixtimes aspop- consolidated powerin the 1990s, China be- benefit is economic: it is poor and aid- ulous, which invaded Cambodia in 1979 gan assiduously courting him. dependent; Chinese money lets it buy and and occupied it forten years. So Cambodia China provides military aid: uniforms, build things it could not otherwise afford. has done what small countries always do: vehicles, loans to buy helicopters and a Phay Siphan, a government spokesman, it has found a protector. training facility in southern Cambodia. Be- said last year: “Without Chinese aid, we go As long ago as 2006 Hun Sen, Cambo- tween 2011 and 2015 Chinese firms fun- nowhere.” dia’s prime minister, declared China his nelled nearly $5bn in loans and invest- But there are also two strategic benefits. country’s “most trustworthy friend”. Chi- ment to Cambodia, accounting for around First, Cambodia uses China as a counter- na’s past three presidents have all visited 70% of the total industrial investment in weight to Vietnam. Among ordinary Cam- Cambodia, offering lavish aid and invest- the country. Chinese firms run garment bodians, anti-Vietnamese sentiment runs ment. The current one, Xi Jinping, declared and food-processing factories and are also deep. Many bitterly recall the Vietnamese Mr Hun Sen “an ironclad friend”. China is heavily involved in construction, mining, occupation and some demand the return Cambodia’s biggest source of foreign di- of “Kampuchea Krom”—the delta of the rect investment by far: in 2015 it contribut- Mekong river, which today is part of Viet- ed a greater share to the total than all other Middle blingdom nam, but is home to many ethnic Cambo- countries combined (see chart). Cambodia Cambodia, foreign direct investment dians and was for centuries part of the has continued to accept Chinese largesse Inflows, $bn Khmer Empire. Since Vietnam harboured with glee, even as most ofthe rest of South- Mr Hun Sen, the opposition depicts him as 1.8 East Asia grows ever warier of its giant a Vietnamese puppet. Closeness to China neighbour to the north (Laos, an even thin- 1.5 helps to defuse such claims. ner slice of ham just north of Cambodia, is 1.2 Cambodia also uses China as a hedge an exception). The ramifications of the From China against the West. Chinese money comes strengthening relationship extend well be- 0.9 with no stringsattached, unlike most West- yond Cambodia’s borders. 0.6 ern donations, which are often linked to China has long taken an interest in From other the government’s conduct. When Mr Hun 0.3 Cambodia. When America backed Lon countries Sen mounted a putsch against his coalition Nol, a strongman who seized power in 0 partners in the 1990s, Western donors sus- 1970, China supported his opponents: No- 2011 12 13 14 15 pended aid. China boosted it. Westerners rodom Sihanouk, the deposed king; and Source: National statistics may threaten to cut funding again if, as is 1 30 Asia The Economist January 21st 2017

2 likely, the government rigs elections next years Cambodia has held joint military expat of the World Bank, is that Thailand year (this week Mr Hun Sen again sued ercises with America, but this week it an- spends too much money propping up Sam Rainsy, the exiled leader of the main nounced that it would not do so this year small schools, where teaching is poorest. opposition party, for defamation, one of or next. Cambodia and China, meanwhile, Almost half of Thai schools have fewer many steps seemingly intended to neuter staged an eight-day joint exercise in No- than 120 students, and most of those have his opponents). Chinese money will make vember. The two countries also held their less than one teacher per class. Opening it much easier for Mr Hun Sen to shrug off first joint naval exercises last year. lots of village schools once helped Thai- Western protests. ASEAN’s long-standing complaint, that land achieve impressive attendance rates, As for China, it gets a proxy within the Chinese influence on Cambodia hinders but road-building and other improve- ten-country Association of South-East regional unity, is growing moot: over the ments in infrastructure mean most schools Asian Nations (ASEAN). Cambodia has re- South China Sea, at least, that unity ap- are now within 20 minutes of another. peatedly blocked ASEAN from making pears to have disintegrated anyway. The Over the next ten years falling birth rates statements that criticise China’s expansive Philippines, which took China to an inter- will reduce school rolls by more than 1m, territorial claims in the South China Sea, national tribunal over its maritime claims, making it ever more difficult for tiny insti- even though they conflict with those of has reversed course. Its new president, tutions to provide adequate instruction at several other ASEAN members. Last year, Rodrigo Duterte, expresses contempt for a reasonable cost. less than a weekafter Cambodia endorsed America and affection for China. Vietnam, Prayuth Chan-ocha, Thailand’s prime China’s stance that competing maritime China’s other main adversary in the sea, minister and the leader of its junta, says claims should be solved bilaterally, China recently pledged to resolve its maritime school reform is urgently needed. But gave Cambodia an aid package worth dispute bilaterally. Nobody yet knows some of his goals are aimed more at boost- around $600m. (Mr Hun Sen insists the what America’s policy on the South China ing his and the monarchy’s prestige than two were not related.) Sea will be under Donald Trump, but in- making children smarter. Soon after taking China also seems to be eroding Ameri- creasingly it looks as if Cambodia has power in a coup in 2014 Mr Prayuth grum- ca’s clout in the region. For the past eight picked the winning side. 7 bled that few Thai children could cite the achievements of long-dead kings. He ordered schools to display a list he drew up of12 “Thai” values, including obedience to Education in Thailand elders, “correctly” understanding democ- Not rocket science racy and loyalty to the monarch. Insiders say that some officials are working on better approaches. In June the government restarted a long-stalled plan to merge small schools; authorities say they hope to subsume more than 10,000 schools over four years. Analysts worry Tosoothe Thailand’s bitterpolitics, first fixits rotten schools that the junta’s effort to re-centralise gov- VERYONE knows that nurturing brain- more than a quarter of the budget. Rote ernment will deprive good schools of in- Eboxes is good for an economy. In Thai- learning is common. There is a shortage of dependence. But they also hope it will land, school reformershave an extra incen- maths and science teachers, but a surfeit of eventually allow reformers to force an os- tive: to narrow differences between rich physical-education instructors. Many sified education system to adopt the best people in cities and their poorer rural cous- head teachers lack the authority to hire or of international practice. There is talk of ins, which have led to a decade of political fire their own staff. Classrooms are stern education reform in a vague 20-year plan tension and occasional eruptions of vio- and bullyingteachers numerous: in one in- which the junta has promised to bequeath lence. For years shoddy teaching has fa- cident that caused uproar in the media last to the nation, and which future elected voured urban children whose parents can year, a PE instructor was alleged to have governments will be constitutionally afford to send them to cramming schools strucka schoolgirl in the face with a mug. bound to follow. Better hope that the army or to study abroad. Dismal instruction in A big problem, argues Dilaka Lathapi- sets only its sanest policies in stone. 7 the countryside has made it easier for city slickers from posh colleges to paint their political opponents as pliable bumpkins. The dangerous social divide is all the more reason to worry about Thailand’s poor rating in an educational league table published in December. Thailand limped into the bottom quarter of 70 countries whose pupils participated in the maths, reading and science tests organised under the Programme for International Student Assessment (PISA). Its scores have deterio- rated since a previous assessment in 2012, when researchers found that almost one- third of the country’s 15-year-olds were “functionally illiterate”, including almost halfofthose studying in rural schools. Thailand’s dismal performance is not dramatically out of step with countries of similar incomes. But it is strange given its unusually generous spending on education, which in some years has hoovered up I must not oppose military coups The Economist January 21st 2017 Asia 31

Street vendors in Mumbai Stabbed in the snack

MUMBAI State legislators decide that not all hawkers are created equal GOOD street-food stall is the one place Ain Mumbai where the posh and the poor might rub shoulders, if only for the few seconds it takes to gobble down a savoury snack. You can be sure the vendor himself will have come from the latter cat- egory: hawking, as it is known, rivals taxi- driving as a time-tested route from rural Can I see your licence? povertyto somethinga little lesswretched. But nativist politicians may change that: in for Mumbai’s 150,000-odd hawkers. In permitted. States have been slow to com- the name of helping hawkers, they are try- 2014 the national parliament passed a law ply. The government of Maharashtra, of ing to impose new rules that would bar that required states to formalise the prac- which Mumbai is the capital, had been sit- most ofthem from the trade. tice, for instance by issuing licences and ting on its hands for three years. It only de- Life was supposed to be getting easier designating areas where it was expressly cided to act in the run-up to municipal elections in February. The draft rules, however, include a re- Politics in Australia quirement that would-be hawkers be domiciled in Maharashtra. Under local Going for gold law, domicile comes only after 15 years of SYDNEY residence. Few hawkers are likely to be eligible: most are immigrants from poorer A series ofscandals prompts tougherrules on politicians’ expenses northern states. Even those who have AVING scraped backto power with a has been a cattle farmer, a cookfor sheep been living in the city for decades would Hone-seat majority last year, Malcolm shearers and an official in the Australian have trouble proving their status, since Turnbull always expected “plenty of Taxation Office. Yet she failedto heed the they tend to live in informal dwellings and surprises and challenges in 2017”.He did lessons of“Choppergate”, an expenses so cannot prove an address. not expect them to start so soon. On scandal that rocked the government17 The proposed rule is the work of the January13th the prime minister accepted months ago. Bronwyn Bishop, then Shiv Sena, a party that blends Maharash- the resignation ofSussan Ley,his health speaker ofthe lower house, quit after the trian chauvinism with Hindu nationalism. minister, after claims that she had mis- disclosure that she had spent more than (Its previous triumphs include renaming used taxpayers’ money.As the scandal $5,000 chartering a helicopter to attend a Bombay as Mumbai in 1995, in a bid to erupted, the government was pursuing Liberal fundraising event. Politicians cleanse the city of any vestige of colonial- spending cuts and clamping down on from both sides have charged taxpayers ism.) Elections to the city council are pit- some welfare recipients in a bid to bal- thousands to fly their familieswith them ting it against the Bharatiya Janata Party of ance the budget. That made it all the to events in the farthest corners of the India’s prime minister, Narendra Modi, more embarrassing that Ms Ley had country.Australians have paid forJulie with which it rules both the city and the bought an investment property worth Bishop, the foreign minister, to attend a state in uneasy coalitions. almost A$800,000 ($600,000) in 2015, polo match. Steve Ciobo, the trade min- The proposal may not be legal. Al- while on a government-paid visit to the ister, says taxpayers “expect” to pay for though India is a federal country, states do Gold Coast in Queensland. politicians to go to sporting events. not have the right to barotherIndians from Ms Ley tried to explain the apparent Perhaps. But opaque rules have given settling or working. The national govern- blurring ofpublic and private business politicians leeway in judging how much ment is trying to pull down internal eco- by suggesting, to widespread derision, they can get away with. An inquiry after nomic barriers: it has fought hard to re- that she had bought the flat on impulse. A Choppergate called the laws on parlia- place local levies with a pan-Indian goods string ofrevelations followed: she had mentary expenses a “complex patch- and services tax. charged taxpayers forseveral other Gold work” that was “close to impossible” to Many of Mumbai’s hawkers may not Coast trips; two were to New Year’s Eve understand and administer. In the wake bother with the new system. Only 14,000 parties hosted by a businesswoman who ofthe latest scandal, Mr Turnbullhas of them make use of the existing one, al- had donated money to the ruling Liberal promised to shift responsibility for over- though atleastten timesthatnumber oper- Party; she had chartered planes to fly to seeing MPs’ claims to a new independent ate, according to unions that represent official engagements instead oftaking agency run by auditing experts, a former them. Those who obtain a licence, how- commercial flights at a fraction of the cost judge and a former MP. Politicians will ever, ought to find it easier to stand up to (she is a pilot) and so on. Ms Ley called also have to disclose expenses monthly bribe-demanding cops and bureaucrats. A the furore a “distraction” but has agreed instead oftwice a year. Mr Turnbull politician for the opposition Congress to repay some ofthe money she claimed. reckons the new system’s independence partyclaimsthe currentsystem allows offi- Ms Ley has been one ofthe more and openness will “make a very big cials to squeeze some 3bn rupees ($44m) a talented and colourful members ofMr change”. This year will be all the trickier month from hawkers. If such bounty is in- Turnbull’s cabinet. Born in Nigeria, she forhim ifit does not. deed to be had, expect the new rules to keep hawkers on the fringes oflegality. 7 32 Asia The Economist January 21st 2017

Pakistan’s economy by land to Gwadar, a deep-water port on the Arabian Sea, in the hope of creating a Roads to nowhere lucrative new trade route. New or upgraded roads will stretch the length ofthe country. The Karakoram Highway between the two countries, which was built in the 1960s at vast expense over a high and crumbly ISLAMABAD mountain range, is being upgraded as part of the trade corridor. But it forever needs An obsession with showy infrastructure distracts from deeperproblems patching up and is little used. Sceptics say EARLY 20 years after it opened, Paki- have fallen behind rivals in India and Ban- Xinjiang, China’s westernmost region, is Nstan’s first motorway still has a deso- gladesh. Exports, 60% ofwhich are textiles, still too poor for better transport links to late feel. There is scant traffic along the have been shrinking for years. Much more make much difference to Pakistan’s econ- 375km link between Islamabad and La- needs to be done to create an educated omy. Securing isolated stretches of road hore (pictured). Motorists can drive for workforce. Almost half of all those aged from separatist rebels in Balochistan is also miles without seeing another vehicle, save five to 16 are out of school—25m children. gobbling up large amounts ofcash. perhaps for traffic cops manning speed Health, like education, is woefully under- Lijian Zhao, a Chinese diplomat, says traps. As the two cities are already connect- funded, in part because successive govern- China is all too aware that Pakistan needs ed by the Grand Trunk Road, which is ments shy away from taxing the wealthy. more than just big-ticket infrastructure if it 90km shorter and toll-free, there is simply Only 0.6% of the population pays income isto flourish. Disarmingly, he praises the ef- not much demand fora motorway. tax. As the World Bank puts it, Pakistan’s forts of Britain and other countries to im- Yet this $1.2bn white elephant is one of long-term development depends on “bet- prove Pakistan’s “software”, such as educa- the proudest achievements of Nawaz Sha- ter nutrition, health and education”. tion and the rule of law. “But China’s rif, who was prime minister when it expertise is hardware,” says Mr Zhao. opened in 1997 and is once again running Cement to be It may not concern Mr Sharif unduly if Pakistan. Mr Sharif, who enjoys compari- But Mr Sharif’s government is pinning its the next generation of roads is as deserted sons to Sher Shah Suri, a16th-century ruler hopes on yet more infrastructure to fix the as the last. Civilian governments have of- who renovated the Grand Trunk Road, country’s economic problems, in the form ten struggled to get much done in between never tires of talking about it. He regained of a $46bn investment scheme known as militarycoups, butvotersare impressed by powerin 2013with a campaign which both the China-Pakistan Economic Corridor gleaming new projects, even if they never harked back to his famous road and prom- (CPEC). Much of it is being financed on use them. It’s an approach that has worked ised more infrastructure to come. He even commercial terms, including several pow- forMr Sharif’s brother, Shehbaz, the popu- pledged bullet trains that would enable pier plants. Pakistan undoubtedly needs to lar chief minister of Punjab province. He ous passengers to leave Karachi after dawn relieve a chronic shortage ofelectricity. But has lavished resources on endless se- prayers and arrive in Peshawar, more than critics fear the country will struggle to pay quences ofover- and underpasses to create 1,000km to the north, in time for evening back the debt, especially if foreign-ex- “signal-free” traffic corridors in Lahore, the worship. change earnings from exports continue to provincial capital, that are of most benefit It is an article of faith for Mr Sharif and dwindle. At the very least, the government to the rich minority who can afford cars. his party, the Pakistan Muslim League Na- will need to continue chasing deadbeat There are limits, however. Khawaja waz (PML-N), that investment in infrastruc- customers to pay their bills and cutting ex- Saad Rafique, the railways minister, recent- ture is a foolproof way of boosting the pensive subsidies—steps that are deeply ly admitted to parliament that the country economy. His government is racing to fin- unpopular. would not be getting a bullet train after all. ish umpteen projects before the next elec- In addition to boosting Pakistan’s pow- “When we asked the Chinese aboutit, they tion, due by mid-2018, including a metro er supply, CPEC is supposed to link China laughed at us,” he said. 7 line in Lahore and a new airport for Islam- abad. The likelihood isthatthe newairport (which has been plagued with problems, includingrunwaysthathave been built too close together) will be as underused as most of the country’s other airports, many ofwhich are modern and spacious. Pakistan’s infrastructure is underused because the economic boom it was meant to trigger has never arrived. Over the past three years the government has successful- ly staved off a balance-of-payments crisis, achieving some measure of macroeco- nomic stability. It has trimmed the budget deficit, partly by broadening the tax take and partly by cutting energy subsidies. That, along with lower oil prices, has nar- rowed Pakistan’s trade deficit and allowed it to begin rebuilding its foreign-exchange reserves. The stockmarket has risen by 50% since the end of2015. But terrorism and insurgency have put off investors, both foreign and domestic. The country is also held back by inefficient and often cartelised industries, which Jam tomorrow? China The Economist January 21st 2017 33

Also in this section 34 China’s new aircraft-carrier 36 Banyan: The factious politics of Chinese museums

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

China and the world he is in charge of China’s economy, as he clearly is ofevery other main portfolio). The new Davos man Mr Xi would have relished the occasion even had the predictions of many in the global elite a year ago proved accurate— that Britain would vote to stay in the EU BEIJING AND DAVOS and that Mr Trump would not win. The forum is one where embarrassing questions Xi Jinping tries to portray his country as a rockofstabilityin a troubled world. His about China’s politics are seldom raised timing, at least, is faultless openly. Mr Xi could talk airily of China’s ELEGATES at the World Economic Fo- was the best of times, it was the worst of openness, with little fear of being asked Drum in the Swiss resort of Davos often times,” he said. Many foreign businesses why he is clamping down on dissent and treat politicians as rock stars. But the fawn- complain about what they regard as a rise tightening controls on the internet (last ing reception given to China’s leader, Xi of protectionism in China, too—but no one year this newspaper’s website joined the Jinping, on January17th was extraordinary. could accuse Mr Xi of being out of tune many foreign ones that are blocked). On He was the first Chinese president to at- with the Davos mood. China, Mr Xi as- January 14th China’s most senior judge tend the annual gathering of the world’s sured delegates, “will keep its door wide condemned judicial independence as a business and political elite. Even an over- open and not close it”. “false Western ideal”. flow room was packed when he delivered, The Chinese president also portrayed Previously, the highest-rankingChinese in his usual dour manner, a speech laced hiscountryasa staunch defenderofthe en- attendees had been prime ministers. In with literary references—rendered through vironment. He said that sticking to the Par- 2016 the vice-president, Li Yuanchao, who bulky headsets into equally monotone is agreement on climate change, which ranks lower than the prime minister in the translations. Mr Xi said little that was new, came into effect last year, was “a responsi- party hierarchy, led the team. So why has but the audience lapped it up anyway. bility we must assume for future genera- Mr Xi waited until his fifth year as presi- Here, at a time of global uncertainty and tions”. These, too, were welcome words to dent to turn up? He may well have winced anxiety for capitalists, was the world’s many listening: Mr Trump’sthreat to reject at the thought of doing so last year, when most powerful communist presenting the pact will make China’s commitment to discussions were dominated by questions himself as a champion of globalisation it all the more crucial. about China’s management of its slowing and open markets. economy in the wake of a stockmarket Mr Xi (pictured, next to a panda ice- The week of whose inauguration? crash and a sudden devaluation of the sculpture) did not mention Donald Trump The timing of Mr Xi’s trip was fortuitous— yuan. Many analysts still worry about Chi- by name, nor even America, but his mes- according to the Financial Times his aides na’s economy (not least its growing debt), sage was clear. “No one will emerge as a were working on it before Britain voted to but the West’s problems have loomed larg- winner in a trade war,” he said, in a swipe leave the European Union and well before er over the Swiss Alps this week. at Mr Trump who has threatened, among Mr Trump’s election victory. But he must And for all his uplifting talk, Mr Xi other mercantilist acts, to slap heavy tariffs have relished the points that those events shows no signs of wanting to take over as on Chinese goods. Mr Xi likened protec- enabled him to score at Davos. Mr Xi faces the world’s chief troubleshooter, even if tionism to “locking oneself in a dark political battles of his own as he prepares MrTrump shuns that role. MrXi is preoccu- room”, a phrase that delegates repeated fora five-yearlyCommunistPartycongress pied with managingaffairsathome and as- with delight. His words seemed comfort- in the autumn and a reshuffle right after it. serting control in seas nearby (see next ing to many ofthem after a year ofpolitical He wants to install more of his allies in key story). “Nothing is perfect in the world,” surprises, not least in America and Britain. positions. Standing tall on the world stage the new Davos man sagely informed the Mr Xi quoted from Dickens to describe a could help (and attending Davos will have delegates. But he is unlikely to take the lead “world of contradictions”, as he put it. “It reinforced the point to his colleagues that in making the world a better place. 7 34 China The Economist January 21st 2017

The navy The US Office of Naval Intelligence has dismissed the Liaoning’s ability to project Deep blue ambition naval power over a long distance. But the ship does have military value. It can provide air-protection for China’s fleet, and would be a major asset in disaster-relief or evacuation missions. Peter Singer of the New America Foundation, a think-tank, says that a Liaoning-led battle group would China’s aircraft-carrierprogramme says a lot about its ambitions also seem pretty formidable to neighbours, such as Vietnam or the Philippines, OR Admiral WuShengli, the command- Chinese fleet headquarters er of China’s navy since 2006, it must should China feel like bullying them. F RUSSIA Major American navy bases have been a sweet swansong to mark his Source: IISS But the main value ofthe Liaoning is the imminent retirement. In November China 1,000 km experience that it is giving the navy in the MONGOLIA JAPAN announced that its first and only aircraft- Yokosuka complex choreography of carrier opera- carrier, the Liaoning, was combat ready.On Dalian N. KOREA tions. Those skills will help in the eventual PACIFIC deployment of indigenously designed car- December 24th its navy duly dispatched Beijing Chinhae OCEAN an impressive-looking carrier battle-group Qingdao S. KOREA Sasebo riers. The Chinese have been training with with three escortingdestroyers, a couple of Shanghai East catapult-launch systems on land. This has China frigates, a corvette and a refuelling ship. It Ningbo fuelledspeculation thatthe carrierthought CHINA Sea Okinawa sailed from the northern port of Qingdao Miyako to be under construction in Shanghai will Taiwan Strait down through the Miyako Strait, past Tai- Strait be a genuine flat-top. It is possible that the wan and into the South China Sea. TAIWAN ship will also be nuclear-powered, which Zhanjiang Guam Three weeks later the Liaoning (pic- South could give it the range and speed ofAmeri- China PHILIPPINES tured) wasbackin porthavingsailed home LAOS can carriers. via the Taiwan Strait, thus completing a Sea It is not clear how many carriers China THAI- VIETNAM LAND plans to build. As a rule of thumb, you loop around the island. The point was not CAM- 2nd Island 1st Island Chain lost on the Taiwanese, who scrambled BODIA Chain need three to be certain of having one at fighter jets and sent naval ships to monitor sea all the time. MrErickson saysthat some the group’s progress. The Chinese ships analysts in China have been suggesting a showed offtheirfirepower,with Shenyang fleet as large as six. Mr Singer thinks it is J-15 fighters staging a series of take-off and walk, run” approach to developing a carri- possible that China’s carriers will one day landing drills. That everything went er capability,recognising the difficulties in- match the capability ofAmerican ones. Mr smoothly was evidence of the navy’s volved. Carrier operations are inherently Erickson says that while China can copy a transformation under Admiral Wu (his ca- dangerous—America lost 8,500 aircrew in lot, without combat experience and “tribal reer perhaps destined by his forename, the 40 years to 1988 on its way to reaching knowledge” passed from one crew to an- which means victory). He had meticulous- what Mr Erickson calls its current “gold other, it will find it hard to attain that level. ly prepared for this moment, which came standard” ofcarrier expertise. China, ironically, has done more than just four years after the carrier, acquired as Commissioning the Liaoning was a any other country to sow doubts about a partially built hulk from Ukraine in 1998, good way to start. Much modified and fet- whether carriers are worth all the effort formally entered naval service. tled by the Chinese, the ship is based on and expense, by developing shore-based China’sdeploymentofan aircraft-carri- the Soviet Kuznetsov-class design. It is big, anti-ship ballistic missiles, such as the er is not a military game-changer. But it is a with a displacement of about 60,000 tons, DF-21D and DF-26, known as “carrier kill- conspicuous symbol of the country’s am- but nowhere near the size of America’s su- ers”. Submarines are less vulnerable, but bitions as a maritime and global power. per-carriers such as the USS Ronald Reagan, highly visible ships bristlingwith weapon- The Liaoning has been a crucial building which is based in Japan. That Nimitz-class ry are still badges ofpride foraspiring great block for the navy in its evolution from a ship displaces around100,000 tons. powerslike China. Asin America, the view coastal defence force into what is now a In other ways, too, the Liaoning pales in in China that carriers and status go togeth- modern navy that China uses to assert its comparison with America’s 10 Nimitz- er will be hard to change. 7 (contested) maritime claims in the East and class carriers. They can carry more than 55 South China Seas. Within the next 25 years fixed-wing aircraft. The Liaoning can only China expects its navy to become a power- handle 24 J-15s (based on the Russian Suk- ful blue-water fleet that can guard China’s hoi SU-33) and a handful of helicopters. sea lanes of communication against any Unlike the American carriers, it lacks a cat- aggressor, push the US Navy beyond the apult to propel aircraft from its deck. In- “second island chain” farout into the Pacif- stead it relies on a “ski-jump” prow to pro- ic (see map) and protect the country’s far- vide extra lift. As a result, the J-15s have to flung commercial interests. carry a lighter load of weapons and fuel. Tothatend, probablyaround 2004, Chi- Heavier, slower airborne early-warning na made up its mind that it must have air- and anti-submarine aircraft cannot take craft-carriers. A second, indigenously de- off from the Liaoning at all. That limits the signed one, based on the Liaoning but with type of missions the ship can perform and the latest radar and space for more aircraft, makes the vessel vulnerable when operat- is nearing completion at the northern port ing beyond the range of shore-based air- of Dalian. Many analysts believe that a craft. The Liaoning also depends on a noto- third such vessel, larger and more com- riously unreliable Soviet-era design for its plex, is under construction in Shanghai. steam turbines, which cuts its range and Andrew Erickson of the US Naval WarCol- speed compared with the nuclear-pow- lege says Admiral Wu adopted a “crawl, ered Nimitz-class carriers. 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Download or stream THEGREATCOURSES.COM/7ECON to your laptop or PC, or use our free apps for iPad, iPhone, Android, Kindle Fire, or Roku. Over 600 1-800-832-2412 courses available at www.TheGreatCourses.com. 36 China The Economist January 21st 2017 Banyan Dangling forbidden pleasures

Why all the fuss about Hong Kong getting a world-class museum? Yet at the same time the Hong Kong administration has called for politics not to be dragged into the debate. The call is absurd. For a start, Ms Lam wants to be Hong Kong’s next chief executive, who will be chosen in March; her museum enthusiasm will surely help to reinforce the Communist Party’s faith in her. More- over, China’s rulers want a museum in Hong Kong precisely to make a political point. As local obstreperousness has grown in recent years, they have lamented that brattish Hong Kongers lack patriotism and appreciation for China’s greatness. The museum is intended to teach them a lesson. Moreover, the Forbidden City has always been about politics and power. The Yongle emperor, orrather thousands offorced la- bourers, built it as an expression of Ming-dynasty might. From it radiated the emperors’ cosmic as well as terrestrial power. That is why, at the height of the Cultural Revolution, Mao Zedong stood before the Forbidden City to call for the destruction of all traits carried over from old, imperial China—though not the palace itself. Zhou Enlai is said to have closed it to save it from rampaging mobs of Red Guards. It was reopened in 1971 when Henry Kissin- ger, Richard Nixon’s national-security adviser, visited Beijing as part of America’s effort to forge ties with the Communist regime. FTHE world’smostpopularmuseum, drawingover15m visitors At a time when Beijing itself was looking miserable and drab, Mr Ia year, suddenly offered a distant city a priceless haul of arte- O’Neill points out, there was no better way to impress on Mr Kis- facts—on permanent loan and absolutely free—you would expect singer a sense ofChina’s power and sophistication. (He has been that city’s residents to jump for joy. Not so, when the city is Hong in awe of China ever since.) The palace still serves this purpose. Kong, and when the Palace Museum, which occupies most of Thousands of tourists gather every morning to watch paramili- Beijing’s vast Forbidden City, is doing the offering. In December tary troops march out ofthe Forbidden City, goose-step across the Hong Kong’s chief secretary, Carrie Lam, announced surprise road and raise the national flag on Tiananmen Square. plans to build a branch of the Palace Museum in a showcase cul- Lastly, remember the rivalry with Taiwan. It, too, has a Palace tural district going up on reclaimed land in Hong Kong’s harbour. Museum—with a far finer display than the one in Beijing and the Many ofthe territory’s residents erupted in anger. word “National” at the beginningofits name. It is filled with hun- The cultural and commercial benefits forHong Kong are unar- dreds of thousands of artefacts, mostly from the Forbidden City, guable, says MarkO’Neill, who has written a bookon the Forbid- that were carried to the island by Chiang Kai-shek and his Kuo- den City’s treasures. The complex was the seat of China’s emper- mintang(KMT) forceswhen theyretreated to Taiwan in 1949. They ors from the 15th century until Pu Yi, the last emperor, resigned in took the best ones, though beauty is sometimes in the eye of the 1912. It houses such an array of imperial Chinese pieces that the beholder: the “Meat-shaped Stone”—a hideous carving in the Palace Museum is able to display less than 1% of the collection at shape of a piece of braised pork—is, perversely, the biggest draw any time. A trove on show in Hong Kong would draw in millions today. For Chiang, the treasures boosted the KMT’s claim to be the of visitors a year. As well as ticket sales, think of all the merchan- sole and rightful rulerofChina. dising possibilities, from catalogues to replicas of jewellery and When ties across the Taiwan Strait improved under the then furniture. Not just the museum but the whole city would profit KMT president, Ma Ying-jeou, who stepped down last year, Bei- from increased visitors. And then there is the intangible aspect: a jing’sPalace Museum lentpiecesto itsTaiwanese counterpart asa boost fora youngcity with a relatively sparse cultural hinterland. mark of goodwill. Since President Tsai Ing-wen took over, China hasbeen farfrostier. HerDemocraticProgressive Party inclinesto- One country, two Hong Kongs wards independence and downplays historical links with China. So greatisthe furore, however, that it may even scupper the plans. Yet even the KMT used Taiwan’s Palace Museum to make a point The problem is that Hong Kong these days is a divided place. On about the island’s distinct identity. A branch of the collection one side are those who favour smooth relations with mainland opened two years ago near Chiayi, a city in southern Taiwan. It China and who would do the bidding of China’s Communist emphasises a history of Taiwan not as an adjunct to China but as masters in Beijing. On the other are Hong Kongers who resent the an island nation steeped in Asian influences. And even as China central government’s growing influence and heavy hand, and has sought to enforce Taiwan’s diplomatic isolation, the treasures who aim zealously to guard Hong Kong’s freedoms. With an eye remain a source of soft power, with Taiwan lending them to the forthe telegenic gesture, pro-democracy politicians staged a prot- world’s top museums—but not to Beijing’s Palace Museum, for est in the subway system in front ofa huge display promoting the fear (implausibly) that China might not return the pieces. museum project. Their leaders said they were not opposed to the As for Hong Kong, China’s leaders will be peeved at the in- idea ofa museum, but to the murky way in which the decision in gratitude of many residents over the museum offer. But Hong favour of it was reached. They also made clear that they associat- Kongers’ refusal to be awed by a supposedly glorious past is hard- ed the Forbidden City mostly with the bloody crackdown on stu- ly surprising. Their problem is an inglorious present, with China dents who in 1989 protested in Tiananmen Square just in front of denying them full democracy. And China’s problem is that it is it. Underpressure, Ms Lam has agreed to a period ofconsultation. still scrabbling fora source ofsoft power with which to appeal. 7 Middle East and Africa The Economist January 21st 2017 37

Also in this section 38 Qat on a streak 39 Mozambique’s default 39 Bahrain cracks down 40 Tunisia’s jihadists come home

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

The African Union ulators when they told her that human trials would be unethical. However, as Ex factor home-affairs minister, she was credited with making her ministry less corrupt and inept. So many thought she would get things done at the AU. For the most part, JOHANNESBURG they were disappointed. “Her heart isn’t in it,” says one observer. “Someone who was Nkosazana Dlamini-Zuma heads home to South Africa aftera disappointing spell more invested might have done more.” running the African Union Her flagship policy, known as Agenda LTHOUGH a jolly spot forsurfand sun, second consecutive summit, representa- 2063, isa mishmash ofproposals. Some are ADurban is hardly a centre ofAfrican di- tives of civil society will be barred; some unambitious; others, implausible. Within plomacy.So it was a surprise when Nkosa- AU leaders apparently don’t like scrutiny. 50 years, the document declares, Africans zana Dlamini-Zuma, the outgoing head of As the first woman to head the AU’s ex- will grow more, earn more and eat more. the African Union (AU), chose to deliver ecutive arm, Ms Dlamini-Zuma came into (This is a safe bet, but in the unlikely event the first-ever “State of the Continent” the role in 2012 buoyed by high hopes and that it does not come to pass, Ms Dlamini- speech there last month instead of at the promises to reform a moribund institu- Zuma will not be around to take the AU’s grand headquarters in Addis Ababa. tion. A medical doctor and veteran of the blame.) A few paragraphs later it promises Ms Dlamini-Zuma’s speech focused on anti-apartheid struggle, she had served as African passports and visa-free travel for high-minded plans for education and agri- a cabinet minister under four South Afri- all Africans by 2018. Governments will culture. She acknowledged “pockets of can presidents, including Nelson Mandela. have to hurry to meet this goal. So far, only problems” in war-ravaged Burundi, Libya, Her record in government was contro- presidentsand officialscan getpan-African Somalia and South Sudan, but only in versial: as health minister she promoted passports. They are so rare that even Ms passing. Journalists fought to stay awake. the use of a toxic industrial solvent as a Dlamini-Zuma struggles to convince bor- The thin crowd had to be cajoled into ap- miracle cure forAIDS, and then purged reg- der guards that hers is real. The document plause. South African cabinet ministers also aims to end all wars in Africa by 2020. due to attend sent lackeys instead. Back in How, it does not say. Addis, the event fed the widely held view Itisbyno meansall MsDlamini-Zuma’s Western AU that Ms Dlamini-Zuma spent her term at Sahara fault that the is so ineffective. It is a club the AU with one foot in South Africa, LIBYA that welcomes autocrats and democrats where she is jockeying to succeed her ex- Darfur alike. The only leaders it ostracises are SENEGAL MALI SOMALIA husband, Jacob Zuma, as president in 2019. CHAD SUDAN those who seize powerin a coup orwho ig- Abyei Addis Ms Dlamini-Zuma’s four-year term as THE Ababa nore the results ofan election too blatantly, GAMBIA NIGERIA SOUTH head of the AU’s executive arm should CAR ETHIOPIA as recently happened in Gambia. Those LIBERIA SUDAN have ended six months ago but was ex- KENYA who merely rig the polls are welcomed. Mogadishu IVORY CONGO AU tended when its members could not agree COAST The ’s current chairman, a ceremonial on a successor. They will gather again from BURUNDI but symbolically important figure chosen January 22nd and vote for her replace- by the body’s assembly, is Idriss Déby, the ment. Among the contenders are a veteran Major peacekeeping oil-fuelled strongman of Chad. The previ- missions, 2017 ZIMBABWE diplomat from Senegal and the foreign ous one was Robert Mugabe, who has mis- African Union Johannesburg ministers of Kenya and Chad. The selec- United Nations ruled Zimbabwe since 1980. SOUTH tion process is less about the candidate’s Durban Yet even given these constraints, Ms AU and UN AFRICA talents than about governments and re- Sources: United Nations; Dlamini-Zuma has been a let-down. She AMISOM gional blocs vying for influence. For the has campaigned against sex discrimina-1 38 Middle East and Africa The Economist January 21st 2017

2 tion, violence against women and for an Farming in Ethiopia and Kenya chewing on street corners or in university end to child marriages. Yet forall her rheto- libraries have become a ubiquitous feature ric, the AU has failed to grapple seriously Qatnip of Ethiopian life. For many, its spread is a with the crisis in South Sudan, where symbol of national decline. “It is getting women and girls are gang-raped by sol- worse bythe day,” says Fitsum Zeab, a busi- diers. She seldom visits countries riven by nessmen in Addis Ababa. conflict; for instance, she has yet to visit So- CHUKO AND MAUA Much the same is true in neighbouring malia. When put to the test the AU has re- Kenya, the region’s second-largest qat pro- A booming green business that may peatedly failed to deploy peacekeepers to ducer. Here, too, demand is growing, turn to bust crisis zones. The notable exceptions are thanks to a large diaspora of Somalis (the Darfur, where it was the first outfit to send HIS is qat,” explains Teklu Kaimo, plant’s long-standing international mis- peacekeepers, and Somalia, where an AU “Tgesturing to the wooded field be- sionaries) and better roads that allow force has helped to push jihadists from the hind him. He started growingit in1976, and farmers to get perishable qat to market capital. A crisis in Burundi offered a chance over the years its soft, green leaves have while it is still fresh. And economic impor- for the AU to show its mettle. President brought him a measure of prosperity. He tance is translating into political heft: last Pierre Nkurunziza’s decision to seek an il- has a modest plot of land, 11 children and year Kenya declared it an officially sanc- licit third term ignited mass protests fol- money to pay their way through school. tioned cash crop. lowed by a brutal, ethnically charged A short walk down the hill, the central But the plight of Maua, a small town crackdown. The AU said it would send marketplace of this part of southern Ethio- considered the Kenyan trade’s epicentre, peacekeepers to protect civilians. But pia comes alive with farmers, merchants gives pause for thought. Britain’s decision when Mr Nkurunziza objected, it decided and salesmen as the sun sets. Young men in 2014 to ban the substance (against the not to. A modest plan to send 100 observ- sprint down streets with bundles of fresh advice ofits drugs advisory council, which ers is still on the starting blocks. The AU qatleaveson theirshoulders, astraders call thought it harmless) slammed the qat also promised, in July 2016, to send a force out prices and haul the bags aboard lorries. economy. In 2013, before the prohibition, to South Sudan. It is nowhere to be seen. They are bound for Addis Ababa, the capi- Britain imported some £15m-worth ($25m) The AU struggles to persuade member tal, where the following morning they will worth of the stuff. Prices have since fallen states to bankroll it. Some 70% ofits budget be sold to qat-chewersin the city,or packed by half and unemployment has risen comes from non-African donors such as onto planes bound for neighbouring Dji- sharply. “Everyone is feeling the pinch the European Union. Ms Dlamini-Zuma bouti and Somaliland. now,” says Lenana Mbiti, a formertrader. tried to reduce the AU’s reliance on the Ethiopia’s trade in qat, a mild stimulant That gives pause to Ethiopian farmers West, appointing Donald Kaberuka, a for- native to this part of Africa, is booming. too. Although they have been less affected mer head of the African Development Where once cultivation and consumption by bans in Europe because they sell most Bank, to find new sources ofcash. His plan, were restricted to the Muslim lowlands to- of their crop close to home, they fret that to finance the organisation through a 0.2% wards the country’s east, today it is grown their market will shrink. levy on imports into African countries, is and masticated throughout the country. Expertsdoubtthatqatwill everbecome meant to start this month. Nearly half a million hectares of land are a mass-marketed global commodity like Ms Dlamini-Zuma is wary of foreigners thought to be devoted to it, some two-and- coffee, tea or sugar. Instead, small towns in who scold Africans about human rights. half times more than was grown 15 years placessuch asWondo-Genetare becoming During her tenure the AU has considered a ago. Many of those cultivating it have dependent upon the production and trade mass pullout from the International Crimi- switched from coffee, Ethiopia’s biggest ex- of a substance that will probably be out- nal Court, which some members deem port, to one that offers juicier and more sta- lawed in yet more countries. prejudiced because most of its targets have ble returns. Qat is now the country’s sec- Even so, qat’s popularity among farm- been African. Her alternative is the African ond-largestsource offoreign currency,and, ers persists because it is perhaps the only Court of Justice and Human Rights, which with prices rising, a handy source of gov- crop that can provide sufficient income the AU has barred from hearing cases ernment revenue. from a small plot of land to support a fam- against incumbent government heads and The industry’s growth is partly due to ily.“There is simply nothing else,” says Bir- their senior officials. increased consumption. Qat kiosks are hanu Kiamo, Mr Kaimo’s brother, neigh- Such deference to high office would dotted around all main towns; young men bour and fellow qat farmer. 7 doubtless please her ex-husband, who has been charged with 783 counts of corruption and fraud by South African prosecutors. (He denies wrongdoing.) Mr Zuma is expected to stand down as head of South Africa’s ruling party, the African National Congress, in December. Whoeversucceeds him as party chiefis likely to win the presidency at the next general election. Mr Zuma has used all his presidential powers to avoid standingtrial and isno doubt keen to anoint a sympathetic successor. On an unrelated subject he argues that itistime forthe ANC to have a female president and that his ex-wife is the most qualified candidate. Ms Dlamini-Zuma has said little about her plans beyond blandly indi- cating that she would never refuse a request from the ANC to serve the party. Judging by her Durban speech, she would welcome such an opportunity. 7 Qat, a tonic? The Economist January 21st 2017 Middle East and Africa 39

Default in paradise of which may be unconstitutional since they were not approved by parliament). On the hook Boats and a Few members of the ruling party, Fre- Mozambique limo, wantto shine too much lighton those GDP, % increase Government debt, scandal loans since bigwigs may be implicated. Yet on a year earlier as % of GDP imposing IMF-mandated spending cuts 10 125 also carries risks. With less bounty to 8 100 KAMPALA spread aroundFrelimo maystruggle to buy support in local elections next year and in Mozambique failsto pay its debts a presidential contest in 2019, says Alex 6 75 N 2014 Mozambique seemed a good Vines of Chatham House, a think-tank. Its Iplace to host the IMF’s “Africa Rising” best hope may be to hold out forthe boun- 4 50 conference. The economy was buoyant, tiful gas revenues expected in the middle having grown by about 7% a year for a de- ofthe next decade. Regulators, meanwhile, 2 25 cade. Offshore gas promised riches. Inves- are probing the banks that arranged both tors were optimistic, so much so that, in the bonds and the secret loans, Credit 0 0 2007 08 09 10 11 12 13 14 15 16* 2013, they snapped up $850m of bonds is- Suisse and VTB. More may yet be revealed Source: IMF *Estimate sued by a state-owned tuna-fishing com- about Mozambique’s fishy finances. 7 pany,with temptingly high yields. But Mozambique’s rise has halted. Those “tuna bonds” were the first mis-step Bahrain in a widening scandal that led the government to say on January 16th that it would An unhappy isle default on its debt. The government’s financial difficulties arise partly from a downturn in commodity prices that caused economic growth to slump to 3.4% in 2016 (though it should im- MANAMA prove this year). Yet the main reason the The royals have won. Yet they are still hounding the Shias government is in a pickle is its own feck- lessness. The state-owned tuna company SAGGING rope, haphazard barri- rain typifies how Arab autocrats have that issued the bonds never caught many Acades—and fear. That is all it has taken crushed the Arab Awakening’s demands fish. That is scarcely surprising since much to keep Diraz, Bahrain’s largest Shia village, for greater representation. After six years ofthe money it raised went toward buying undersiege forthe past seven months. Two of suppression, the Shia opposition is dis- gunboats instead of the fishing sort. When checkpoints bar access to all but residents. heartened. Maligned as the cat’s paw of itbecame clearthatthe companycould not Friends and family members are kept out. Iran and a threat to Sunni rule in Bahrain, honour its debts, bondholders agreed to Grocers offload their wares at the perime- their movement is battered and broken. swap the bonds it had issued for govern- ter wall. And the protesters who once More than 2,600 political prisoners are in ment ones. Yet before the ink was dry on thronged to hear the island’s leading Shia jail, a large number in a kingdom of just thatdebt-swap the governmentadmitted it cleric, Isa Qassim, deliver his Friday ser- 650,000 people. Many ofthe detainees are had also guaranteed $1.4bn in secret loans, mon now stay at home. “Forget the thou- children, says a former member of parlia- worth 11% of GDP. The revelation shocked sands who used to join rallies,” says a cler- ment from Wefaq, the Shia party the gov- the IMF and donors into freezing support ic in a neighbouring village, recalling the ernment banned last year. Hundreds have to a country that still relies on internation- protests which erupted after tanks crushed been exiled, scores barred from travel, and al aid to balance its books. the mass demonstrations fordemocracy in over 300 stripped of their nationality, in- The government, now weighed down 2011. “Today we can’t even find ten. Who cluding Sheikh Qassim. Even the execu- by debt equalling some 112% of GDP,may wants to risk five years of prison and tor- tion on January15th ofthree Bahrainis—the be trying to use the default as a tactic to ture forten minutes ofglory?” firstfortwo decades—roused onlysporadic force bondholders into “restructuring” the Though small, running out of oil and unrest by the island’s opposition. debt, which is a polite way of saying that it dependent on largerGulfneighbours, Bah- The “national dialogue” that was es-1 wants them to give it a handout. This week’s missed payment will irk bondholders but may not be enough to force them to the table, says Stuart Culver- house of Exotix, a brokerage. Having been hooked once, few trust the government. Theyhave refused to negotiate until it signs up to an IMF programme and allows a full (and independent) audit of its indebted- ness. The IMF, forits part, also wants an investigation into where the money went and who authorised the borrowing before it will lend more. Kroll, a firm of investiga- tors hired by the government, is expected to release a report next month. Instead of squeezing bondholders the government may do better by trying to re- structure, oreven repudiate, its secret loans (one of which is already in arrears and all Protesters may topple bins but they can’t bin Hamad 40 Middle East and Africa The Economist January 21st 2017

2 poused during more turbulent times by Last month Islamic State put out an was later killed by Italian police. the king’s son and crown prince, Salman hour-long video of a Bahraini ideologue The government is trying to stem the bin Hamad, is on hold. Many of his erst- from the same tribe as the royal family ap- flow of people joining jihadists abroad. It while interlocutors are in jail on implausi- pealing for Sunni suicide bombers to at- has closed mosques led by radical preach- ble terrorist charges. The online edition of tack the island’s Shias. And on New Year’s ers and keeps an eye on thousands of the last independent daily newspaper was DaymilitantShiasbroke into a high-securi- young suspects. Tunisiansunder the age of banned on January16th. Although the graf- ty jail, freeing ten dissidents and prompt- 35 are not allowed to travel to Libya, Turkey fiti on village walls declare “Death to [King] ingthe opposition to askifit might be more or Serbia, the main transit routes to Iraq Hamad”, few youngsters risk more than a effective underground. “We desperately and Syria. The borders with Algeria and token rally before police start firing bird- need a political process,” says Jasim Hus- Libya have been tightened. Parliament has shot. “We had a revolution and we lost,” sain, a former Wefaq MP. “The country passed an anti-terrorism law, criticised by says a female protest leader now in exile. can’t afford anything less.” 7 human-rights groups, that gives the gov- Shia and Sunni subjects should share ernment more power to detain suspects many grievances. Both resent a ruling fam- and tap phones, among other things. ily that hoards ministerial posts. The king’s Terrorism in Tunisia In any case, the flow is reversing, with uncle, Khalifa bin Salman, is the world’s fighters making their way home as the longest serving prime minister, having Jihadis come home groups they had joined are pushed back. been in place for46 years. The kinghimself The interior ministry says 800 have al- has ruled since the death of his father in ready returned. Many fear that some will 1999. Although the Al Khalifas monopolise carry out attacks once back. Indeed, IS has power, they spread the pain of austerity. In CAIRO told them to do so and has claimed respon- line with Vision 2030, an economic pro- sibility for several atrocities in the country. Tunisia struggles with fighters gramme devised for Bahrain by McKinsey, Last March a large group of Tunisian IS returning from Iraq and Syria a consultancy, they have cut subsidies on members crossed the border from Libya to such basics as meat. Even this is not F BEN GUERDANE had been located stage an assault on Ben Guerdane that left enough. The oil price would have to dou- “Inext to Falluja, we would have liberat- dozens dead. Tunisian security forces feara ble to balance the budget. Last year Stan- ed Iraq.” So (reportedly) said Abu Musab possible Somalification ofthe country. dard and Poor’s, a ratings agency, judged al-Zarqawi, the leader of al-Qaeda in Iraq, Last month Mr Essebsi played down the country’s debt to be junk. before he was killed a decade ago. He was the threat. But after much criticism, and The government’s fiscal measures have referring reverentially to a town in south- calls to strip the militants of their citizen- fallen most harshly on Shias. Fellow Gulf eastern Tunisia that is one of the world’s ship, the government braced up. Youssef states have given billions in aid to prop up biggest exporters of jihadists. No place bet- Chahed, the prime minister, who belongs the kingdom, but much has been chan- ter epitomises the challenges facing Tuni- to Nidaa Tounes, the main secular political nelled into building housing for Sunnis sia’s government as it tries to consolidate a party, has said that returning militants will and foreigners. New mansions, com- wobbly democracy sixyearsafterthe revo- immediately be arrested. Ennahda, the pounds and high-rise blocks screen run- lution that toppled the old dictatorship. moderate Islamist party that shares power down Shia villages. Undulating parks Hundreds of Tunisians marked the an- with Nidaa Tounes, backs this approach, along the corniche beautify Sunni parts. niversaryofthe revolution on January 14th though some blame it for having exacer- The authorities have also chipped away at bytakingto the streetsto demand jobs. The bated the problem by previously indulging the demographic majority of the Shias, protests began in Ben Guerdane before radical preachers. “We have all the details who once made up 60% ofthe population. spreading to other poor places, such as Sidi on [the returnees],” says Mr Chahed. “We A rash of new Hindu temples, churches Bouzid, Meknassi and Gafsa, where locals know them one by one.” But many proba- and Sunni mosques testifies to an influx of blocked the route of Beji Caid Essebsi, the blyleftthe countryand came backwithout non-Shia foreigners. Unusually for the president, who was in town to mark the passing through customs. Moreover, the Gulf, Bahrain has opened its doors to Syri- anniversary. “Work is our right,” yelled the grievances that prompted so many to bean Sunnis from Jordan’s refugee camps. An protesters, using the slogans of2011. come jihadists have not yet been dealt acrid xenophobia peppers Shia discourse. Work is indeed a right enshrined in the with. In places like Ben Guerdane locals Shias gibe that even the ruling Al Khalifas, constitution, adopted in 2014. But the un- still feel that the government does not care who came from the Arabian hinterland employment rate of 16% is higher than it very much about them. 7 over the water in 1783, are foreigners. was before the revolution. The rate for Communal tension is less fierce in the youngsters and those in the countryside is few places where Sunnis and Shias live to- higher still. This is partly because a series Tourists of terror gether. But sects that once shared the same ofterrorist attacks has driven away tourists Origin of foreign jihadists in Iraq and Syria streets in new towns built in the 1980s are and foreign investors. Unemployed protes- 2015, ’000 now moving apart. Flags of Shia saints ters have blocked roads leading from phos- 0123456 hang from the homes on one side of the phate mines, further harming export earn- Tunisia 527 main road through Hamad Town; Bahraini ings. Past governments have responded by Saudi 78 flags of loyalist Sunnis fly from the other. promising to create public-sector jobs. The Arabia Intermarriage, too, is getting rarer, says Su- result is a bloated, unaffordable bureauc- Russia 17 hail Algosaibi, who runs an interfaith racy. Ahiring freeze is now in effect. Turkey 26 group. Alone of the Gulf states, Bahrain Disillusioned and aimless, youngsters Jordan 258 still marks Ashoura, the holiest day in the in rural areas are prime targets of jihadist France 26 Shia calendar, as a public holiday, but divi- recruiters. Some 6,000 Tunisians have sions are widening. Though some Sunni joined armed groups abroad, with most Morocco 34 grandmothers still bake pomegranate going to fight in Iraq, Syria and Libya, and Lebanon 150 cakes for Ashoura, their husbands who some farther afield (see chart). One was Germany 9 Number per 1m once joined the chest-beating rites now Anis Amri, a 24-year-old follower of Islam- Britain population* 12 furtively watch from afar. For many Sun- ic State (IS) who drove a lorry into a Christ- nis, Shia villages are no-go areas. mas market in Berlin, killing 12 people. He Sources: The Soufan Group; The Economist *Estimate Europe The Economist January 21st 2017 41

Also in this section 42 Emigration from eastern Europe 43 Enter Antonio Tajani 43 Economic reform in Russia 44 Putin’s overrated propaganda 45 Charlemagne: Trump anxiety

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

Turkey’s all-powerful president direction which Turkey is taking. The government has disowned peace talks with Iron constitution Kurdish insurgents, opting instead for a ruthless military offensive, a solution Mr Bahceli has favoured for years. Since the failed coup, Mr Erdogan and his ministers have revved up nationalistrhetoricto justi- ISTANBUL fy a mounting crackdown against Kurdish politicians, socialists and the press. Islam- Recep Tayyip Erdogan may soon have the executive presidency he has long sought ists and nationalists have closed ranks. T HAS been a U-turn to make a stunt fore being elected president in 2014, has “Bahceli might be in opposition, but his Idriver proud. For the past couple of continued to rule almost uncontested. ideas are in power,” says Asli Aydintasbas, years, Devlet Bahceli, the head of the Emergency law, adopted in the wake of a a fellow at the European Council on For- Nationalist Movement Party (MHP), the violent coup attempt in July, has removed eign Relations. “These might be the happi- fourth-largest in parliament, had been con- most remaining checks on his power. est days ofhis life.” sidered one of President Recep Tayyip Er- The proposed changeswould make this dogan’s most vicious critics. Mr Erdogan’s situation permanent. The office of prime Wham, bam, Erdogan plan to replace the country’s parliamenta- minister would cease to exist. Mr Erdogan The vote on the constitutional changes has ry system with an executive presidency, he would manage his own cabinet, appoint- been a pathetic spectacle. Ruling-party once warned, was a recipe for a “sultanate ing senior officials without needing ap- lawmakers openly flouted a rule on secret without a throne” and a system with “no proval from parliament. He could issue de- balloting, then assaulted an opposition MP balances, no checks, and no brakes”. Mr crees and declare a state of emergency. His who used her phone to film them. Bahceli opposed the constitutional over- term in office would last five years, renew- Punches, notebooks and at least one flow- haul as recently as October. able once. Since the changes would kick in er pot flew across the parliamentary floor Today, the raspy-voiced nationalist is after the 2019 presidential elections, Mr Er- during the brawls. One AK member dis- suddenly rolling out the red carpet for Mr dogan could remain in power until 2029. played a gash on his shin, claiming to have Erdogan’s pet project. As The Economist AK officials say the set-up would preclude been bitten during the melee. went to press, Turkey’s parliament was unwieldy coalitions. Critics call it a blue- The referendum, if it goes ahead, risks poised to adopt a package of 18 amend- print foran elected dictatorship. becoming an even worse travesty. Under ments that would place all executive pow- Analysts—and the handful of MHP the state of emergency, the government er in Mr Erdogan’s hands. In the first round members willing to speak to the press—are has arrested, sacked or suspended over of voting, concluded on January 15th, each at a loss to explain what Mr Bahceli gains 130,000 people, only some of them linked of the amendments passed with a major- by backing constitutional amendments to July’s coup. Over 100 journalists are in ity of at least 330 votes. Of these, no more that his own voters seem to oppose. (Popu- prison. Mainstream media outlets are in- than 316 came from the ruling Justice and lar support for the changes has long lan- creasingly wary of airing dissenting opin- Development (AK) party. Mr Bahceli and guished below 50%.) Umit Ozdag, a one- ions. Mr Erdogan, meanwhile, retains the his whips, undeterred by a mutiny that has time MHP deputy chairman, suggests that rightto close newspapersand NGOswith a been swelling inside their party for his former boss may have been offered stroke of his pen. In late 2016 his own months, provided the remaining votes. cabinet posts. Others say he is paying back prime minister, Binali Yildirim, opined Barring a new wave of defections, the new Mr Erdogan for a court verdict that helped that the referendum should not take place constitution will be put to a referendum in him stave off a leadership challenge over under such conditions. Yet that is what is early April or late March. the summer. Though he has never won an set to happen. On January 19th, just as par- AtpresentTurkey’spresidencyislargely election, Mr Bahceli has not relinquished liament began voting on the amendments, ceremonial—in theory. In fact, Mr Erdogan, control over his party fortwo decades. emergency rule went into effect for anoth- who spent a decade as prime minister be- He may be pleased, however, with the er three months. 7 42 Europe The Economist January 21st 2017

GDP, social spending in Bulgaria, Romania and the Baltic states is roughly half of that in many richer European countries. Unable to dissuade people from leaving, governments are trying instead to lure them back, inspired by successful efforts in Ireland and South Korea. Daumantas Si- menas, project manager of the Panevezys free economic zone, credits his return from Britain to the country’s “Create for Lithua- nia” programme, which matches educated professionals from the diaspora with government jobs. Having a job already lined up made the decision to return easier, he says. Plus, he adds, “home is home.” Whether such efforts can turn the tide seems doubtful. “Create for Lithuania” has brought back more than 100 people since its launch five years ago, says Milda Dargu- zaite, who started the programme after leaving an investment-banking career in America for a government post in Vilnius. Returnees include an MP, a deputy mayor and several advisers to the prime minister. Emigration in eastern Europe Bringing back doctors and engineers, however, is trickier. Studies show that skilled The old countries workers from eastern Europe are attracted abroad primarily by the quality of institutions such as good schools; better social benefits matter more for unskilled migrants. Data on return migration are scanty, IMF VILNIUS AND RIGA but a recent report by the suggests it has been “modest”, in some countries as Eastern Europe is losing workers and keeping pensioners low as 5% ofthose who left. N THE Lithuanian town of Panevezys, a 2014. By 2030 GDP per person in Bulgaria, Firms are adapting to labour shortages. IshinynewfactorybuiltbyDevold, a Nor- Romania and some of the Baltic countries At a recent business conference in Bulgaria, wegian clothing manufacturer, sits alone may be 3-4% lower than it would have employers said they are having to raise in the local free economic zone. The fac- been without emigration. wages to entice workers from farther and tory is unable to fill 40 of its jobs, an eighth All ofthis imperils public finances. Pen- farther away. In Bulgaria and the Baltic of the total. That is not because workers in sions, which take up about half of social states wages have grown faster than pro- Panevezys are too picky, but because there spending in eastern Europe, are the biggest ductivity for the past five years—a trend are fewer and fewer of them. There are worry. In 2013 Latvia had 3.3 working-age that makes exports less competitive. about halfas many students in the munici- adults foreach person older than 65, about That may change. Higher labour costs pality’s schools as there were a decade ago, the same as Britain and France; by 2030 are pressing firms to automate, says Rokas says the mayor. that is projected to fall to just over two, a Grajauskas, an economist at Danske Bank. Such worries are increasingly common level Britain and France will not reach until On the factory floor at Devold many tasks across central and eastern Europe, where 2060. Countries are raising the retirement once done by hand, such as cutting cloth birth rates are low and emigration rates age (apart from Poland, which is recklessly into shapes for winter pullovers, are now high. The ex-communist countries that lowering it). Benefits are already meagre, executed by robots. joined the European Union from 2004 on leaving little room for cuts. As a share of Some countries are warming to anoth- dreamed of quickly transforming them- er solution: immigrants from poorer neigh- selves into Germany or Britain. Instead, bours. Estonia’s population increased in many of their workers transported them- Brain drain 2016 for the second year in a row thanks to selves to Germany or Britain. Latvia’s Education level of emigrants v general population incomers from Ukraine, Belarus and Rus- working-age population has fallen by a 2010 sia, afterfallingsteadily since the 1990s. But Ukraine quarter since 2000; a third of those who 40 immigration may not plug the brain drain. Latvia graduated from university between 2002 Almost all ofthe 400,000 Ukrainians who Hungary Lithuania and 2009 had emigrated by 2014. Polls of obtained residency permits in Poland in 30 Czech Poland Bulgarian medical students show that Rep Estonia 2015 workin agriculture, construction or as 80-90% plan to emigrate after graduating. Bulgaria household help. By contrast, about 30% of Lithuania’s loss of workers is costly, Slovakia Polish émigrés have higher education— 20 says Stasys Jakeliunas, an economist. Re- Romania roughly twice the share in Poland’s general Slovenia mittances and EU money forinfrastructure population (see chart). Croatia upgrades have helped, but labour short- 10 Forthose who leave eastern Europe, the

ages discourage foreign investment and % of emigrants with tertiary education freedom to live and work where one hurt economic growth. According to the choosesisan immense boon. Butthe coun- IMF 10 20 30 40 , in some countries in eastern Europe % of population with tertiary education tries where they were raised face a diﬃcult emigration shaved 0.6-0.9 percentage challenge. They must learn how to attract Source: IMF points from annual GDP growth in 1999- and retain new workers, or decline. 7 The Economist January 21st 2017 Europe 43

The European Parliament of government. Furious at being shut out, And there is plenty to do. The parlia- last year the S&D reneged on the agreement is often mocked, but it plays a crucial A shift to the right ment. After Mr Schulz said, last November, role in EU policymaking. This year it must that he would return to German politics, work on tricky reforms to Europe’s migra- the S&D’s parliamentary leader,Gianni Pit- tion and asylum systems, as well as ratify- tella, declared he would run. ing a controversial trade deal with Canada. EPP ALDE BRUSSELS The upshot was virtually unheard-of in The - agreement calls for action the parliament’shistory:a genuinecontest. when “European principles” are breached, A new president has a shaky coalition Seven candidates, many of them from which could mean steps against Poland’s and a tough agenda fringe outfits, threw their hats into the ring. populist government. The deal also seeks a T FIRST glance the European Parlia- Mr Tajani defeated Mr Pittella only after bigger role for the parliament in Brexit Ament might look invulnerable to the the EPP struck deals with the Euro-federal- talks. MEPs must approve the final settle- populist wave sweeping across Europe. ist ALDE grouping, led by Guy Verhofstadt, ment; their vote may take place in early Antonio Tajani, a centre-right Italian who and with the European Conservatives and 2019, just as they gear up for re-election. won the presidencyofthe chamberon Jan- Reformists, a Eurosceptic outfit dominated One relationship to watch will be that uary 17th, is the sort of bland functionary by Britain’s Conservatives. This odd three- between Messrs Tajani and Juncker. The the European Union specialises in. Little some leaves plenty ofquestions. commission president and Mr Schulz got on Mr Tajani’s CV grabs the eye, bar an af- The job ofthe president sits somewhere on famously, despite hailing from different fection for Italy’s long-defunct monarchy between parliamentary speaker and insti- political families. That helped smooth the and a spell as spokesman for Silvio Berlus- tutional cheerleader. After his win Mr Ta- process of passing legislation (under EU coni, the bunga-bungatastic former prime jani suggested he would lean towards the rules the commission proposes laws, and minister. His victory was engineered in former, vowing not to “push a political the parliament and representatives from classic EU fashion, after fourrounds of vot- agenda”. On his watch the parliament will national governments pass them). Mean- ing and endless dealmaking between the not enjoy the stature it did under the bruis- while, the S&D is left licking its wounds. parliament’s sundry political groupings. ing Mr Schulz, but after the collapse of the Another European trend, then, for the par- Yet Mr Tajani’s win can be traced to grand coalition, wiliness may be more im- liament to follow: the collapse ofthe main- those same disruptive forces. At the last portant than charisma. stream left. 7 election, in 2014, nearly one-third of the parliament’s 751 seats went to anti-EU or anti-establishment outfits. That forced its Reform in Russia two biggest groupings, the centre-right European People’s Party (EPP) and the So- Listen, liberal cialists & Democrats (S&D), into a “pro- European” grand coalition. Under their deal Martin Schulz, a German Social Democrat, was to serve a two-and-a-half- MOSCOW yearterm as president before givingway to Alexei Kudrin wants to save Russia’s economy,but the Kremlin now thinks its an EPP candidate. model is winning That pact collapsed in a style that is vin- tage Brussels. After the deal was struck the XPECTATIONS were high last week as said, is at a low pace of economic growth other two top EU jobs went to EPP figures: EAlexei Kudrin, a former finance minis- even compared with the period of stagna- Jean-Claude Juncker secured the presiden- ter and the informal leader of a moderate tion in the 1970s and 1980s that led to the cy of the European Commission, the EU’s liberal camp in the Russian establishment, Soviet collapse. The reasons go well be- version of an executive arm, and Donald outlined his proposed economic pro- yond lowoil pricesand Western sanctions: Tusk was appointed president of the Euro- gramme in a packed Moscow auditorium. “The main problems lie within Russia and pean Council, the forum forthe EU’s heads Russia’s top economic officials occupied they are structural and institutional.” Rus- the front row. Foreign ambassadors sat be- sia lags farbehind in technology and inno- hind. Journalists stood in the aisles. The vation, and faces a severe demographic setting was the Gaidar Forum, a sympo- slump. The key problem is not a lack of in- sium named after the architect of Russia’s tellect or business talent, but state ineffi- market reforms in the 1990s. The date, Fri- ciency and dysfunctional institutions. “In day the13th, was perhaps unfortunate. our country the state dominates every- Nine months ago, as Russia’s recession thing, so you have to start with reforming deepened, Vladimir Putin drafted Mr Ku- the state,” Mr Kudrin said. drin to come up with a new economic Mr Kudrin made it clear that the techni- strategy. The former minister, who over- cal tinkering favoured by the Kremlin can- saw strong economic growth in the early not pull Russia out of its economic trough. 2000s, resigned in 2011 in protest against a Reforms must involve fundamental massive increase in military spending. changes to the system, particularly to the Since then he has acquired cult-like status judiciary.Courts must provide justice even among Russian liberals. A personal friend when that requires ruling against the state of Mr Putin, he is a counterweight to the or security services. To convince his boss, hardliners of Russia’s security services, Mr Kudrin framed his strategy in terms of and has stayed inside the system rather national security and global prestige—one than becoming a dissident. Although he of the few subjects Mr Putin seems to care holds no formal position, he is seen as the about. “Unless we become a technologi- most senior liberal courtier in the Byzan- cally advanced country we face a problem tine world ofthe Kremlin. of diminishing defence potential and a Wiles over charisma MrKudrin’sverdictwas grim. Russia,he threat to sovereignty,”he said. 1 44 Europe The Economist January 21st 2017

Promises, promises Russian propaganda Russian GDP, % change on a year earlier Putin’s prevaricating puppets 12 Actual FORECAST 9 6 RT broadcasts drivel, but is farless influential than the West fears Target 3 RODUCERS at RT, the Kremlin-fi- with the company logo. RT hopes that the Projection + nanced media weapon formerly authenticity ofsuch raw content will without 0 P reforms – known as “Russia Today”, must have draw viewers to its political stories too, 3 been glowing. More than halfofthe explains Ellen Mickiewicz ofDuke Uni- 6 report on Russian electoral interference versity. This sounds like a canny strategy, 9 which America’s intelligence agencies but it does not work. RT’s most popular 2000 05 10 15 20 25 30 35 released on January 6th was devoted to videos are ofearthquakes and grisly Sources: Economist Intelligence Unit; warning ofthe network’s growing influ- accidents. Among the top 15, the closest to Centre for Strategic Research ence. The report noted the “rapid expan- a political clip is one ofVladimir Putin sion” ofRT’s operations and budget— singing “Blueberry Hill”. 2 Mr Kudrin presented Mr Putin with a now $300m a year—and cited impressive RT is not all strongman serenades. It choice. If the government does nothing, audience numbers listed on the RT web- broadcasts loopy conspiracy theories and provided oil prices do not fall, he esti- site. The channel, whose professed mis- and fake news stories that encourage mates Russia’s growth rate between now sion is to present the Russian point of distrust ofWestern governments (the CIA and 2035 will hover in the vicinity of 2% view to foreign audiences, claims to created Ebola; the 9/11attacks were an (see chart). If it implements Mr Kudrin’s re- reach 550m people worldwide, with inside job; Ukraine crucifies babies). forms, growth rates will top 4%—enough America and Britain as its most success- Ofcom, Britain’s media regulator, has gradually to close the income gap with ful markets. Conclusion: RT is part ofa rebuked the network, and NATO has Western economies. Yet from the Krem- “Kremlin-directed campaign to under- called forcounter-messaging to combat lin’s point of view Mr Kudrin’s reforms are mine faith in the US Government”. its propaganda. But the conflation of RT risky: they threaten to destabilise Russia’s That is no doubt true, but whether it is with Russian hacking and espionage has centralised, cronyistic political system. succeeding is a different question. RT has made it out to be a10-foot monster, says The government is already trying to cut a clever way with numbers. Its “audi- Samuel Charap, a Russia analyst. In fact public spending from 37% of GDP down to ence” of550m refers to the number of the Kremlin cut its funds by10% last year 32%, creating a fight forshrinking resources people who can access its channel, not as it struggled to balance the federal that was evident at the forum. Aday before those who actually watch it. RT has never budget. With awestruckreviews from his speech, Mr Kudrin moderated a panel released the latter figure, but a 2015sur- American spooks, however, money may composed of Russia’s most successful and vey ofthe top 94 cable channels in Amer- flow more freely in the future. 7 powerful regional governors. The presi- ica by Nielsen, a research firm, found that dent of the Muslim republic of Tatarstan RT did not even make it into the rankings. complained of excessive centralisation In Britain last month, it captured just Toxic, but not viral and a lack of trust from Moscow. “To rule 0.04% ofviewers, according to the Broad- News organisations’ Twitter accounts any territory, you need money and cad- cast Audience Research Board. Followers, January 18th 2017, m res,” he said. Last year Moscow cut 8bn On Twitter and Facebook, RT’s reach is 0 5 10 15 20 25 30 35 roubles ($134m) from his budget, about 5% narrower than that ofother news net- nytimes 240.7 ofhis annual spending. works (see chart). Its biggest claim to Instead of granting economic freedom dominance is on YouTube, where it bills CNN 400.3 and rewarding regional initiative, Moscow, itselfas the “most watched news net- Reuters 96.8 fearful ofseparatism, keeps the regions de- work” on the platform. As the intelli- AP 190.9 pendent on hand-outs from the centre. gence report fretfully notes, RT videos get “God forbid if your budget revenues are 1m views a day,far surpassing other BBCNews 211.6 growing: you will immediately lose subsi- outlets. But this is mostly down to the AJEnglish Average 135.1 retweets dies and be forced to finance other federal network’s practice ofbuying the rights to RT_com per tweet* 109.7 projects,” said Anatoly Artamonov, the go- sensational footage, for instance of Ja- Source: Twitter *Early December 2016 to January 18th 2017 vernor of the car-making region of Kaluga. pan’s 2011tsunami, and repackaging it “Transferring most executive powers to the regions is long overdue,” said Sergei Moro- zov, the governor ofthe Ulianovskregion. Europe have convinced many in the Krem- anchor of Channel One’s weekly analyti- For Mr Putin, however, the risks of com- lin that things are going their way. cal programme, is that the era of Western prehensive reforms, such as decentralisa- State television channels ignored Mr liberal interventionism is coming to an tion, could be greater than the benefits—es- Kudrin’s speech, concentrating instead on end. Those who attackMrTrump’sadmira- pecially when he faces no immediate Mr Trump’s upcoming inauguration. On tion ofMrPutin can see the commonalities pressure, at home orabroad. Asource close the largest, Channel One, announcers rel- between their approaches: “The world or- to the Kremlin says the president is confi- ished America’s humiliating obsession der can be renewed on the basis of our dent that he has earned the unwavering with claims that Russia had interfered in its principles.” support of his people and no longer needs elections and that Mr Trump employed The popularity ofthis view bodes ill for to reinforce his standing through stellar prostitutes while visiting Moscow. (Mr Pu- Mr Kudrin’s programme. Russia’s long- economic performance. Despite two years tin discounted the allegations but noted term economic prospects may be as dire as ofrecession, Russians have adjusted to fall- that Russian prostitutes were “the best in he says. But it is unlikely to adopt liberal re- ing incomes without much protest. Mean- the world”.) The reason for America’s hys- forms when its elite believes that liberal- while, Donald Trump’s election in Ameri- teria over Russia’s relationship to the presi- ism is on the retreat and a new Russian ca and the growing wave ofnationalism in dent-elect, explained Valery Fadeev, the model is on the rise. 7 The Economist January 21st 2017 Europe 45 Charlemagne Looking hairy

Europeans might hope forthe best with Donald Trump, but must prepare forthe worst America’s foes. More likely it reveals Mr Trump’s slapdash approach to policy, and promises bureaucratic chaos those adver- saries will be delighted to exploit. Mr Trump shows little affection for Germany, despite his Ba- varian grandfather. Yet if this has caused panic in Germany, it is well concealed. Charlemagne has heard an official in Berlin suggest, with a straight face, that Mr Trump would surely change his mind on Mr Putin once the intricacies ofthe 1994 Budapest Mem- orandum, under which Ukraine agreed to give up its legacy nuclear arsenal in exchange for guarantees of territorial integrity, were explained to him. OtherGerman officials place their faith in America’s institutions—Congress, the civil service, the military—to restrain the new commander-in-chief. Verywell: hope forthe best. Bien-pensant Europeans were ter- rified ofRonald Reagan when he tookoffice in 1981; less than a decade later they watched the Berlin Wall tumble. Mr Trump hasno track record in government on which to base forecasts, and his habit of self-contradiction renders prediction impossible. Some even spy opportunity. Perhaps a Putin-friendly president could ease tensions with Russia, at least in the short term. Mr Trump’s threatto withdrawAmerica’ssecurityumbrella providesa useful UST over a year ago Barack Obama decided that the European argument to those Europeans pressing for more defence spend- JUnion needed his help. His advisers devised a strategy to bol- ing at home. Maybe the uncertainty Mr Trump has injected into ster America’s European allies, incorporating transatlantic vis- global politics will galvanise Europeans into resolving their petty its, political theatre and pep talks. Mr Obama talked of the dan- differences and forging a genuine common foreign policy. gers of Brexit in London and invited Matteo Renzi, Italy’s ill-starred prime minister, to Washington to backhis constitution- Be afraid al referendum. Last April Mr Obama’s visit to Hanover, ostensi- But the risks to Europe of a Trump presidency outweigh any pos- bly to encourage a floundering transatlantic trade pact, occa- sible benefits. First, a fraying EU may be susceptible to the presi- sioned a stirring defence of European unity, the memory of dent’s brand ofbilateralism. Watch Britain, seekingfresh partners which still turns beleaguered Brussels bureaucrats misty-eyed. as it Brexits (Mr Trump pledges a trade deal “very quickly”, Sharp-eyed readers will have noticed that each of these gam- though Brussels rules make that impossible). Poland’s nationalist bits failed. Britons ignored Mr Obama’s warning that a post-EU government, a pariah in the EU for its unconstitutional power Britain would be at the “back of the queue” for any new trade grabs at home, is a prime candidate for Trumpian deal-making, deals; Italians spurned Mr Renzi’s constitutional changes (and says Jan Techau ofthe American Academy in Berlin, a think-tank. forced him from office); and Donald Trump’svictory, in the words Watch, too, Mr Trump’s choice of European friends. The roll call of the EU’s trade commissioner, put multilateral trade talks into of visitors to his gold-plated tower since the election includes the the “freezer”. All of these outcomes revealed voters’ discontent leaders of populist outfits from Britain, Austria and France, who with their political masters, a mood that found its fullest expres- see in Mr Trump’s victory a validation of their own assaults on sion in the election ofMr Trump. the established order. If Europeans seek change, they will receive it good and hard The principal victims may be outside the EU. Europe’s fate lies from America’s new president. This week Mr Trump told British in its own hands, Mrs Merkel said this week. But the EU struggles and German newspapers that he expected other countries to fol- to extend its sway to weak countries on its fringes. Take Mr lowBritain outofthe EU, which he termed “basicallya vehicle for Trump’s hint that he might ease sanctions on Russia, imposed in Germany”. Slamming America’s allies for miserly defence 2014 over its aggression in Ukraine. The offercarries a cost even if spending, he declared NATO “obsolete”. He said he was as likely it comes to nothing. Without American backing the EU’s consen- to fall out with Germany’s chancellor, Angela Merkel, as with sus on Russian sanctions will evaporate (especially ifFrançois Fil- Vladimir Putin, the Russian president. These remarks hardly rep- lon, a Putin-friendly Gaullist, wins France’s presidential election resented an about-face: Mr Trump has lamented security free-rid- in May). As the West loses its attraction Ukraine may be sucked ing for decades, for example. But coming four days before his in- into Russia’s orbit. Atlanticists in post-Soviet states like Moldova auguration, they delivered a hefty payload. and Georgia will be left in the cold. Tensions in the Balkans may Mr Trump appears to promise the biggest rupture in trans- bubble over, especially ifMr Putin steps up his meddling. atlantic relations since 1945. Should he be taken at his word? On a American support, both hard and soft, has always under- recent visit to Washington your columnist was urged by Atlanti- girded European unity, and its absence will be keenly felt. The cists to pin his hopes on appointments like that of James Mattis, condition may not be permanent: American presidential terms Mr Trump’s pick for defence secretary. During last week’s confir- last only four years. But that is plenty of time to inflict immense mation hearings General Mattis, a conventional Republican harm. During his last visit to Europe, in November, Mr Obama hawk, hammered Russia and declared NATO vital to American sought to reassure his allies that the transatlantic bond would interests. What to make of such apparent conflict inside Mr survive the Trump era. Europeans must hope that on this trip, un- Trump’s cabinet? Perhaps it is a calculated strategy to confound like the earlier ones, the president got it right. 7 46 Britain The Economist January 21st 2017

Also in this section 47 Trading with Trump 48 Bagehot: Let the work permits ﬂow

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

Brexit was less honest in not admittingthat Brexit will impose costs, and that a hard Brexit Doing it the hard way will make them heavier. A YouGov poll for Open Britain, a pro-EU group, finds that even a majority ofLeave voters are not prepared to be made worse offin order to control immigration. Mrs May’s response that the economy has done better since the referendum than Theresa May opts fora clean breakwith Europe. Negotiations will still be tricky economists forecast is disingenuous. Not T MIGHT be called May’s paradox. Since The trouble is that, for all her pleasing only have easier monetary and fiscal poli- Ishe became prime minister last July, Mrs rhetoric, Mrs May is not really pursuing cy and the fall in sterling cushioned the im- May has been urged by businesses to clari- thisvision. She hassetimmigration control pact but Brexit has not yet happened—and fy her Brexit goals. Yet every time she has as her priority (see Bagehot), even though until recently many firms hoped to stay in tried, investors have reacted by selling ster- today’s service businesses depend on be- the single market. Nor did Mrs May offer ling, because she has shown a preference ing able to move people around at short any solution to the problems that leaving for a “hard” (or, as her advisers prefer, notice, as does high-tech industry. A simi- the single market and customs union will “clean”) Brexit that takes Britain out of the lar drawback attaches to her insistence on cause for the border with Ireland, where EU’s single market and customs union. escaping the jurisdiction of the European there are currently no customs checks. In fact the pound rose on January 17th Court of Justice (ECJ). Free-trade deals re- Negotiating free-trade agreements will when she gave a speech that set out her quire a neutral umpire. So would any ef- be harder and more time-consuming than most detailed thinking so far about Brexit. fort, hinted at again by Mrs May, to secure Mrs May suggests. She expressed hope that That was partly because her decision to post-Brexit barrier-free access to the EU’s a comprehensive deal with the EU could leave the single market and customs union single market for such key industries as be done in two years. But experience sug- had been widely trailed, causing the cars and financial services (see page 63). gests this is highly unlikely. Many EU coun- pound to fall in the run-up to her speech. Such a sectoral approach is anyway un- tries say they need to settle divorce terms But it may also have been because markets likely to work, for two reasons. One is that (dividing up property, pensions and so on) were pleasantly surprised by her language the EU will not offer favoured access to its before even talking about trade. Canada’s in setting out a dream of a liberal, open fu- market only for certain industries. The sec- free-trade deal with the EU has taken seven ture for the country—she spoke behind the ond is that the World Trade Organisation years and is not yet in force. For Britain to slogan “A Global Britain”—and her ex- does not allow it. The WTO accepts free- replicate the EU’s trade deals with 53 third pressed wish for continuing friendly rela- trade deals and customs unions, but only if countries will be more testing than today’s tions with Europe. they embrace “substantially all the trade”. enthusiastic talk of an early agreement There is a liberal vision of a post-Brexit Were the EU to single out cars, say, for barri- with America suggests (see next story). future in which Britain escapes the most er-free trade with Britain, the EU would be And ratification is always tricky: a recent protectionist features of the EU and opens obliged by the WTO’s non-discrimination ECJ rulingmakesa free-trade deal with Brit- its economy to the rest of the world. It is rules to offer the same deal to all WTO ain a “mixed” agreement that must be ap- one that includes lower taxes, less pettifog- members, including China and India. proved by every parliament in the EU, in- ging regulation and freer trade. During the Mrs May was frank about the trade-off cluding regional ones. referendum campaign it was sometimes between being in the single market and The truth is that when Mrs May formal- talked of as “Singapore on steroids”: a dy- taking back control of borders and laws. ly triggers Brexit she will find the cards namic, open Britain capable of competing She even declared that to stay in the single stacked against her. Subject to an immi- not just with other EU countries but with marketwould mean “to all intentsand pur- nentSupreme Courtrulingon needingpar- the whole world. poses” not leaving the EU at all. But she liamentary approval, she plans to initiate1 The Economist January 21st 2017 Britain 47

2 the process in March. The divorce proceed- pushed for a punitive settlement; Britain vatory at Sussex University says that Brit- ings then have an extremely tight two-year could retaliate by slashing taxes, she said. ish consumers could benefit if the home deadline. Mrs May acknowledged the She believes her predecessor, David Cam- market were opened to cheap American need for transition, but only as an imple- eron, made a mistake by not being ready to food. Britain might allow in genetically mentation process towards a final deal. As walk out rather than accept inadequate modified crops, which are regulated more she conceded, the other 27 EU countries new membership terms. In her speech, in- heavily in the EU, or buy from America’s have been impressively united over Brexit. deed, she insisted that no deal was better highly competitive beeffarmers. They may welcome her new clarity,but for than a bad deal. But as the car industry shows, it is not them the preservation ofthe union is more As Malcolm Barr of J.P. Morgan points tariffsbut non-tariffbarriers, such as differ- pressing than all else. As several leaders out, this is a dangerous line. No deal would ing regulations, that most impede British- have said, Britain cannot have a better deal mean fallingbackon WTO terms, implying American trade. One research paper finds outside than inside the club. not just non-tariff barriers and lost access that in the chemicals industry, EU exports Mrs May made helpful noises about to the single market but actual tariffs on ex- to America face non-tariff barriers equiva- not wishing to see the EU unravel, unlike ports of cars, pharmaceuticals, processed lent to a tariffofabout 20%. Donald Trump. She stressed the need to re- foods and much else. The EU would suffer Agreements to scrap non-tariff barriers tain co-operation on foreign policy and se- too, but its goods exports to Britain are would help trade along. Caroline Freund curity.And she said Britain mightpay mod- worth only3% ofitsGDP; Britain’sto the EU of the Peterson Institute, a think-tank estly into the EU budget (though no longer are worth12% ofits own GDP. Mrs May has based in Washington, DC, reckonsthatBrit- “vast contributions”, so talk in Brussels of made a powerful case for her version of a ain and America could make progress on an initial Brexit bill of upwards of €50bn, hard Brexit. But it is Britain, not the 27, that “digital trade”, somethingon which negoti- or $53bn, may not go down well). But she is the demandeur in these negotiations. ations between the EU and America have also threatened her partners, calling it an And that will make securing a good out- stalled. This could include, for instance, act of “calamitous self-harm” if they come hard in every sense. 7 agreements on data sharing and copyright. It would not all be plain sailing, however. British firms, especially small ones, Trade with America would struggle to comply with American and EU standards simultaneously (a paper The art of the deal from 2015 noted that the area of the wind- screen cleaned by wipers must in certain cases be larger for American-compliant cars than EU ones, for instance). And although Mr Trump might swallow sheep’s lungs, he may play hardball with more lucrative industries. Britain, whose economy Don’t get too excited by the prospect ofa trade agreement with President Trump is one-sixth the size of America’s, would T WAS music to Brexiteers’ ears. In an in- have little bargaining power. Iterview with the Times and Germany’s American negotiators could, for in- Bild, Donald Trump revealed that he want- stance, target Britain’s insurance market, ed a trade agreement between America extracting an agreement to lower non-ta- and Britain “very quickly”. Less widely re- riff barriers and in so doing cutting that ported was Mr Trump’s refusal to specify prized trade surplus. Britain’s public-pro- how far up his list of priorities Britain curement market might also be of interest, would be after he took office on January in which case expect headlines about 20th. Trade deals have assumed fresh im- American health-care firms snapping up portance since Theresa May confirmed National Health Service contracts. British this week that Britain would leave the EU’s carmakers may be disappointed: Mr single market and customs union, allow- Trump makes political capital from pro- ing it to sign trade agreements of its own. tecting America’s auto industry, not throw- Unfortunately the probable benefits of a ing it open to foreign competition. deal with the Donald are underwhelm- Even if these bumps can be smoothed ing—especially forBritain. over, geography will also limit the impact In 2015 Britain sent exports worth about of a British-American trade deal. So-called £100bn ($121bn) to America, making it Brit- gravity models of trade reveal something ain’s biggest export destination after the very simple: nearby countries trade more EU, to which it sold goods and services with each other. It is hard for a London- worth over £200bn. Americans are heavy based lawyer to provide services to a Cali- users of British financiers’ expertise. In in- fornian client when their working days surance Britain probably has a larger trade barely overlap. surplus with America than it does with the Other countries “are already queuing EU. An index of “trade complementarity” crisis in the 1980s. Haggis, a Scottish deli- up” for a trade deal with Britain, according produced by the World Bank suggests that cacy containing sheep heart, liver and to Boris Johnson, the foreign secretary. But the British and American economies lungs, is in effect banned. there is a mountain to climb. One estimate would be highly suitable trade partners. A bonfire of rules and tariffs could help suggested that quitting the EU and falling However, gummy regulations hold certain industries. Haggis makers are de- back on World Trade Organisation rules back commerce. Britain sends relatively lighted by rumours that Mr Trump, whose would be associated with a decline of few cars to America, forinstance, partly be- mother was born in Scotland, wants to lift about a fifth in Britain’s total trade vol- cause America and the EU use different the ban. (“Consider it done,” he supposed- umes. Mr Trump’sproclamations, ifofany safety standards. America has turned its ly told one hotelier following his election.) substance, are encouraging. But Britain is nose up at British meat since a food-safety Alan Winters ofthe UK Trade Policy Obser- not about to enter a golden era oftrade. 7 48 Britain The Economist January 21st 2017 Bagehot Let the work permits flow

The prime minister’s maximalist Brexit need not mean immigration cuts lowing European residents in Britain to stay after Brexit. Which is not to say that culture is irrelevant. Listen to voters discuss their worries about immigration and it becomes clear that these are part of a broader sense that society is unstable and unjust; thatthe system doesnotworkproperly. Thisencompasses concerns about the integrity of borders; crime and terrorism; social atomisation; the speed at which society is changing; the waning of deference. One study last year showed that people who do notfeel in control oftheirlivesare more likelyto oppose immigration. Voters need have no specific quarrel with immigrants to see them as part ofthis phenomenon. Reducingnumbers is therefore unlikely to get to the heart oftheir complaints. Most of all, however, objections to immigration are material. According to pollsbyIpsosMORI, the five most-cited reasons people give when asked why they considerimmigration too high are: job shortages, overcrowding, pressures on the state, welfare strainsand housingshortages. (Cultural factors—crime, lossofna- tional identity and failure to integrate—are farbehind, on low single digits.) In other words, though immigrants make Britain richer, locals correctly believe that the prosperity they generate is unevenly spread. Yet only a fraction of the political energy and HERESA MAY’S speech on Brexit lasted almost an hour, but capital invested in cutting immigration goes into thinking up and Tfive seconds would have sufficed. She could just have said: implementing ways ofrelieving its pressures. “Immigration controls will be imposed at any cost.” As home sec- Even ifall this were wrong, and Britons really disliked the peo- retary, she tried and failed to implementDavid Cameron’spledge ple who moved to join them on their islands, would shutting the to drive net immigration below 100,000 (it was 335,000 in the borders cheer them up? Views about immigration bear only an year to June 2016). After she replaced him she could easily have imprecise relationship to number ofimmigrants. In the Brexit ref- dumped the target, but instead cleaved to it. When Amber Rudd, erendum, the parts ofthe country with the most foreign-born res- her liberal-minded home secretary, suggested it be softened, idents voted most heavily to remain; it was those areas that had Number 10 promptly overruled her. Clearly the prime minister seen the fastest increase in foreigners that were among the keen- believes it worth pulling Britain out of the European single mar- est to leave. Britons guess 31% of the population is foreign-born, ket and the customs union to achieve this elusive goal. So expect when the true figure is 13%—and when confronted with the dis- drastic immigration cuts when, in 2019, free movement is re- parity they tend to question the figures rather than their assump- placed by a system ofworkpermits. tions. Whether voters would acknowledge, let alone notice, a The prime minister’s thinking is not hard to fathom. Immigra- large fall in immigration is therefore open to question. tion was integral to the anti-EU campaign in the Brexit referen- MrsMay’sdoor-slam, then, threatensto representthe worstof dum. A poll of Leave voters’ motivations commissioned by Lord all worlds: creating unmeetable expectations among voters, Ashcroft, a Tory peer, after the vote found that regaining control while the fall in immigration damages the British economy, low- of borders had been second only to casting off rules from Brus- ering tax receipts, putting services under even more strain and sels. Dominic Cummings, the mastermind of the Brexit victory, thus compounding the immigration “problem”. As such, the says: “All focus groups now start with immigration and tend to re- coming crackdown could alienate not just cosmopolitans—a vert to it within two minutes unless you stop them.” One only group likely to grow, given young Britons’ relaxed stance on im- has to join an MP on a canvassing round to see what he means: migration—but also those nativists it is meant to placate. door after door, residents raise it when asked what bothers them. Yet such sessions also make clear that immigration is no Don’t cut. Build monolithic political issue. It contains multitudes. And picking To politicians struggling with the subject: there are alternatives. these apart suggests Mrs May should think twice about slam- Ditch the constipated talk of “concerns about immigration” ming the door. (which only looks evasive) and make the honest case for the cur- That starts with being frank about something politicians use rent, controlled levels. Propagate accurate facts about the num- patronisingly tortuous insincerities to describe: some voters just bers of immigrants, their impact and the process by which work don’t like immigrants. These voters are not bad people—they may permits are to be issued. Revive and expand the Migration Im- be pillars of their communities, compassionate and generous to pacts Fund, a foolishly mothballed programme that channelled their fellow citizens—but they dislike hearing foreign languages, government resources to places experiencing fast population mistrust cultures other than the native one and assume foreign- change. Embrace the proposals by Sajid Javid, the communities ers are scoundrels and malingerers. This group is a small minor- secretary, to relax the green belt to accelerate housebuilding. ity: in 2015 YouGov, a pollster, found that 10% of respondents Have a proper debate about health-care funding, make the wel- would mind ifsomeone ofa different ethnicity moved next door; fare system more contributory, put more police officers on the 16% if he or she married one of their children. In general, Britons beat, make a period of national service compulsory for young- like immigrants even ifthey dislike immigration. British Future, a sters. Before reaching for reckless immigration cuts, pick the low- think-tank, found that 84% (and 77% of Leave voters) favoured al- hanging fruit. It is plentiful. 7 International The Economist January 21st 2017 49

Also in this section 50 Prizing girls in South Korea

Sex selection two children are more likelyto tryto tip the odds. Third, there must be an accessible, Boy trouble tolerated way of getting rid of superfluous girls. Today, that is usually abortion. All three things used to be true of South Korea (see box on next page) and they are true today of China, India, Pakistan, Viet- nam and the south Caucasus. They hold in parts ofIndonesia but not the whole coun- The waron baby girls has turned. Thankurbanisation, economics and soap operas try. Indeed, Indonesia has an unusual OR somethingso private and covert, the the last census, in 2011, India had 109 boys group that proves the rule. The Minangka- Fselective abortion of female fetuses is aged 0-6 for every 100 girls; in Punjab, a bau, from West Sumatra, practice matrilo- an oddly common topic ofconversation in wealthy northern state, the ratio was 118 to cality—that is, newly married couples India. Narendra Modi, the prime minister, 100. China had 119 boys aged 0-4 for every move into the wife’s household. They exhorts his countrymen to save girls and 100 girls in 2010. have a normal sex ratio. But birth data sug- send them to school. When Sakshi Malik Sex ratios go out of whack when three gest that they are hungry for daughters. A won India’s first medal at the Rio Olym- things occur at once. First, a large propor- Minangkabau who gives birth to a boy pics, in wrestling, it was an occasion for re- tion of couples must fervently desire boys. will, on average, have a second child more gret as well as national chest-beating. Such That happens mostly in “patrilocal” societ- quickly than one who gives birth to a girl. victories are only possible when girls are ies, where a woman moves out of her par- not killed, commented Virender Sehwag, a ents’ home upon marriage and into her Uptown girl dashing cricketer turned Twitter star. husband’s home, to dote on his parents The first signs that sex ratios might be re- India has cause to fret. According to two and harvest his family’s crops. Second, turning to normal appeared after the last demographers, John Bongaarts and Chris- birth rates must be low. A couple who in- round of censuses. The sex ratio among tophe Guilmoto, a staggering 45m girls and tend to have five or six children (as Nigeri- China’s children, which had risen steadily women are missing from the country. ans do today, for example) will almost cer- for decades, did not budge between 2000 Some were never born, having been de- tainly get a boy just by the law of averages, and 2010. In India, the excess of boys over tected by ultrasound scans and aborted. whereas a couple who would like one or girls worsened slightly between 2001 and Others died young as a result of being ne- 2011. But more girls were counted in the glected more than boys. Some villages in states where sex selection had been most the north have an alarming surplus of Getting back to nature common, such as Haryana and Punjab. boys and young men. Yet attitudes and be- India, sex ratio at birth Annual data on births, which are less haviour are changing. In India, and in the Boys per 100 girls, three-year moving average authoritative than census figures on chil- world as a whole, the war on baby girls 120 dren but more up-to-date, suggest the tide seems to be winding down. has turned. India’s sex ratio at birth has be- Urban Even without human meddling, the sex 115 come more normal over the past decade, ratio is skewed. Asians and Europeans especially in cities (see chart). In China— tend to have about 105 boys for every 100 where, admittedly, official figures of all 110 girls, whereas Africans have closer to 103 Rural kinds are fishy—the sex ratio at birth has boys. That seems to be nature’s way of fallen from a peak of 121 boys per 100 girls 105 compensating for the higher death rate of NATURAL RATIO in 2004 to 114 in 2015. boys and men; by the time men and wom- Vietnam still has too many male births, en are ready to have children, the numbers 100 but the situation has not worsened since 1999 2001 03 05 07 09 11 13 ought to be roughly balanced. But in a few about 2010. Armenia and Azerbaijan are countries the ratio is unnaturally high. At Source: Census of India also holding steady; sex ratios had become 1 50 International The Economist January 21st 2017

2 unbalanced in both countries in the 1990s. Prizing girls Sex selection is disappearing in Georgia and Taiwan. Then there is South Korea, the country that most cheers demographers. Like father, like daughter In 1990 it had a sex ratio at birth of 116 to SEOUL 100. For the past three years the figure has How South Korea learned to love baby girls been 105—precisely what it should be. Something is driving sex ratios backto nor- CRIED when I heard,” writes one also carry out ancestral rites. When mal levels. But what? “Iblogger, recalling the moment she ultrasound technology became wide- Not, probably, the efforts that some learned that her baby was a boy.Those spread in the1980s, many South Koreans countries have made to crackdown on sex- were bitter tears. The woman was “so used it to detect female fetuses and then selective abortion. Indian couples find it envious” ofa mother who had just given have them aborted. Sex ratios became easy to circumvent an official ban by book- birth to a daughter. She was not at all skewed. In1992 twice as many fourth ing their ultrasound scans at one clinic and unusual. South Koreans ofreproductive babies were boys as were girls. theirabortions at another. The Chinese au- age now prefergirls to boys (see chart). In response to these trends the South thorities have cracked down harder, scruti- They have created a new term, “ddal- Korean government made it illegal for nising couples who already have a girl and babo”—“daughter crazy”—formen who doctors to reveal the sex ofa fetus. It are thus highly likely to abort another fe- go loopy over their female offspring. produced pro-girl slogans: “There is no male fetus. The sex ratio for second births Until the early 20th century failure to envy forten sons when you have one in China duly became more normal. But, bear a son was grounds fordivorce. Kore- well-raised daughter.” as Monica Das Gupta of the University of ans greatly preferred boys, who could not That may have helped, but not as Maryland, an expert on the subject, points only support their parents financially but much as economic change. Following the out, some Chinese couples simply moved Asian financial crisis of1997, many wom- to sex-selecting in the first pregnancy. en tookpart-time jobs to supplement the Ms Das Gupta thinks that urbanisation Girl power family income. Parents noticed, and is a more powerful force forchange. A city- South Korea, % responding by age group, 2012 began to invest more heavily in educat- dwelling couple might be teased by neigh- If you could have only one child, would you prefer a: ing girls. In 2015three-quarters ofSouth bours forhaving only girls, but that is noth- DaughterSon No preference Korean female secondary-schoolers ingcompared with the pressure heaped on 0 20406080100 went to university,compared with two- villagersbyclan patriarchsand matriarchs. 18-29 thirds oftheir male peers. And young city-dwellers tend to live apart 30-39 Aborting girls simply because they are from theirparents, which removesone rea- girls has become so unthinkable that the 40-49 son for preferring sons. Now that children law has been relaxed. Since 2009 expec- tend to support their parents by sending 50-59 tant parents have been allowed to know money, daughters are just as good. Urba- 60-69 the sex oftheir baby after 32 weeks’ gesta- nites have access to the latest medical tech- 70+ tion. Many will have found out before, nology, but they seem less keen on using it. from doctors who trust that parents’ Source: Korea General Social Survey As urban women grow more indepen- attitudes have changed. dent and more valuable to their parents, rural men are struggling. Years of skewed sex ratios mean there are already too many that the state felt sorry for those who had ending last July, and hasalso been popular would-be grooms for every village bride. failed to produce a boy. But where govern- in Vietnam. He believeseven conventional Worse, the women they might marry often ments have been confused and half-heart- soaps, which tend to hinge on conflicts be- head for cities, where they can find better ed about the worth ofgirls, popularculture tween women and their mothers-in-law husbands. “There’s an awareness that life has been loud and insistent. and dial all emotions up to 11, get viewers is not great for males,” says Therese Hes- used to the idea of powerful women. “Sto- keth of University College London, who TV is good for you ries with strong male protagonists do not follows sex ratios in China. For sheer attention-grabbing power, noth- workin India,” he says. Indeed, rural Chinese men increasingly ing beats TV in India. One study found that Studies of India have shown that TV- look like burdens on their parents. A re- 51% of women in Kurukshetra, a district in watching is associated with reduced pref- markable paper by Shang-Jin Wei and the state of Haryana, had seen a soap op- erence for sons, even after controlling for Xiaobo Zhang shows that parents of sons era called “Na Aana Is Des Laado” (Don’t wealth and other factors. That might seem in districts with high sex imbalances tend Come To This Country, Beloved Daughter). implausible. ButrememberthatIndians of- to save large amounts of money, fearing That soap revolves around female infanti- ten distrust politicians and public officials, that they will have to splash out on houses, cide: in one episode, a father murders his says Shoma Munshi, an expert on Indian consumer goods and weddings if they are baby daughter by drowning her in milk. By soap operas. They are at least as willing to to snag a local girl. This effect is so strong, contrast, just 5% of women in the district listen to actors. That is why TV and film the authors calculate, that it explains about had seen a film produced by the govern- stars often become politicians, or are used halfthe increase in China’s household sav- ment about the equality of boys and girls, to front public-health campaigns. ings rate between 1990 and 2007. and less than 1% had heard about the sub- Sex ratios remain highly unbalanced in Spying a coming social catastrophe, ject from religious leaders. many countries. But there is an important governments have tried to cajole citizens “TV is not just entertainment—it is a big difference between a giant social problem into prizing girls by putting up posters or source ofeducation,” says Purnendu Shek- and an endless one, and gendercide now even offering them money. They might har, a writer of soap operas. One of his looks like an example of the former. Mr have changed a few minds. But officials soaps, “Balika Vadhu” (Child Bride), is Guilmoto believes that sex ratios will con- have often muddled their message. Under about the evil of child marriage. Mr Shek- tinue to normalise until they return to nat- China’s one-child policy, for example, cou- har thinks the show changed attitudes, ural levels. Asia has engaged in a demo- ples who gave birth to a girl were often al- and it certainly entertained the country. graphic experiment with disastrous lowed to have a second child, implying “Balika Vadhu” ran daily for eight years, consequences. It will surely not repeat it. 7 Business The Economist January 21st 2017 51

Also in this section 52 Fiat’s emissions trouble 53 Scandals at Samsung 54 Europe’s eye-catching merger 54 Rolls-Royce rumbles on 56 Upgrading Indian IT ﬁrms 57 A new boss at Tata Sons 58 Schumpeter: Shareholder value

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

Cigarette companies passed a battery of laws to fight smoking, including taxes and bans on advertising Plucky strike and on smoking in pubs. Tobacco companies have fought these ferociously, suing countries such as Australia for prohibiting logos on cigarette packs, for example. But some rules had hidden benefits. Bans on New York advertising lower marketing costs and make it harder for young upstarts to chal- A mergeris the latest sign ofBig Tobacco’s resilience lenge established brands. RITISH AMERICAN TOBACCO (BAT) which sells Marlboro elsewhere and is the Electronic cigarettes would seem an- B announced on January17th a final deal industry’s leader to date—a scary prospect other existential threat. But they increas- to buy Reynolds American for $49bn. BAT even fora merged BAT and Reynolds. ingly appearto be an opportunity. Large to- already owns 42% of Reynolds; buying the Regardless of whether their rivals’ deal bacco firms are investing in such rest of it will create the world’s largest list- proceeds, the merger of BAT and Reynolds “reduced-risk” products, as they term ed tobacco company by sales and profits. It hasclearlogic. The firmsclaim itcould save them. New requirements fore-cigarettes in will peddle brands such as Dunhill, Camel at least $400m each year. Reynolds will Europe and America, finalised last year, and Newport. The casual observer might also give BAT access to America, a market may also hinder smaller companies’ abili- imagine the deal to be a frantic bid to re- that once looked repulsively litigious but ty to innovate. That could help Big Tobacco vive an ailing industry. On the contrary. now seems stable. Companies still operate gain even greater market share: large firms Cigarettes may kill you, but the big compa- under a vast settlement reached with may be the only ones with resources to nies that make them are rather healthy. American states in 1998, but separate class- navigate complex rules. That is despite a decline in smoking action suits have turned out to be less cost- Companies are particularly bullish on rates. In 2015 just over a fifth of adults ly than feared. new products that heat tobacco, without smoked, estimates the World Health Orga- New regulations have not snuffed out burning it. These gadgets are more satisfy- nisation, down from almost a quarter ten tobacco firms, either. Countries have ing to smokers than e-cigarettes, which years earlier. This drop hardly helps com- contain nicotine but no tobacco, so may panies, but it isn’t ruinous either. encourage more smokers to switch. Ciga- Smokingis still popularin certain spots. Eternal flame rette executives claim that would be a More than three-quarters of men light up Prevalence of smoking, % health boon: just heating tobacco avoids in Indonesia, for example. The habit is be- much of the nasty stuff that comes with FORECAST comingmore common amongmen in Afri- 40 combustion. ca and the eastern Mediterranean (see Less encouraging for health is the pros- Western Europe chart). And though global smoking rates Pacific pectthatsome smokersmightswitch to the have fallen, population growth means that 30 new products rather than give up tobacco about 1.1bn people still smoke, roughly as Eastern completely. For years companies have sold Mediterranean many as did in 2005. This, combined with 20 to a shrinking share of the population. If rising prices, means that the value of retail enough would-be quitters switch to “saf- sales jumped by 29% in the decade to 2015, Africa er” cigarettes instead, firms could slow or according to Euromonitor, a data firm. The Americas 10 even reverse what had seemed a perma- South-East Asia The gravest threat to big cigarette mak- nent downward trend. Far from fading ers comes from rivals. Indeed, this week’s 906Number of smokers worldwide, m 1,006 away, Big Tobacco might be on the verge of 0 deal increases the chance that Altria, 2000 05 10 13 15 20 25 a new boom. which sells Marlboro in America, will be If so, the company formed by BAT and Sources: National Cancer Institute; WHO bought by Philip Morris International, Reynolds stands to gain, as it will combine 1 52 Business The Economist January 21st 2017

2 the two firms’ research into reduced-risk André Calantzopoulos, Philip Morris’s designed to protect the engine. Yet on Janu- products. That will help it compete against chief executive, describes a possible future ary 15th Germany’s transport minister in- Philip Morris, which has spent nearly in which his giant cigarette company sisted that it amounted to an “illegal shut- twice as much on research as BAT. Philip phases out cigarette sales. off device” and said the cars should be Morrisisnowseekingapproval in America Many health advocates view such dec- withdrawn forsale. to market its heated tobacco product as saf- larations sceptically. For now, combustible FCA is not alone. A day after the EPA an- er than traditional cigarettes; it submitted products still account foralmost all of ciga- nounced its investigation of FCA, French its application to American regulators in rette firms’ revenue. And tobacco remains prosecutors said that they were probing Re- December. The firm already reckons the responsible formore than one in nine ofall nault over abnormally high emissions product might add $1bn in profit by 2020. adult deaths. 7 from some ofits diesel engines. The French carmaker’s shares also dipped, but by only 6% and have since rebounded slightly too. Fiat Chrysler Europe’s watchdogs are much less of a threat than the EPA, largely because the Gas puzzlers continent’s emissions rules are open to ratherwide interpretation. Indeed, VW has reached the conclusion that its “defeat device” does not actually contravene Euro- pean regulations. Manydieselsemitfarmore noxious gases than under test conditions. Transport & The Italian-American carmakeris in regulators’ headlights overemissions Environment, an NGO based in Brussels, HE priorities of America’s Environ- them, such as cold-weather starts. reckonsthatnewmodelsfrom the worst of- Tmental Protection Agency (EPA) will Any wrongdoing is strongly denied by fenders produce on average 15 times more doubtless change under Donald Trump. the company. Its chief executive, Sergio NOx on the road than when tested. En- Mr Trump may well relax emissions rules Marchionne, suggested that anyone draw- forcement, however, is almost non-existent for carmakers in return for concessions, ing parallels with the VW scandal was in Europe and no penalties have ever been such as keeping production in America “smoking something illegal”. He called the issued for carmakers contravening emis- rather than relocating to Mexico or other dispute a “difference of opinion” over sions rules. The EU is beefing up its testing lower-cost countries. So it is perhaps no co- whether the engine’s “calibrations met the system but there will still be lots of grey ar- incidence that on January12th, before con- regulations”, insisting that FCA “may be eas forcarmakers to exploit. ditions change, the agency took action technically deficient but not immoral”. The FCA’s biggest worry, therefore, remains against Fiat Chrysler Automobile. It ac- complexities mean it will be hard to prose- the EPA. Even in the worst case—ie, its soft- cused FCA (whose chairman, John Elkann, cute. If FCA is right it can expect a fine but ware is deemed a defeat device—a fine ex- sits on the board of The Economist’s parent nothing as severe as VW’s punishment. ceeding $4 billion would not “break its company) of using software in 104,000 The Italian-American carmaker is also neckin the current environment”, explains Dodge pickups and Jeeps that allowed in the firing line in Europe. A spat with Ger- Patrick Hummel of UBS, a bank. But it them to exceed legal limits on toxic emis- many’s regulators has intensified. In April would scupper Mr Marchionne’s target of sions of nitrogen-oxide (NOx) gases from German authorities concluded that emis- shedding debt and having cash in the bank their diesel engines. sions controls were timed to turn down by 2018 in order to weather any downturn Nervous investors feared a repeat ofthe after 22 minutes of the engine starting in in the global car market, now widely as- huge penalty imposed on Germany’s some of FCA’s cars. Europe’s test cycle lasts sumed to be at a peak. It would also com- Volkswagen (VW) for cheating American around 20 minutes. Italy’s testing agency, plicate any attempts to merge with a big emissions laws. FCA’s shares plummeted which certifies the cars for the European carmaker, anotherofhis ambitions, even if by 16%, though they have since recovered market, dismissed the complaints, saying it he can find a willingpartner. Emissions can slightly.AdayearlierVW had agreed to pay was part of a “modulation” of the controls have far-reaching consequences. 7 a criminal fine of $4.3bn for selling around 500,000 cars in America fitted with so- called “defeat devices” designed to reduce NOx emissions under test conditions. That pushes its total bill for the scandal above $20bn. IfFCA were fined on the same basis it would have to pay over $4bn. Yet the Italian-American carmaker may not suffer so severely. VW admitted that it had employed an illegal defeat device. FCA’s engines used undisclosed software that, under some circumstances, alters the characteristics of emissions controls to exceed NOx limits. Crucially, however, the EPA has not determined whetherthese bits of software constitute a defeat device. Fail- ure to disclose this type of software also breaks the rules, however. The firm must now demonstrate that it is not illegal. Im- portant to its argument will be the fact that excessive emissions are permitted for limited periods, in circumstances where the engine may be damaged without allowing An exhausting process The Economist January 21st 2017 Business 53

that collusion between the state and its chaebol, the large conglomerates behind South Korea’s economic boom, has long been tolerated. Nowhere has that collusion been clear- er than in the circus of corporate pardons: the elder Mr Lee was convicted of bribing politicians in 1996, and of tax evasion in 2008, but spent no time in prison. The mis- creant bosses ofCJ, Hanhwa, Hyundai and SK, other chaebol, have all been sentenced to prison in the past decade. Each has also been pardoned, supposedlybecause ofthe importance of their firms to the economy. (Samsung alone accounts for one-fifth of South Korean exports and is the country’s biggest employer.) Research by Sustinvest, a proxy advisory firm, suggests that argument is dud: the performance of chaebol whose owner- familieshave done stints in prison is usually unharmed. Lawyers for a Democratic Samsung Society, an activistgroup in Seoul, says that “the law has once again knelt before the Heir of disapproval wealthy”. Lee Sung-bo, formerly head of Korea’s anti-corruption and civil-rights agency, says citizens often misunderstand pre-charge arrests as a punishment. The prosecution says that it will carry SEOUL on its investigation “unshaken” by the court’s decision. Investors seem unruffled Lee Jae-yong dodges an arrest on bribery charges too: they are happy with the recent stellar HE deal which did most to secure Lee performance of Samsung Electronics, the TJae-yong’s control over South Korea’s Take note crown jewel of the group (see chart), biggest conglomerate threatened this week Samsung Electronics, share price, won, m whose share price has stayed steady to ruin him. On January16th special prose- throughout the twists and turns of the cutors accused Mr Lee, the only son of 2.0 probe. Despite quarterly losses estimated Samsung’s chairman, Lee Kun-hee, ofbrib- at over 2trn won after a recall last year of ery, embezzlement and perjury. But three 1.5 faulty devices, Samsung Electronics ex- days later a court rejected a request to ar- pects fourth-quarter profit, out on January rest him, as a suspect in an investigation 1.0 24th, to be 9.2trn won: itsbestperformance into a vast influence-peddling case that led in three years. Revived global demand for last month to the South Korean president’s chips and screens that use OLED (organic 0.5 impeachment. It saw “no reasonable light-emitting diode), of which Samsung grounds” to detain him while prosecutors Electronics produces more than any other pursue their probe. 0 firm, are buoying up the firm. For now, the result is a victory for Sam- 1997 2000 05 10 15 17 When the division announced in No- sung. Prosecutors had accused Mr Lee of Source: Thomson Reuters vember that it would boost dividends and paying 43bn won ($36m) into sports and consider moving to a holding-company cultural organisations controlled by Choi of the merger, advisory firms such as ISS structure, its shares rose to a 40-year high Soon-sil, a formerconfidante ofPark Geun- urged shareholders to reject the deal be- on the expectation of more transparency hye, the president: the biggest-ever sum in cause ofa big discrepancy in the two firms’ in its Byzantine workings. A watcher at a a South Korean bribery charge. In return valuations. Because it went ahead, Mr Lee foreign bank in Seoul says that the corrup- for that grant, they allege, Samsung se- wasable to gain large stakesin keyaffiliates tion probe, whateverits outcome, will help cured government support fora controver- at no extra cost through the group’s com- to speed up governance reform at the sial $8bn merger oftwo affiliates—Cheil In- plex web of cross-shareholdings—smooth- group: in a televised hearing last month, dustries, the group’s de facto holding ing an eventual takeover from his father, MrLee said Samsungshould have seta bet- company, and Samsung C&T, its construc- who has been in hospital for nearly three ter example. tion arm—in July 2015. That support, they years since a heart attack. The firm’s image is at stake. South Kore- say, came from a vote cast by the state-run Legal experts say that the decision by ans are fed up with the culture ofimpunity National Pension Service (NPS), the single the court, which deemed that the evidence at its chaebol; many will see the court’s de- biggest shareholder in C&T. (The head of for bribery was not persuasive enough to cision as leniency towards them. In a re- the NPS, who has admitted to pushing the detain Mr Lee before any official charge cent poll, 70% thought their third-genera- fund into backing the merger when he was was made, may yet propel prosecutors to tion heirs were unfit to lead firms run to health minister, was recently indicted.) strengthen their case. The charge, linking a global standards. Mr Lee is trying to bur- During intense questioning by MPsand corporate “princeling” to the president, is nish his credentials to be the face of Sam- prosecutors—including one 22-hour unprecedented, says Chung Sun-sup of sung for the next three decades, says Mr stretch—Mr Lee has said he provided the Chaebul.com, a corporate watchdog based Chung. At the moment, his image is too of- funds, but denies any bribery. At the time in Seoul, the capital. Itcame despite the fact ten used forthe wrong reasons. 7 54 Business The Economist January 21st 2017

French and Italian firms share equal managerial duties of the new Rolls-Royce entity, looks well placed to take charge Into the frame once Mr Del Vecchio retires. Weathering the Building a bigger company looks possible. Some savings will come from knitting storm two teams of managers together. The glo- Paris bal eyewear market, already worth some DERBY €90bn, is alluring. It is expected to grow as A continental mergerbetween A big fine comes at a bad time fora large cohorts ofmiddle-class consumers in Asia, Luxottica and Essilorfits a pattern engine-maker especially, find they need eyesight correc- T MAY be an exaggeration to talk of tion and develop a likingforspecs as acces- OR those who still associate Rolls-Royce IFrench firms “colonising” corporate Italy. soriesorprotection againstultraviolet rays. Fwith its past as a posh carmaker, its Some Italian business leaders nonetheless An amicable merger hardly ranks as a home on a scruffy industrial estate comes fret about expansionists from across the French assault on Italy. But it does come in as a shock. Yet it is there the engine-maker northern border plucking control of some the context of other Franco-Italian tie-ups. assembles the Trent XWB, the second-big- of their most celebrated local firms. Fam- In luxury goods, for example, French con- gest commercial jet engine in the world. ily-run companies, especially, can make glomerates with deep pockets, notably Some components are made to a tolerance tempting prospects: ones that make excel- LVMH and Kering, have been acquiring of 50 microns—the width of a human hair. lent products but struggle to grow, or that smallerItalian rivalsforyears. French firms The job ofrunning the firm is a bit messier. face agonising succession problems, are first grew faster by attending to flourishing On January 16th, in a deal with Ameri- notably juicy targets. markets for accessories such as handbags. can, British and Brazilian regulators, Rolls The latest example, announced this Then they paid handsomely to take over agreed to cough up £671m ($809m) to settle week, is the merger between Luxottica, an prominent Italian brands, including Gucci, allegations that it had in the past secured Italian maker of fancy specs, and Essilor, a Bulgari and Fendi. sales with bribery. The fine is the largest- spiffy French producer of lenses. Together The French are active in other sectors, everimposed by Britain on a firm for crimi- they will produce an entity with a market too. Vincent Bolloré, a swaggering billion- nal conduct. But given the wrongdoing the value of at least €46bn ($49bn), 140,000 aire who is determined to grow in Italy,last deferred prosecution agreement outlines, staff and annual revenues of €15bn. The year led his firm, Vivendi, to buy nearly a the firm got off lightly (the co-operation of deal, one ofthe largest cross-border tie-ups quarter of Telecom Italia. (Unconfirmed the company’s more recent management attempted by European firms, had long rumours say he might sell to another helped). It admitted a dozen counts of cor- been expected by industry watchers. The French operator, Orange.) The daring ruption and bribery in seven countries, idea is to produce an entity that combines Frenchman is also pushing Vivendi in a spanning decades. This included giving of- Italian style and skills in marketing with second bold bid, for Mediaset, a company ficials money, hotel stays and even a luxu- deft French engineering. in which Silvio Berlusconi, a formerItalian ry Rolls-Royce car to secure engine sales. The new firm will be listed on the Paris prime minister, and his family are the big- Rolls has since cut its use of the freewheel- bourse (as probably its eighth-largest firm) gest owners. Vivendi now owns nearly ing third-party consultants who got the later this year. That will mark the culmina- 29% of Mediaset. company in trouble, and promises better tion of a long campaign by Essilor to ar- In retailing, too, a pair of French super- oversight ofall staff. Ifit errs again, the firm range a merger. The founder and owner of market chains, Auchan and Carrefour, to- will be prosecuted for the original charges. Luxottica, Leonardo Del Vecchio, now 81 gether operate more than 2,000 supermar- The settlement puts one source of con- years old, had long resisted. But he now kets in Italy’s unusually fragmented cern to bed: shares in Rolls surged the fol- gushes that “two products which are natu- industry.Given that many businesses in It- lowing day. But investors have other, less rally complementary, namely frames and aly are run by ageing, first-generation foun- tractable worries. Despite bulging order- lenses, will be designed, manufactured ders with no clear plan for succession, books the engine-maker has been strug- and distributed under the same roof.” more targets are bound to attract buyers gling to make any money. His change of heart may stem from the from its neighbour to the north. 7 The last three years have been fraught problem of arranging for a successor. The financially. In 2014 and 2015 Rolls issued company he founded in 1961 is widely lau- five profit warnings in quick succession, ded and owns global brands such as Ray halving the firm’s share price. Last Febru- Ban, Oakley and Sunglass Hut. Mr Del Vec- ary it was humiliatingly forced to cut its chio himself rose from poverty (he spent dividend in two—the first such paring for some of his childhood in an orphanage) to more than 24 years. Next month, it is ex- become Italy’s second-richest man, worth pected to reveal that profits fell from £1.6bn some €20bn. Yet for all his strengths, he in 2014 to just £680m in 2016. The fine—of could not foster a strong alternative leader which £293m will be paid this year—may and would not let any ofhis children (from prevent Rolls from meeting financial tar- variousmarriages) become managers. Col- gets in 2017. leagues felt squeezed out, seeing the boss By rights, Rolls should be raking it in. as reluctant to delegate. One ex-employee The market for passenger jets, the engines says “90% of top management” aban- for which make up more than half of the doned the company in recent years. company’s revenues, is flying at full throt- The deal with Essilor is thus a way out, tle. On January 11th Airbus revealed it had even if Mr Del Vecchio is not stepping built a record 688 planes last year; Boeing a down yet. Through his family trust, Delfin, whopping748. Orders are also solid. As en- he will be the largest shareholder in the gines represent a third of the price tag of a merged entity (potentially with 38% of it) new jet, some analysts reckon that engine- and its “executive chairman and chief ex- makers will sell more than $1 trillion over ecutive” for the next few years. But Essilor’s the next two decades. boss, Hubert Sagnières, who is 61 and will An eye-catching opportunity But Rolls has been badly buffeted by1 Who connects Tigers and Dragons with Bulls and Bears?

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© Nomura Holdings, Inc. 2016. Nomura is the global marketing name for Nomura Holdings, Inc. (Tokyo) and its direct and indirect subsidiaries worldwide including Nomura International (Hong Kong) Limited, licensed and regulated by the Hong Kong Securities and Futures Commission, Nomura Securities International, Inc., a member of SIPC and Nomura International plc, authorized and regulated by the Financial Services Authority and a member of the London Stock Exchange. This is not an offer to sell or a solicitation of an offer to buy any security in any jurisdiction nor does it purport to render professional advice. Use of electronic services is subject to Nomura’s terms of use. For more information, please go to www.nomura.com. 56 Business The Economist January 21st 2017

2 simultaneous downturns in many of its Information technology other businesses. Both its main engine- making rivals, GE and UTC, are huge con- Reboot glomerates, and churn out other products that can make up the shortfall; Rolls is more exposed. Defence cuts have hit demand for its military-jet engines. Low oil prices hurt sales of its power-generation Mumbai turbines and marine engines. As a result, Indian outsourcing specialists must upgrade theirstrategies several investorshave said itshould sell off its non-aerospace divisions and focus on OMPUTERS slow as they age, and be- jet engines, which are largely responsible C fore long must be replaced by newer Low-tech forthe thickness ofits £80bn order-book. models. Something similar is true of the Revenue, moving four quarters To tackle its problems, the engine-mak- business models of Indian IT firms. Spe- % change on a year earlier, $ terms er lured Warren East out of retirement in cialised in running global companies’ out- 50 2015 to turn the firm around. A former boss sourced back-offices, the likes of Infosys, Wipro of ARM, a British chipmaker, he trans- Wipro and Tata Consultancy Services 40 TCS TCS formed the middling startup into a world- ( ) used to be national championsgrow- 30 beating tech giant. It was sold last year to ing at double-digit rates. Their prospects Infosys SoftBank of Japan for£24bn. The new boss have dimmed of late; an entire industry 20 reckons that selling off Rolls’s non-aero- built on the back of globalisation is fretting 10 space businesses is unwise. In November about the incoming American president. + 0 he revealed that the firm’s accountingprac- But Donald Trump is merely the latest – tices had been flattering the performance threat to their operating systems. 10 of its civil-aerospace engines for many Over three decades, Indian IT has be- 2007 08 09 10 11 12 13 14 15 16 years. Instead of the £800m in profit de- come a $140bn industry built on a simple Source: Jefferies India clared for 2015, that division probably proposition: rich-country companies made a small loss. could trim costs by getting tedious behind- biggest customers, have been in penny- the-scenes IT work done by cheap engi- pinchingmode oflate; ditto energycompa- Engine revamp neers in India. The Indian firms hoovered nies struckby falling oil prices. Rolls wants growth to fill that hole. It plans up bright graduates—the big three have But what felt like cyclical softness looks to double production to 600 enginesa year over 700,000 employees in total—paying increasingly like it is being compounded by 2020—the fastest increase to date in its them starting salaries of $5,000 or so, a de- by structural decline. Dollar-denominated history. The boost will increase the firm’s cent local wage. After gaining some experi- growth rates have oscillated but clearly economies of scale in its factories. And the ence, tens ofthousands were dispatched to trended downwards and are now firmly in more of its engines that are installed, the client sites in Europe or America, along the single digits (see chart). Margins ofover more in profitthatcan come from servicing with a few expensive local staff. The rest 20% are coming under pressure, even after them over the next decade, explains Eric ensured their clients’ computer systems a sustained fall in the rupee against the dol- Schulz, the boss of Rolls’s civil-aerospace kept ticking over from cosy cubicles in Ban- lar increased the cost advantage of earning business. Each engine brings in four times galore, Hyderabad and elsewhere. in America and paying staffin India. as much revenue from maintenance over Growth spurts and stalls are nothing There is still plenty of the $900bn glo- its lifetime as from its original sale. Cost- new for the trio, the most international of bal IT services budget for them to capture. cutting is under way to try and pay for the dozens of Indian IT firms (American and But some headwinds now look like they production boost. The firm currently European companies such as IBM, Accen- will endure. Mr Trump’sswearing-in is the makes an initial loss of up to £2m on each ture and Capgemini have large Indian most immediate concern. The incoming and every engine it sells. More than 4,000 presences, too). Their prospects are ulti- president has railed against certain visas jobs have been culled (nearly a tenth of its matelytied to the sluggishrich-worldecon- for skilled workers, many of which are workforce) and a third of cost centres have omies of their clients: America makes up gobbled up by Indian IT firms to send staff been eliminated. over half of Indian IT sales, Europe a quar- on stints to America. A proposal to hike the Mr East says the cuts are ahead of ter. Banks and insurance companies, the minimum salaries to qualify for such 1 schedule. But other challenges lie ahead. Brexitisone. The fallingvalue ofthe pound since June has reduced its assembly costs in Britain, but leaving Europe’s single market will disrupt its international supply chain. Many analysts also question the firm’s decision in 2011 to exit the faster- growing engine market for short-haul planes. Mr East hopes Rolls can consider re-entering this segment in the 2020s with the cash generated by servicing the engines it is currently building. Although reliance on investment today forprofitstomorrowhasbeen compared to a startup’s business plan, investors seem to believe in Mr East’s strategy, says Sandy Morris at Jefferies, a bank. But if Rolls fails to generate the cash for Mr East’s visions, recovery will be hard to engineer. 7 The Economist January 21st 2017 Business 57

novation. Devising a mobile-banking app Tata Sons formillennials, say, is a farcry from parsing lines ofcode for bugs. Chandra’s challenge The IT firms know they need to adapt. Mumbai “We will not survive if we remain in the constricted space of doing as we are told, Old problems await a new boss depending solely on cost arbitrage,” Vishal T WAS a predictable end to a corporate winds. He is a rare boss in India who Sikka, the boss at Infosys, wrote in a recent Isaga which has been anything but started offon the shop floor, as a TCS letter urging staff to shape up. “If we don’t prosaic. On January12th Natarajan Chan- intern three decades ago, rather than we will be made obsolete bythe tidal wave drasekaran, the head ofTata Consultancy being handed the family kingdom. of automation and technology-fuelled Services (TCS), became the boss ofTata But nothing will have prepared Chan- transformation that is almost upon us.” Sons, its parent and India’s largest com- dra forhis new job. From running a single pany. Universally known as Chandra, company, he will now have to oversee Please wait, update in progress and just as universally respected for around 100 businesses that make up the Others have a head start in the race to the helping build up the IT services firm that Tata group. Many are faring poorly, nota- sunlit digital uplands. Accenture has digi- delivers much ofthe salt-to-steel con- bly its European steel unit, an undersized tal-services revenue per employee around glomerate’s profitability, he now takes on mobile-telephony arm in India, a stalled fourtimes its Indian rivals, points out Vaib- India’s toughest corporate job. domestic carmaker, and the struggling hav Dhasmana of Jefferies, a bank. It de- An internal appointment seemed global chain ofTaj hotels. Chandra has rives more than a fifth of its revenues from inevitable. Few expected an outsider no experience in turning around failing such work. Most Indian firms don’t break after the botched defenestration of Tata’s businesses, let alone in any industry out this figure, somewhat tellingly, but it is last boss, Cyrus Mistry, on October 24th. outside IT. Worse, he must ensure his old thought to be in the 10-17% range. Slighted, and emboldened by his family’s TCS fiefdom, whose day-to-day manage- European and American rivals have 18% stake, Mr Mistry has had to be eased ment he will now give up, continues to heftier consulting arms that can shape offthe boards offirms operating under generate enough profits to prop up the companies’ spending. They are eager ac- the Tata aegis, but ofwhich it is often only duds as they are dealt with. quirers ofcompanies, often boutiques that a minority shareholder (fornow he still Mr Mistry complained he was never give them skills they cannot develop inter- sits on the board ofTata Sons). As well as truly at the helm, and that all his deci- nally. They spend more on research and hiring a battalion oflawyers, Mr Mistry sions were second-guessed by Mr Tata in development, too: 2% of revenues for Ac- has thrown heaps ofmud at the group, his role as chairman ofcharitable trusts centure, compared with a mere 0.5-1% of and particularly at Ratan Tata, the 79- that own two-thirds ofthe group. He is revenues at Indian firms. All this reduces year-old patriarch who seized backthe now contesting the legality ofChandra’s profits: Accenture has margins on earnings reins from him. Some ofit has stuck. appointment, to boot. The byzantine before interest and tax of around 15%, not Chandra’s appointment should bring structure that frustrated him remains in much more than half what Indian firms a modicum ofpeace. As boss ofTCS since place. Chandra will need the right ideas have traditionally secured. 2009, he has overseen steady progress, to get Tata backon an even keel—and the The Indian firms are moving in this di- even ifthe company now faces head- authority to put them into action. rection. All have invested in “platforms” they can sell to more than one client—for example, to analyse social media. But by 2 schemes from $60,000 to $100,000 would maintain) with cloud storage (which they their own admission progress has been make many postings uneconomical. do not). And some of the tasks which engi- limited. Pivoting towards higher-value of- That would mean replacing Indian ex- neers used to do, such as tailoring software ferings requires an overhaul of Indian pats to America with locals, especially if fora client, can now be done by machines. companies’ past models, not a tweak. The the cap for the number ofnew visas is low- It seems that workers in India’s vast code- focus must now be on the quality, not the ered from the existing65,000 a year. Add in writing centres are as much at risk of being quantity, ofemployees. Hiring has slowed: higher visa-application fees for large-scale made obsolescent by automation as those in the nine months to end-December 2016, labourimporters, and thatmighttrim up to in factories making cars or shoes. Infosys added 5,700 new staff, compared five percentage points from IT companies’ Indian firms want to get in on the new with 17,000 in the same period a year ago. margins, analysts think. Fuzzy talk of an digital action, which they think is less like- There are fewer junior engineers—able “outsourcing tax” will in any case hardly ly to be commoditised. But they specialise only to carry out the most routine tasks— encourage IT procurement managers to in fixing problems cheaply, not driving in- and more relatively senior staff as a result lookoverseas. (see chart). This middle-age bulge in staff- Changes in how clients think about ers increases staff costs by 5-7%, says Anan- technology is a bigger worry for Indian IT Tried and tested tha Narayan ofCredit Suisse, a bank. firms. Budgets globally are growing steadi- Infosys employees by experience, % All this is happening as Infosys and Wi- ly, at about 3% a year reckons Gartner, a re- pro are still adapting to a newish genera- search outfit. But an increasing amount of 100 tion of professional managers who took the money is spent on trendy stufflike ana- More than over from the entrepreneurs that founded 5 years 80 lytics or the internet of things. Such new these firms. On January 12th, meanwhile, 3-5 years TCS “digital” services will rise from a tenth of 60 lost its respected boss, Natarajan total IT spending in 2014 to over a third in Chandrasekaran, who has been tapped to 2020 accordingto McKinsey, a consultancy. 1-3 years 40 take over the reins at the firm’s parent com- IT managers at big firms think they can pany (see box). The economics that made finance the development of snazzy big- 20 Indian IT such a compelling proposition data projectsand mobile appsbytrimming 0-1 year are fading rather than disappearing alto- spending in their existing IT infrastructure, 0 gether. But as with computers, it is best to 2005 09 12 16 for example by replacing their own data replace an ageing model before it unex- centres (which they pay Indian firms to Sources: Infosys; Credit Suisse pectedly crashes. 7 58 Business The Economist January 21st 2017 Schumpeter Six sects of shareholder value

Businesses’ favourite doctrine will adapt to the age ofpopulism primacy of shareholder value but are prepared to be more pa- tient. At their best these firms are consistently successful—think ofShell or Intel investing on a ten-year time horizon. Corporate oracles, the third group, want to maximise profits within the law, but with a twist. They think the law will evolve with public opinion and so they voluntarily do things today that theymaybe required to do tomorrow. Mostenergyfirmshave become greener to anticipate changing public expectations on pol- lution and safety. Laggards discover it can be devastating when the rules ofcapitalism change. Shares ofcoal and nuclear-energy firms in the rich world have collapsed. Soft-drinks firms may be next, as attitudes and laws about sugar and obesity change. Corporate kings are in a luxurious position. They are so successful at creating shareholder value that they have a licence to ignore it periodically. In July Jamie Dimon, the boss of JPMorgan Chase, now the world’s most valuable bank, gave its lowest-paid staff a pay rise, “because it enables more people to begin to share in the rewards of economic growth”. Paul Polman describes Unilever, the consumer-goods firm he runs, as a non-governmen- tal organisation committed to cutting poverty. He can do so only because Unilever makes a stonking return on equity (ROE) of34%. S THEY slid down the streets of Davos this week, many exec- Outside Western boardrooms, the most common sect is the Autives will have felt a question gnawing in their guts. Who fifth, corporate socialists. These firms are controlled by the state, matters most: shareholders or the people? Around the world a re- familiesor dominant managers. They think that shareholder val- volt seems under way. Agrowing cohort—perhaps a majority—of ue is not as important as social objectives such as employment, citizens want corporations to be cuddlier, invest more at home, high pay or cheap products. But they recognise that institutional pay higher taxes and wages and employ more people, and are investors have some legal powers. So profits are set according to voting forpoliticians who say they will make all that happen. Yet an informal quota system—outside shareholders should get the according to law and convention in most rich countries, firms are minimum required to avoid a revolt, but no more. China’s state run in the interest of shareholders, who usually want companies firms together book an ROE of 6-8%. Goldman Sachs is a cor- to use every legal means to maximise their profits. porate champagne socialist. It pays its shareholders the least it Naive executives fear that they cannot reconcile these two im- can getawaywith and allocateswhatisleftasbonuses foritsstaff. pulses. Should they fire staff, trim costs and expand abroad—and On the farleft are the corporate apostates. They are organised face the wrath of Donald Trump’s Twitter feed, the disgust of in a corporate form but don’t care about shareholders at all. Usu- their children and the risk that they’ll be the first against the wall ally this is a result of political dysfunction. PDVSA, Venezuela’s when the revolution comes? Or do they bend to popular opinion state oil firm, paysformuch ofthe country’swelfare state and cro- and allow profits to fall, inviting the danger that, in the run up to nyism. Fannie Mae and Freddie Mac, two state-owned American their 2018 annual general meeting, a fund manager from, say, Fi- mortgage firms, are run to make cheap loans, not profits. delity or Capital will topple them for underperformance? Wiser executives know that shareholder value comes in Sects change shades ofgrey. It has been a century since the idea was baked into Between 1990 and 2007 companies around the world drifted American law. In 1919 a court ruled that “a business corporation is right, towards shareholders. Now in response to populism they organised and carried on primarily forthe profit ofthe stockhold- may driftback. But don’t expect a governance crisis. The system is ers.” In the 1990s this view spread to Europe, Asia and Latin adaptable. Carmakers are shifting factories to America; drugs America because of reforms to governance laws and the rising and defence firms may slash prices. All have become oracles. clout ofinstitutional investors. But the doctrine is not monolithic. They anticipate that the Trump administration will change rules Schumpeter reckons there are six distinct corporate tribes, each on tariffs and government procurement that govern their busi- with its own interpretation of what shareholder value means. nesses. Shareholders can object only so much. Firms become cor- Firms have some flexibility to choose which one they belong to. porate socialists if they have controlling owners who demand Start at the farright ofthe spectrum, with the corporate funda- they prioritise social objectives. There is no sign ofthis yet. mentalists. Boosting their profits and share price—immediate- Many individual firms will still move the other way, towards ly—is their goal. Firms built on these objectives rarely do well for shareholders. Google is becominga corporate toiler, not a king, as long. Valeant, a Canadian pharmaceutical concern, is an exam- its growth slows. Afterits emissions scandal, Volkswagen is drop- ple. In 2011-15 it raised prices, slashed investment, paid little tax ping its extravagant ways and firing staff. Under its new boss, Tata and fired staff. By 2016 it faced scandals and its shares fell by 85%. Group in India will now start to worry about profits as much as Occasionallyfirmsbecome so weakthattheyuse fundamentalist nation-building. And in order to revive the economy, Japan’s tactics, temporarily, to try to restore confidence. IBM is shoring up firms will need to drive their ROE above the present, sluggish 8%. its stock price with savage cost cuts and share buy-backs. In the contest between shareholders and the people, companies Shift a little to the left and there are the corporate toilers. Most and bosses are caught in the middle. But there are no final victo- Western firms place themselves in this group. They believe in the ries. Just constant, pragmatic accommodations. 7 Finance and economics The Economist January 21st 2017 59

Also in this section 60 Cyprus’s banking Lazarus 60 Ukraine’s economy 61 Buttonwood: Zombie companies 62 Indonesian capital ﬂows 62 American ﬁnancial regulation 63 Brexit and the City 63 Oxfam’s striking wealth sums 64 Free exchange: America and border-adjusted taxes

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Italy’s bank rescue in a stress test—such as one Monte dei Pas- chi failed last summer. That would imply Saving Siena “burden-sharing”, converting junior debt to equity, rather than a bail-in. Separately, retail investors who were “mis-sold” sub- ordinated bonds may be compensated. MILAN The world’s oldest bank, Monte dei Pas- chi was founded in 1472 by Sienese magis- The world’s oldest lenderprovides the European Union’s new bank-rescue rules trates. Its recent history has been an igno- with theirfirst big test ble shambles. With exquisite timing, in NOTHER blow to national pride: on cluding guarantees, for banks. Italy’s share 2007 it bought Antonveneta, another Ital- AJanuary 13th DBRS, a Canadian rating was a piffling €130bn. But “bail-in” has ian bank, from Spain’s Santander for€9bn agency, downgraded Italy’s sovereign since replaced “bail-out”. The Bank Recov- in cash. Further blunders followed. It has debt, stripping the country of its last A rat- ery and Resolution Directive, which came had two capital increases since 2014. In the ing. Government bond-yields rose; so will fully into force last year, demands that year to December 23rd, when the private the cost of funding for Italian banks. Erik banks receiving state help be put into “res- rescue failed and trading was suspended, Nielsen, chief economist of UniCredit, Ita- olution”—in effect, bankruptcy. Share- its share price fell by 88%. ly’s biggest lender, calls the extra €5bn holders and junior creditors cop it, for at How much help it needs now remains ($5.3bn) or so banks will have to put up as least 8% ofliabilities, ifthe state steps in. unclear. The private plan, devised in July, collateral fortheirloans from the European For investors in Monte dei Paschi, the would have stripped out and securitised Central Bank (ECB) “immaterial”. Still, it is outlook may not be so bleak. The govern- €27.6bn-worth (gross) of non-performing a burden they could do without. ment plans a “precautionary recapitalisa- loans and recapitalised the bank with Weighing heaviest on bankers’ minds is tion”—allowed by the directive. To qualify, €5bn. After it failed, the ECB told the bank a planned state rescue of Monte dei Paschi a bank must be solvent; the injection must that its capital shortfall, under an “adverse di Siena, now Italy’s fourth-largest lender. be on market terms; and the capital must scenario” in the summer’s stress test, had A private recapitalisation scheme col- be needed to make up a shortfall identified widened to €8.8bn. But the capital re- lapsed in December, prompting it to seek quired will depend on MrMorelli’s revised government help. Days earlier, anticipat- plan, and in particular on what will be ing the plan’s demise, the state had created Mountain rescue done to clean up bad loans. The conver- a €20bn fund to support ailing banks. Italian banks’ assets, September 30th 2016 sion of bonds to equity could raise €4bn, €bn Nextmonth Monte dei Paschi’schiefex- 0 200 400 600 800 but retail investors, who have around ecutive, Marco Morelli, will present a new €2bn-worth of bonds and are in line for UniCredit business plan. On January 18th he con- the same value in shares, maythen be eligi- firmed to a Senate committee that 500 Intesa Sanpaolo ble for compensation. The government’s branches and 2,450 jobs will go within Banco BPM* total bill could amount to around €6bn. three years. Soon the bankis expected to is- Banca Monte dei Pier Carlo Padoan, the finance minister, sue a state-backed bond, for perhaps Paschi di Siena says the banking system is turning a page. UBI Banca €1.5bn, to shore up liquidity; it hopes even- Ifhe is to be proved right, Monte dei Paschi tually to raise €15bn to replace deposits BPER Banca must be sorted out. Yet other signs are en- that bled away last year. Once the plan is Mediobanca couraging. On January 12th UniCredit’s out, negotiations between Italy and the Banca Mediolanum shareholders approved a €13bn share is- European Commission will ensue, over sue, part of an overdue overhaul. Last year Credito Emiliano the first state rescue of a big bank since the Banca Popolare was the first since 2008 in which banks’ to- commission tightened state-aid rules. di Sondrio tal non-performingexposuresdeclined, ac- Between 2007 and 2014 the commis- Sources: Bloomberg; *Merger of Banco Popolare and cording to PwC, an accounting firm. ABI, company reports Banca Popolare di Milano, Jan 1st 2017 sion approved €5trn-worth of state aid, in- the national banking association, and 1 60 Finance and economics The Economist January 21st 2017

Ukraine’s economy Finance in Cyprus Bank from the brink The other war

The repairjob at Cyprus’s biggest lender KYIV HE banking woes ofItaly,the euro 2016; Moody’s, a rating agency,expects Ukraine’s conflict with Russia is also area’s third-biggest member, pale next 2.7% in 2017. But it is still smaller than T being waged on the financial front to those that, fouryears ago, plagued before the bust. Sustained growth will be Cyprus, its second-smallest. Now there is needed to grind down Cypriot banks’ N THE tense, uncertain days of late 2013, cause forcautious optimism. This month worryingly large heap ofnon-perform- Iwhen Ukrainians filled Kyiv’s Indepen- BankofCyprus, the biggest local lender, ing loans—which as a share ofthe total is dence Square in protest at their govern- finished repaying €11.4bn ($12.2bn) of second only to that ofGreeklenders, ment’s turn towards Russia, the then presi- emergency liquidity assistance from the according to the European Banking Au- dent, Viktor Yanukovych, grabbed a country’s central bank. It followed that thority (see chart). Progress in recent talks lifeline. To bolster his resolve in resisting by returning to the bond markets, raising on reunifying the Greek-Cypriot south of the demands of pro-EU protesters, Russia €250m in a sale ofunsecured notes, the island and the Turkish-Cypriot north, lentUkraine $3bn in the form ofa bond. Mr albeit with a stiff9.25% coupon. which is recognised only by Turkey, Yanukovych was subsequently ousted Even better, on January19th Bankof would surely be a boon. anyway. Russia and Ukraine went to war. Cyprus listed on the London StockEx- The bad-loan pile has, however, been The money was never paid back. change. This, says John Hourican, the shrinking foralmost two years. A new So Russia took legal action against Uk- chiefexecutive, fulfils a promise to in- foreclosure law,says Mr Hourican, has raine. The bond was issued under English vestors in 2014, when the bankraised helped to hasten restructuring, by creat- law, and a hearing began this week in Lon- €1bn ofequity,to list on “a liquid, index- ing a “credible foreclosure threat”. In the don. Those on the Ukrainian side say the driven European exchange”. It is quitting first nine months of2016 BankofCyprus country has no case to answer. In 2015 a the Athens bourse, now that it “no longer took€900m-worth ofproperty onto its group of creditors agreed to a debt restruc- has any business ofsignificance in books, at a “sensible” discount, in swaps turing on favourable terms: Russia refused Greece.” (Its listing in Nicosia remains.) It fordefaulted debt; around €170m-worth to take part. And Russia made it harder for has also rid itselfofoperations in Roma- has been sold. With a bad-loan ratio still Ukraine to repay the bond by annexing nia, Russia, Serbia and Ukraine. Although over 40%, it has a long way to go. But 2017, Crimea and stoking war in the Donbass re- its return on equity is still meagre, just at any rate, has begun well. gion. Moreover, it has fiddled with gas sup- 2.7% in the third quarter, its ratio of equity plies to the country and slapped on trade to risk-weighted assets, a key gauge of sanctions. In 2013-15 Ukraine’s GDP strength, is respectable enough, at14.6%. Sisyphean Cyprus dropped by 15%. The purchasing power of All this marks a big improvement Banks’ non-performing loans as % of total ordinary folk has fallen far more. In 2013 since 2013, when Cyprus seemed in grave September 2016 eight hryvnias bought one American dol- Value, €bn danger oftumbling out ofthe euro area. EU AVERAGE lar; it now takes more than 25. Banks closed their doors and capital 0 1020304050 It is not clear, however, that English controls were imposed forthe first time Greece 86 courts, which pride themselves on their in the zone’s existence. The price ofa Cyprus 14 political impartiality, would wish to rule rescue by the IMF and the rest ofthe definitively that Russia was responsible for currency club was steep. Owners of Portugal 37 Ukraine’s economic woes. Awkwardly, bonds and uninsured deposits in Bank of Italy 255 Ukraine continued to pay interest on the Cyprus and its closest rival, Laiki, were bond in part of 2015, when it was in the “bailed in” (the losers included many Ireland 29 depths of recession. And Crimea was reli- Russians). Laiki was wound up, its bad Spain 127 ant on subsidies from the Ukrainian gov- loans were put into a “bad bank” and its ernment. So Russia’s annexation, per- France 159 good ones and deposits were transferred versely, may have made it easier in some to BankofCyprus. Germany 61 respects forUkraine to repay the bond. The last ofthe capital controls were Netherlands 41 The legal spat comes as the Ukrainian lifted in 2015.The economy returned to economy is looking stronger. The weak growth the same year. It managed 2.9% in Source: European Banking Authority hryvnia is helping to lift exports; in Octo- ber the IMF predicted 2.5% growth in GDP for 2017. A building boom is under way in 2 Cerved, a ratings agency, predict that by now Italy’s third-biggest bank. Another is Kyiv and the shopping malls off Indepen- 2018 bad loans will almost be back to their on the horizon, oftwo Venetian banks. An- dence Square are now filled with people pre-crisis level—although that may depend alysts at Credit Suisse suggest that the gov- eating noodles and hamburgers. A few on what happens to Monte dei Paschi. The ernment’s €20bn fund should suffice to months ago Uber, a car-hailing app, plan to securitise its portfolio was intend- plug any remaining capital gaps. launched in Kyiv. Markets do not seem ed to kick-start a market in duffdebt. All this is necessary—but not sufficient. overly concerned by the prospect of a pro- Italy’s fragmented banking industry is Most banks need to slash costs and get rid Russian Donald Trump becoming Ameri- also consolidating. The resolution in No- of dud loans. With interest rates in the cel- can president: the hryvnia has weakened vember 2015 of four tiny banks, in which lar, revenue is hard to find. And without only slightly since November. bondholders were bailed in, caused stronger growth than Italy’s recent pitiful Were $3bn eventually extracted from uproar. Now UBI Banca, the fifth-largest record, many lenders will find life a grind. Ukraine as a result of the Russian lawsuit, lender, hopes to buy three of the four Forecasters say GDP will expand by just however, the hryvnia would come under “good” residual banks for €1. A merger fi- 0.7% this year and 0.8% next. The vicious renewed pressure. Repaying Russia would nalised on January 1st created Banco BPM, cycle will be hard to break. 7 also infuriate ordinary Ukrainians. Al-1 The Economist January 21st 2017 Finance and economics 61

2 ready, the next few years looktough. To ser- to stamp out corruption and improve the on public pensions is worth 13% ofGDP, ex- vice other dollar debts Ukraine will have rule of law. Some progress has been made. tremely high by international standards. to fork out about $15bn in 2017-20—an The recent nationalisation of the nation’s Popular disillusionment has set in amount roughly equivalent to its current biggest lender, the struggling PrivatBank, about the government’s reformist zeal. reserves offoreign exchange. Should those has maintained financial stability, says To- Elena Besedina of the Kyiv School of Eco- reserves fall below about $10bn, investors masFiala ofDragon Capital, an investment nomics points out that no big names from will start to worry about the country’s fi- bank based in Kyiv. Raising heavily subsi- the old regime have been thrown in jail for nancial health. Ukraine’s bail-out pro- dised gas prices has improved the finances their wrongdoing. GDP per person is less gramme with the IMF, agreed in 2015, ofthe state monopoly, Naftogaz. than a tenth of America’s, yet luxury-car should soften the blow, but it is behind These positives aside, however, reform dealers and fashion boutiques still do a schedule. Last year Ukraine received just momentum has slowed recently. Hopes surprisingly brisk trade. With elections $1bn in disbursements from the fund. that Ukraine’s market for agricultural land scheduled for 2019, populist vote-winning Bond repayment or no bond repay- would be thrown open to foreign investors measures will doubtless be wheeled out. ment, Ukraine’s economic to-do list is have been dashed. Ukraine’s sprawling And this time, Russia will not be financing daunting. Far-reaching reforms are needed pension system needs change: spending any part ofthe bill. 7 Buttonwood Zombies ate our growth

Investors should be aghast at the trend towards a more active industrial policy QUITY markets have shrugged off the growth that cannot be explained by the EBrexitand Trumpvotes. Indicesin Lon- use ofincreased labour or capital.) don and New York have reached new The new versions of industrial policy highs. But individual stocks and indus- are likely only to exacerbate this problem. tries have had the odd wobble, not least They look worryingly like the “Latin when they have been the subject ofa hos- American” model of the 1960s and 1970s tile tweet from the incoming president. (ie, an import-substitution policy). If a “You’ve been fired at” mayturn outto be a company makes an investment decision dominant meme ofthe next fouryears. on the backofa tax breakor a threatening Indeed, what seems to be emerging on presidential tweet, then it is probably not both sides ofthe Atlantic is a new version making the most efficient use of its capi- of industrial policy, in which Brexit nego- tal. It may seem like good news in the tiations, tax laws and trade talks are used short term forthe workers who keep their as a way to favour some industries and jobs. But it is not good in the long run. The punish others. And that ought to be cause companiestheyworkforwill be less com- forreal investor concern. petitive in international markets; and, as The standard criticism of industrial consumers, workers will either pay high- policy is that it is all about “picking win- those aged ten years or older with an inter- er prices or buy inferior goods. Instead of ners”. But the real problem is that it is est-coverage ratio (the ratio of operating in- an inflexible labour market, you get an in- more about protecting the position of es- come to interest expenses) of less than one flexible corporate market. tablished corporations—cosseting losers, in each of the preceding three years. In a It all adds up to a double problem for in other words. harsher age, their creditors might have fin- equity investors. For now the market may Which companies are most likely to ished them off.Buttodaythe zombies shuf- be benefiting from a couple of sugar get protected? The obvious answer is in- fle on, discouraging more efficient firms highs: in Britain, the impact of a falling cumbent groups that possess lobbying from investing and making it harder for ri- pound on the overseas earnings of multi- clout. Many companies have expressed vals to earn increased profits and gain mar- nationals; and in America, the hopes for concern about Brexit, but it is to Nissan, a ket share. Worse still, the decline in new fiscal stimulus and lower corporate taxes. Japanese cargiant, thatthe British govern- business formation may be partly caused But in the longrun, a more interventionist ment has made an undisclosed commit- by the suffocating impact ofzombies. government policy is likely both to weigh ment. Startups are unlikely to be afforded Europe, for example, often gets criti- on economic growth and to make equi- the same courtesy. The danger is that this cised for its economic inflexibility—partic- ties riskier. Who knows, after all, which cements in place the existing structure of ularly in the labourmarket, where the diffi- sectors will fallout offavour? the corporate sector and prevents the culty of firing workers makes companies Imagine the reaction of investors if emergence ofmore efficientfirmsthat can reluctant to hire them in the first place. But left-wing leaders were in charge. If Presi- drive forward productivity improve- the OECD study suggests that the problem dent Bernie Sanders were berating Amer- ments. This has been called the “zombie of corporate ossification may be even ican companies on Twitter,orJeremy Cor- company” phenomenon. more widespread. byn was pledging unquantified British A new paper* from the OECD finds a The issue may also help to explain why government support to manufacturers, link between the proportion of zombie the productivity performance ofthe global markets would be plunging. firms surviving in an economy and de- economy has been so disappointing. Fig- clining productivity.Specifically,a 3.5% in- ures released by the US Conference Board, ...... * “The Walking Dead: Zombie Firms and Productivity crease in the zombie share is associated a research group, earlier this month Performance in OECD Countries” by Mûge Adalet with a1.2% decline in labour productivity showed that total factor productivity (TFP) McGowan, Dan Andrews and Valentine Millot across industries. globally fell in 2015and had been flat in the The paper defines zombie firms as previous two years. (TFP is that element of Economist.com/blogs/buttonwood 62 Finance and economics The Economist January 21st 2017

Indonesian capital flows accorded securities that crashed during the Not as bad as all that crisis, was announced late on January 13th, Heavy baggage Indonesia the Friday before a holiday weekend. The GDP other cases were resolved almost as dis- % increase on a year earlier 8 creetly. Admittedly the amounts involved were comparatively small (Moody’s will 6 JAKARTA pay $864m, Citadel $23m, and the Port Au- 4 thority a mere $400,000). But the cases The economy is not as fragile as were bigger than the numbers suggest. officials’ nervousness suggests 2 0 The Moody’s settlement will inflame N RECENT weeks signs have appeared in 2007 08 09 10 11 12 13 14 15 16* suspicions that Wall Street is infested with the poky arrivals hall at Soekarno-Hatta conflicts of interest. As part of it, the firm I Current-account balance airport in Jakarta, Indonesia’s capital, ex- As % of GDP admitted that it vitiated its stated standards horting visitors to shun the dollar in the 4 for evaluating securities in an area where name of national sovereignty.“Use rupiah 2 those standards put in question its ability for all transactions in Indonesia!” travel- + to win business. It could still assert, how- 0 lers are told, as they wait, interminably, at – ever, that the “settlement contains no find- the luggage carousels. That reflects old sus- 2 ing ofany violation oflaw.” picions of foreign interference in the econ- 4 The case involving the Port Authority omy, South-East Asia’s largest, coupled 2007 08 09 10 11 12 13 14 15 16* stems from its failure to provide investors Source: IMF *Estimate with newer concerns about the currency’s with critical information on the risks of a vulnerability to capital flight. $2.3bn bond offering. Disclosure violations In 2013, when the Federal Reserve’s “ta- Foreigners hold nearly 40% of Indonesia’s are not particularly unusual. The penalty, pering” of its asset purchases led to a 21% local-currency bonds. So it is vulnerable to however, surely is. The cost will be levied slide in the rupiah against the dollar, Indo- souring sentiment. on the Port Authority itself, which is fi- nesia was seen as one of the “fragile five” Still, the economy seems better placed nanced by local taxpayers. No individuals emerging markets. Of late, anxieties have to withstand shocks than a few years ago. were punished. This, says the Securities resurfaced. On December 14th the Fed The trade surplus rose to $8.8bn last year, and Exchange Commission (SEC), is the raised interest rates for the first time in a the highest level since 2011. Exports are re- first time a municipality admitted wrong- year. More rises are expected this year. covering rapidly, boosted by higher prices doingin an enforcementaction. So it opens Higher yields in advanced economies for coal and other commodities. At 1.8% of the door to further actions against munici- draw capital from emerging markets, put- GDP, in the mostrecentquarterthe current- palities ever keener to raise debt. ting pressure on their currencies. The rupi- account deficit is less than half what it was The Citadel settlement, which was re- ah fell by 3.7% against the dollar in Novem- in 2013. External debt is relatively low. vealed on January 13th, revolved around ber, the steepest monthly decline for more Alarmist signs at the airport and lash- charges that unfavourable prices were than a year, as part of a wider sell-off of ing out at banks for their research tend to used to consummate trades from retail cus- emerging-market currencies. bury rather than highlight such positive in- tomers on orders routed from other bro- ThispartlyexplainswhyIndonesianof- dicators. Not for the first time, Indonesian kers. Clients, the SEC concludes, were mis- ficials are so prickly. On January 3rd the fi- nervousness risks making the country ap- led. That is a particularly jarringrevelation: nance ministry severed all business ties pear weaker than it actually is. 7 investors have little or no control over with J.P. Morgan, after the American in- where their trades are filled and little abili- vestment bank downgraded its view of In- ty to detect such problems on their own. donesian equities to “underweight” fol- American financial regulation Citadel neither admitted nor denied guilt. lowing Donald Trump’s election victory. The business prospects of none of the Sri Mulyani Indrawati, the finance minis- Not with a bang defendants seem to have suffered much ter, said that financial institutions have a harm from these investigations. Citadel re- responsibility to create positive sentiment. mainsa huge factorin itsbusiness. The Port On January16th J.P.Morgan partially back- Authority keeps borrowing. Moody’s, S&P tracked, shifting to a “neutral” stance and NEW YORK along with Global Ratings, still domi- saying the post-election volatility it had nate their industry, accounting for 84% of Recent legal cases raise big questions feared had “played out”. all ratings issued in 2015, according to a re- about America’s financial markets It is not the first time Indonesian offi- port issued by the SEC in December. Rev- cials have penalised banks for their re- HIS week, Credit Suisse and Deutsche enues have kept rising for years. The large search. In 2015 Bambang Brodjonegoro, Ms TBank became the latest banking giants agencies have had the heft to comply with Mulyani’s predecessor, memorably told J.P. to finalise multi-billion dollar settlements a costly regulatory framework imposed Morgan analysts responsible for a similar- with American authorities over misdeeds after the crisis. Smaller ones struggle. ly critical note to do 100 press-ups. Ms Mu- in the mortgage market in the run-up to the It is worth wondering whether these lyani, however, is widely regarded as the financial crisis. But other, less publicised three entities would fare worse if their le- cabinet’s most pro-market member, fol- settlements have hissed out of the waning gal travails were better known. The Port lowing a previous, reformist stint as fi- Obama administration like a series of Authority, for example, might be required nance minister in 2005-10. Markets rallied slow punctures: with Moody’s, a leading to disclose its failure prominently on its when the president, Joko Widodo, brought credit-rating agency; with Citadel Securi- website, forlocal residents to see. Similarly, her back in a reshuffle last July. So her ac- ties, a critical component of America’s Citadel could be required to note its settle- tions tookobservers aback. equity-trading system; and with the Port ment on trade confirmations sent to cli- Indonesia relies on foreign capital to fi- Authority of New York and New Jersey. ents. And Moody’s could add a footnote to nance a current-account deficit (see chart). High-profile defendants all, but the most ratings citing its admission. That would be Foreign reserves amount to a hefty $116bn, striking characteristic of the deals is how consistent with the original mission of the but are amongthe lowest in Asia relative to gently their tyres were let down. SEC: to provide relevant, timely informa- the economy’s overall financing needs. The Moody’s deal, about high ratings tion to the market. 7 The Economist January 21st 2017 Finance and economics 63

Inequality A minivan of Mammon

DAVOS Are eight men as wealthy as halfthe world’s population? VERY ten minutes, blackVolkswagen ed from the comparison, the poorest half Eshuttle vans ferrydelegates from their ofthe remaining population would have hotels in Davos, Switzerland, to this a combined wealth equivalent to the year’s World Economic Forum, held from richest 98 billionaires. January17thto 20th. Ifyou could squeeze The Credit Suisse team converts the the world’s eight richest men into one of world’s wealth into dollars at market these vans, they might feel cramped. But rates. But the dollar stretches further in they could comfortthemselves with an poor countries. So studies ofglobal pov- extraordinary statistic: according to erty typically make currency conversions Oxfam, a charity,they own as much at “purchasing-power parity” (PPP) in- wealth ($426bn) as halfthe world’s pop- stead. Wealth data also exclude the ulation combined ($409bn). poor’s biggest asset: their labour or “hu- Tomake this striking calculation, the man capital”. The returns on that asset— Brexit and financial regulation charity draws on data from Forbes maga- such as wages—do however appear in zine, which lists the wealth ofthe billion- income statistics. So whereas the bottom Lost passports aires, and Credit Suisse, which estimates halfofthe global population have a the smaller holdings ofeveryone else, negligible share ofglobal wealth (only thanks to painstaking workby three 0.15% at market exchange rates, according scholars ofwealth, Anthony Shorrocks, to Credit Suisse), they have a bigger share Jim Davies and Rodrigo Lluberas. ofglobal income (10.6% at PPP in 2013, the Pedants can nonetheless criticise latest number available, according to How the City hopes to secure its future Oxfam’sheadline-grabbing comparison Christoph Lakner ofthe World Bank). aftera hard Brexit for its handling ofdebt, the dollar, labour In valuing the poor’s wealth at HERESAMAY’Sspeech on January17th and data. The world’s least wealthy $409bn, Oxfamalso seems to have com- Tset Britain definitively on a path to a include over 420m adults whose debts mitted a rounding error. The figure “hard” Brexit, in which it will leave not just exceed their assets, leaving them with should be just $384bn, according to Mr the EU but the European single market. negative net worth. Most ofthis net debt Shorrocks (although the data are too This was not what the City of London is owed by people in high-income coun- patchy to allow much precision). For wanted to hear. The prime minister did at tries. There are, forexample, over 21m what it’s worth, $384bn is less than the least pick out finance, along with carmak- Americans with a combined wealth of wealth ofthe world’s seven richest men. ing, as an industry for which “elements of minus $357bn. Only people with relative- There would be no need to squeeze current single-market arrangements” ly good prospects, by global standards, Michael Bloomberg, the world’s eighth- might remain in place as part of a future can be so poor; the wretched ofthe earth richest person, into the minivan. That trade deal. The City is holding out hope could never borrow so much. Ifall of the would leave room forthe magnificent that a bespoke deal built on the existing le- people with sub-zero wealth are exclud- seven to stretch their legs. gal concept of “equivalence” could still accord it a fairdegree ofaccess to Europe. “Passporting”, which allows financial might even allow Britain to remove some outs. Even before the Brexit referendum in firms in one EU member state automatical- onerous regulations. Jonathan Herbst of June the ECB had sought to move euro ly to serve customers in the other 27 with- Norton Rose Fulbright, another law firm, clearing into the euro area. out setting up local operations, was always notes that precedents exist for“variable ge- Yet that is not a reason to dismiss equiv- goingto be difficultafterBrexit. Outside the ometry” in regulation. For instance, to gain alence altogether. It would seem strange, single market, says Damian Carolan of Al- access to American clients, some British as MrHerbst points out, to admit Canadian len & Overy, a lawfirm, the “passportaswe clearing houses already submit to partial banks into the EU on the back of the recent know it is dead.” Already, two big banks, American regulatory oversight. If they EU-Canada free-trade deal under better HSBC and UBS, this week each confirmed deal in euro-denominated trades, nothing terms than British banks. (Indeed, many plans to move 1,000 jobs from London. seems to stop them from submittingto, say, Canadian bankshave theirmain European Financial companies all have to firm up direct oversight by the European Central presence in London.) their contingency plans. For the City, these Bankwithout leaving London. Even on clearing, it is more likely that focus on so-called “equivalence” provi- Such proposals may be stymied by cold euro-denominated derivatives would sions, allowing third-country financial political considerations. Equivalence de- move to New York rather than continental firms access to the EU if their home coun- terminations are at the full discretion ofEU Europe. According to Mr Carolan, it would try’s regulatory regime is deemed equiva- regulators, and the status can be with- be tricky for the ECB to stop this unless it lent. Currently only some regulations, drawn at short notice. Britain, as a current were to forbid European banks from using such as those governing clearing houses EU member, starts with identical rules. In a non-European clearing houses, which and securities trading, contain the provi- charged political environment, even a would deprive them of access to liquidity. sions. Much of finance, notably bank lend- small future divergence could be con- It might be in the ECB’s interest, then, to ing and insurance, is not covered. And strued as moving away from equivalence. agree on a bespoke arrangement on clear- even where the provisions exist, applying For all the creative solutions proposed by ing. Other financial-market activities may them will, in effect, be a political decision. lawyers in London, Europeans are not prove harder nuts to crack—especially if, as Optimists hope equivalence could not minded to let Britain offthe hookby allow- seems possible, broader Brexit negotia- just form the basis of a feasible deal, but ing it easily to “cherry-pick” sectoral carve- tions descend into acrimony. 7 64 Finance and economics The Economist January 21st 2017 Free exchange Tariff-eyeing policy

Both economics and politics could confoundRepublican taxplans MONG other things, the start of Donald Trump’s presidency to include foreign sales of American mugs. The American tax Athis week heralds a collision between campaigning rhetoric would then come on top of whatever sales taxes were in place in and legislative and economic reality. What follows will be a foreignmarkets, leavingtheAmerican mugsata significant disad- learning experience forall, it is fairto say.Though not perhaps the vantage relative to competitors. The rebate paid to exporters isthe most consequential ofthe loomingreality checks, the outcome of way the government prevents what is essentially a national sales a brewingdebate overa proposed border-adjusted taxplan could tax from penalising domestic firms seeking to compete in foreign prove a taste of things to come. As Mr Trump and his Congress markets. A value-added tax with border adjustments has no ef- workto make policy,there are many ways forthings to go awry. fect on export competitiveness whatsoever. Sad! Both MrTrumpand congressional Republicans are keen to cut That is not quite the end of the story. Republican leaders do taxes on corporations. America’s inefficient corporate-taxsystem not consider their plan to be a VAT. That is partly because label- has remarkably high rates but leaks like a sieve, yielding a pitiful ling it as such might discomfit rank-and-file Republicans accus- tax take (see chart). As a solution, Mr Trumpfavours a large cut in tomed to seeing VAT as a money-generating machine, fit to sup- the corporate-tax rate, from 35% to 15%, and a chance for compa- port a European-style welfare state. More substantively, Mr nies to repatriate foreign profits at a tax rate of 10%. Paul Ryan, Ryan’s reform also exempts labour costs: a practice common in Speaker of the House of Representatives and chief Republican corporate income-tax regimes but not VATs. policy wonk, has something very different in mind. Exempting firms’ wage bills would add an additional subsidy At present American firms are assessed for tax on their global to exporters’ rebates, which might cause the plan to run afoul of income. This encourages multinationals either to use clever ac- the rules of the World Trade Organisation (or at least to attract a counting to book profits in foreign subsidiaries, or to “invert”: to challenge from other countries). Still, the effect of the wage ex- relocate their headquarters, at least on paper, to countries with emption is similar to that of a cut in payroll tax. It can hardly be more favourable tax regimes. Mr Ryan’s radical solution is to taken as a ham-fisted attempt to sock it to foreign competitors. scrap the tax on corporate income and replace it with a modified Perhaps this should come as no surprise. Mr Ryan unveiled his value-added tax (VAT). The new tax, assessed at a rate of 20%, plan in June oflast year, long before election day, in a distant past would apply to all domestic sales while exempting foreign ones. when Republicans were less supportive of trade restrictions. It is This “destination-based” system would reduce the incentive to tempting to suspect congressional leaders of trying to slip a non- move profits oroperations abroad. As is common in VAT systems, protectionist tax plan past Mr Trump under the cover of “border the plan includes a border adjustment: imports would be subject adjustment” language. to the taxwhile firmswould receive a creditfortheir exports. And If so, Mr Trump is on to them. In a recent interview with the that is where things get tricky. Wall Street Journal he criticised the complexity of the plan, add- Many suppose that a VAT, because of the adjustment, pro- ing: “Anytime I hear ‘border adjustment’, I don’t love it.” A more vides the countries which use it with an export advantage. Some straightforwardly mercantilist policy such as import tariffs might Republicans have argued in favour of their reform plan on just not please him any better, even ifhe could wring one out ofCon- those grounds. Imposing a 20% VAT means adding 20% to the gress. In a world offlexible exchange rates, policies which reduce price of imports while rebating domestic firms 20% of the value demand for foreign goods—and, correspondingly, for foreign cur- oftheir exports. The combination ofimport tax and export subsi- rency—generate exchange-rate shifts which offset much of the dycertainlysoundslikea boon to exportingfirms. Yet economists competitiveness effect. are practically unanimous in their view that it is not. Tosee why,imagine that Congress were to impose a universal We’ve had enough ofexports sales tax on all coffee mugs sold in America, regardless of origin. Indeed, plans fortariffs could generate a speedy rise in the dollar, The tax would have no effect on the price of American coffee squeezing goods exporters before tariffs take effect (and hurting mugs sold abroad and therefore would not give a boost to export- exporters of services who could not expect much help from ta- ing American mugmakers. Suppose the tax were then extended riffs in the first place). American exporters would suffer in the short run, and a rising dollar could exacerbate global financial stress. Mr Trump seems to be aware of that threat as well. In the The American exception same interview he suggested the time was right for a dollar de- Tax revenue as % of GDP, 2015 cline, as the currency’s strength, as he put it, is “killing us”. In this Corporate tax Value-added tax Corporate-tax rate, % area, as in others, the need to make real-world policy decisions 0246810 will reveal to Mr Trump previously unappreciated inconsisten- Australia* 30.0 cies in his policy preferences. In practice, the impact that competing Republican tax plans Japan 32.1 have on exports will be a sideshow. Centre stage will be occupied Canada 26.7 byotherissues: the impactoftaxchangeson inequality, forexam- Sweden 22.0 ple; and separate policy debates such as over the repeal of Oba- Britain 20.0 macare. Overshadowing it all will be the unceasing, stomach- churning drama to be expected in the presidency of Mr Trump. United States 39.0 But the tax-policy battle will reveal how well he and Congress France 38.0 can manipulate each other. And it will give a taste of how the 7 Germany 30.2 president reacts when economies fail to do as they are told. Source: OECD *2014 Economist.com/blogs/freeexchange Science and technology The Economist January 21st 2017 65

Also in this section 66 Evolution and panda genetics 67 Sunspots, 290m years ago 68 Supercavitating torpedoes

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Modelling brains Kong”—the Nintendo game that introduced Mario the plumber to the world— Does not compute while preserving its ability to run other games. But it would be a mistake, Dr Jonas points out, to conclude that those transistors were thus uniquely responsible for “Donkey Kong”. The truth is more subtle. They are instead part of a circuit which implements a much more basic computing A cautionary tale about the promises ofmodern brain science function that is crucial for loading one EUROSCIENCE, like many other sci- true about how the chip works. piece ofsoftware, but not some others. Nences, has a bottomless appetite for Their test subject was the MOS Technol- Another neuroscientific approach is to data. Flashy enterprises such as the BRAIN ogy6502, firstproduced in 1975 and famous look for correlations between the activity Initiative, announced by Barack Obama in for powering, among other things, early ofgroupsofnerve cellsand a particular be- 2013, orthe Human Brain Project, approved Atari, Apple and Commodore computers. haviour. Applied to the chip, the research- by the European Union in the same year, With just 3,510 transistors, the 6502 is sim- ers’ algorithms found five transistors aim to analyse the way that thousands or ple enough for enthusiasts to have created whose activity was strongly correlated even millions of nerve cells interact in a a simulation that can model the electrical with the brightness of the most recently real brain. The hope is that the torrents of state ofevery transistor, and the voltage on displayed pixel on the screen. Again, data these schemes generate will contain every one of the thousands of wires con- though, that seemingly significant finding some crucial nuggets that let neuroscien- necting those transistors to each other, as was mostly an illusion. Drs Jonas and tists get closer to understanding how exact- the virtual chip runs a particular program. Kordingknow that these transistors are not ly the brain does what it does. That simulation produces about 1.5 giga- directly involved in drawing pictures on But a paper just published in PLOS Com- bytes ofdata a second—a large amount, but the screen. (In the Atari, that was the job of putational Biology questions whether well within the capabilities of the algo- an entirely different chip, the Television In- more information is the same thing as rithms currently employed to probe the terface Adaptor.) They are only involved in more understanding. It does so by way of mysteries ofbiological brains. the trivial sense that they are used by some neuroscience’s favourite analogy: compar- part ofthe program which is ultimately de- ing the brain to a computer. Like brains, The chips are down ciding what goes on the screen. computers process information by shuf- One common tactic in brain science is to The researchers also analysed the fling electricity around complicated cir- compare damaged brains with healthy chip’s wiring diagram, something biolo- cuits. Unlike the workings of brains, ones. If damage to part of the brain causes gists would call its connectome. Feeding though, those of computers are under- predictable changes in behaviour, then re- this into analytical algorithms yielded lots stood on every level. searchers can infer what that part of the ofsuperficially impressive data that hinted Eric Jonas of the University of Califor- brain does. In rats, for instance, damaging at the presence of some of the structures nia, Berkeley, and Konrad Kording of the hippocampuses—two small, banana- which the researchers knew were present Northwestern University, in Chicago, who shaped structures buried towards the bot- within the chip. On closer inspection, both have backgrounds in neuroscience tom of the brain—reliably interferes with though, little of it turned out to be useful. and electronic engineering, reasoned that the creatures’ ability to recognise objects. The patterns were a mishmash of unrelat- a computer was therefore a good way to When applied to the chip, though, that ed structures that were as misleading as test the analytical toolkit used by modern method turned up some interesting false they were illuminating. This fits with the neuroscience. Their idea was to see wheth- positives. The researchers found, for in- frustrating experience of real neurosci- er applying those techniques to a micro- stance, that disabling one particular group ence. Researchers have had a complete processor produced information that of transistors prevented the chip from run- connectome of a tiny worm, Caenorhabdi- matched what they already knew to be ning the boot-up sequence of “Donkey tis elegans, which has just 302 nerve cells, 1 66 Science and technology The Economist January 21st 2017

2 since 1986. Yet they understand much less about how the creature’s “brain” works than they do about computer chips with millions oftimes as many components. The essential problem, says Dr Jonas, is that the neuroscience techniques failed to find many chip structures that the researchers knew were there, and which are vital for comprehending what is actually going on in it. Chips are made from transistors, which are tiny electronic switches. These are organised into logic gates, which implement simple logical operations. Those gates, in turn, are organised into structures such as adders (which do exactly what their name suggests). An arithmetic logic unit might contain several adders. And so on. But inferringthe existence ofsuch high- level structures—working out exactly how the mess of electrical currents within the chip gives rise to a cartoon ape throwing barrels at a plumber—is difficult. That is not a problem unique to neuroscience. Dr Jo- nas draws a comparison with the Human Panda genetics Genome Project, the heroic effort to sequence a complete human genome that Hey, dude. Give me six! finished in 2003. The hope was that this would provide insights into everything from cancer to ageing. But it has proved much more difficult than expected to ex- tract those sorts of revelations from what is, ultimately, just a long string of text writ- Two strange mammals illuminate the process ofnatural selection ten in the fourletters ofthe genetic code. Things were not entirely hopeless. The ONVERGENT evolution—the arrival, ously of all, both have a sixth digit on their researchers’ algorithms did, for instance, C independently, by different species at forepaws—a kind of ancillary thumb de- detect the master clock signal, which co- the same answer to a question posed by rived from one of the bones of the wrist ordinates the operations of different parts nature—is a topic of great interest to biolo- that helps them hold bamboo stalks for ofthe chip. And some neuroscientists have gists. One aspect of the phenomenon consumption. These common features led criticised the paper, arguing that the analo- which has not yet been much looked at, Hu Yibo of the Institute of Zoology, in Beij- gy between chips and brains is not so close however, is its underlying genetics. In paring, and his colleagues, to wonder if the that techniques for analysing one should ticular, an issue not previously addressed two vegetarian carnivores also shared ge- automatically workon the other. is how often such changes arise from simi- netic modifications that might explain Gaël Varoquaux, a machine-learning lar mutations in the two convergent lines, those features. And, as Dr Hu observes in a specialist at the Institute for Research in and how often they have different genetic paper just published in the Proceedings of Computer Science and Automation, in causes that happen to have similar effects the National Academy of Sciences, they do. France, says that the 6502 in particular is on the organisms’ forms and functions. To search for such genetic commonal- about as different from a brain as it could That has now been rectified by an exami- ities, Dr Hu and his colleagues compared be. Such primitive chips process informa- nation of two creatures which, though the DNA of the two pandas with that of tion sequentially. Brains (and modern only distantly related, share an unusual four other members of the Carnivora: po- microprocessors) juggle many computa- feeding habit, an unusual anatomical fea- lar bears (close relatives of giant pandas), tions at once. And he points out that, for all ture and an unusual name: panda. ferrets (close relatives of red pandas), and its limitations, neuroscience has made real The giant panda is a black and white tigers and dogs (close relatives of neither). progress. The ins-and-outs of parts of the bear. The red panda (pictured above) is re- If pandas share features of their DNA with visual system, for instance, such as how it lated to weasels, raccoons and skunks. each other, but not with the four compari- categorises features like lines and shapes, Their habitats—mountainous areas of son species, he reasoned, then it is likely are reasonably well understood. southern China and its neighbours—over- that those features encode recent adapta- Dr Jonas acknowledges both points. “I lap, but their last common ancestor lived tions common to the two ofthem. don’t want to claim that neuroscience has 43m years ago. They do, though, share a Altogether, the team identified 70 genes accomplished nothing!” he says. Instead, limited kinship, for both are members (out of the 20,000 or so that mammals he goes back to the analogy with the Hu- (along with dogs, cats, hyenas, mongooses, have) which sport bits ofDNA that seemed man Genome Project. The data it generat- seals and so on) of the mammalian order to be shared. They also found ten genes ed, and the reams of extra information Carnivora. Which is curious, because both which have been disabled by crippling churned out by modern, far more capable are vegetarian. mutations in both ofthe pandas, but not in gene-sequencers, have certainly been use- More intriguing still, both subsist al- the other fourspecies. Not all ofthe shared ful. But hype-fuelled hopes of an immedi- most entirely on bamboo (some etymolo- genetic features obviously tied in with the ate leap in understanding were dashed. gists think their mutual name is derived shared peculiarities of pandas, but some Obtaining data is one thing. Working out from the Nepali phrase nigalya ponya, did. These fell into three categories: genes what they are saying is another. 7 meaning “bamboo-eater”). And most curi- affecting anatomy, genes affecting appetite 1 The Economist January 21st 2017 Science and technology 67

2 and genes affecting the digestion and me- Solar physics and palaeontology nearby fossil forest. This forest (imagined tabolism ofnutrients. in an artist’s impression below) was bu- The anatomy-related adaptations were Set in stone ried by a volcanic eruption 290m years those that seemed to control the develop- ago, during the Permian period. And, as ment of the pandas’ second thumbs. Two they report in Geology, Mr Luthardt and Dr genes in particular, DYNC2H1 and pericen- Rössler have found that the sunspot cycle trin, have mutations that cause identical waslittle differentthen from whatit isnow. changes in each type of panda in the pro- The Chemnitz fossil trees, mostly coni- An ancient forest reveals the sun’s teins encoded by these genes. In mice, mu- fers and ferns, are particularly well pre- behaviour290m years ago tations in these genes are known to en- served. Volcanic minerals seeped into courage extra digits to grow, so it is not VERY11years or so, a new sunspot cycle them soon after the eruption and petrified unreasonable to suspect that they are also Ebegins. Sunspots are apparent blemish- them before bacteria and fungi could rot the cause ofthis in pandas. es in the sun’s photosphere, the layer their tissues away. Mr Luthardt and Dr The appetite-modifying change in- which emits its light. Though still hot Rösslerselected 43 ofthe largestspecimens volved one of the disabled genes. When (about 3,500°C), they are cooler than their and looked at their growth rings. working, this gene encodes a protein surroundings (about 5,500°C) and thus ap- They found 1,917 rings which were in a which formspartofthe tongue’staste buds pear dark by contrast. A cycle starts with good enough state to be measured under a for umami, a savoury “meatiness” sepa- spots appearing at mid-latitudes in both microscope. They knew that the trees had rate from the other four tastes of sweet- northern and southern hemispheres. Over died simultaneously, giving them a base- ness, sourness, bitterness and saltiness. time, the spot-generating areas migrate to- line to workfrom, and so were able to com- Umami perception is stimulated by glu- wards the equator. As they do so, the pare the rings from different plants. They tamic acid, one of the 20 amino acids that amount of light and other radiation the were stunned by how clearly they could make up proteins—but one that is more sun emits first increases to a maximum see the cycles. characteristic of animal proteins than and then decreases to a minimum, until About three-quarters of their speci- plant ones. Sensitivity to umami is valu- the spots vanish and the cycle renews. mens showed synchronous growth peaks able to a carnivore but unnecessary (and On Earth, the increased illumination of like those caused by modern sunspot ac- possibly harmful) to a herbivore. solar maxima drives photosynthesis, and tivity. In total, the rings they measured let The other genetic convergences Dr Hu thus plant growth. That permits botanists them study 79 years of forest growth be- recorded were related to the digestion and to use trees’ annual growth rings to work fore the eruption. During this period, the metabolism of substances scarce in, or about what sunspot activity was like hun- solar cycle averaged 10.6 years. That com- sent from, bamboo. He and his colleagues dreds, and occasionally thousands, of pares with 11.2 years in the modern era, al- noted parallel changes in the genes for years ago. Determining solar activity mil- though this figure conceals wide variation three digestive enzymes whose job is to lions of years ago, though, has not been so in the lengths of individual cycles. Within liberate two particular amino acids, lysine easy. But it is of interest to solar physicists, statistical limits, then, it seems that the sun- and arginine, from proteins. Both lysine who wonderhow farbackinto the past the spot cycle was the same in the early Perm- and arginine are abundant in meat, but in oscillations of the sun’s magnetic field that ian as it is now, suggesting that the sun’s short supply in bamboo. The team also drive the cycle go, and how they might magnetic oscillations were the same then noted parallel changes in four genes that have changed over the course oftime. as they are at present. Whether that is a co- encode proteins involved in the metabo- Now,Ludwig Luthardt and Ronny Röss- incidence has yet to be determined, but lism oftwo vitamins, A and B12, and ofara- ler of the Natural History Museum of there is no reason why the method Mr chidonic acid, a lipid essential for bodily Chemnitz, in Germany, have cracked the Luthardt and Dr Rössler have developed function. All of these are scarce or non-ex- problem. They have been able to apply the should notbe applied to otherpetrified for- istent in bamboo as well. Exactly how the tree-ring method to petrified trunks from a ests, from different periods, to find out. 7 geneticchangesseen alterthe effectiveness of the proteins involved remains to be determined. But the prediction would be that they enhance the availability of the nutri- ents in question. The upshotisthatthe two pandas do indeed seem to have similar genetics underlying their similar peculiarities. Such simi- larities are, admittedly, easier to find than different genetic routes to the same outcome would be. But Dr Hu has established that, at least in the case of pandas, natural selection has often taken the same paths to arrive at the same outcomes. 7

The Richard Casement internship

We invite applications for the 2017 Richard Casement internship. We are looking for a would-be journalist to spend three months of the summer working on the newspaper in London, writing about science and technology. Applicants should write a letter introducing themselves and an article of about 600 words that they think would be suitable for publication in the Science and Technology section. They should be prepared to come for an interview in London or New York. A stipend of £2,000 a month will be paid to the successful candidate. Applications must reach us by January 27th. These should be sent to: [email protected] Down in the forest, something stirred 68 Science and technology The Economist January 21st 2017

fence Advanced Research Projects Agency. The firms’ engineers tried to overcome the guidance problem by developing a new type of cavitator. Rather than a flat disc, General Dynamics’ design had a curved surface, increasing the area available forsonarreception. In addition the sonar’s transmitters, mounted on the torpedo’s steering fins, were separate from the receiver, and the interference caused byen- gine noise was reduced by special filters. In the end, though, these efforts ran into the sand. Barracuda was never completed. General Dynamics’ project was shelved after a year. American naval research into supercavitation in general ended in 2012, though which particular problems proved insurmountable has never been revealed. Russia, though, has not given up on the idea. In October 2016 plans emerged for a new supercavitating torpedo, Khishchnik (“Predator”). Few details have been released, except that the work is being carried out by Elektropribor, a design bureau Submarine warfare specialising in high-precision systems for submarines. Combining a General Dy- Torpedo junction namics-style sonar with a better motor could, however, result in a weapon that the world’s navies would truly have to fear. Such a motor is possible, according to Georgiy Savchenko of the Institute of Hydromechanics at Ukraine’s National Academy of Sciences. His supercavitation- A new Russian weapon may give that country an underwateradvantage research group estimates that with the HEN introduced 40 years ago, the So- The resultisthatmostofthe torpedo ex- right fuel (perhaps lithium, which packs Wviet Shkval (“Squall”) torpedo was periences no hydrodynamic drag, greatly more energy per kilogram than magne- hailed as an “aircraft-carrier killer” be- enhancingits potential velocity. To take ad- sium) a new torpedo could have ten times cause its speed, more than 370kph (200 vantage of this it is propelled, when the the range of Shkval. It would still be noisy, knots), was four times that of any Ameri- booster rocket runs out of oomph, by a hy- but, added to itsspeed, such a combination can rival. The claim was premature. Pro- drojet—a motor fuelled by a material, such ofrange and trackingability would make it blems with its design meant Shkval turned as magnesium, that will burn in water. hard to evade. Moreover, there is no theo- out to be less threatening than hoped (or, Shkval’s problems are threefold. First, it retical reason why Khishchnik should not from a NATO point of view, less dangerous has a short range—around 15km compared travel quite a lot fasterthan Shkval does. In than feared), even though it is still made with around 50km for America’s principal laboratory tests, supercavitating projec- and deployed. But supercavitation, the submarine-launched torpedo, the Mk 48. tiles have clocked more than 5,000kph. principle upon which its speed depends, Second, the hydrojet is noisy, so opponents has continued to intrigue torpedo design- can hear the weapon coming. Third, it can- Kanyon diabolo ers. Now, noises coming out of the Soviet not track its target. Most torpedoes use so- The supercavitating design being devel- Union’s successor, Russia, are leading nar to home in on the ship they are intend- oped for Khishchnik might also feed into some in the West to worry that the coun- ed to sink. Because Shkval travels inside a the Kanyon project, a giant nuclear-pow- try’s engineers have cracked it. bubble, any sonar needs to be mounted on ered torpedo with a nuclear warhead that the cavitation disc, which is too small for isintended to attackcoastal targets. In what Life in a bubble the purpose. In addition, returning sonar was either a deliberate leak or a piece of Bubbles ofvapour (ie, cavities) form in wa- pings would be drowned out by the hydro- disinformation, this project was revealed ter wherever there is low pressure, such as jet’snoise. Asa consequence, Shkval’sonly to the world in 2015 during a televised on the trailing edges of propeller blades. guidance is an autopilot which steers it to- meeting between Vladimir Putin, Russia’s For engineers, this is usually a problem. In wards the place where its target was locat- president, and senior officers of the coun- the case of propellers, the cavities erode ed at the moment of launch, in the hope try’s armed forces. The camera, looking the blades’ substance. Shkval’s designers, that the target has not moved. overone ofthese officers’ shoulders, gave a however, sought, by amplifying the phe- These deficiencies have not stopped picture of plans forthe putative device, an- nomenon, to make use of it. They gave Western countries trying to build super- notated with helpful information such as their weapon a blunt nose fitted with a flat cavitating torpedoes of their own. Diehl, a “speed oftravel—185kph”. disc (pictured above) that creates a circular German firm, announced a programme The leaked design did not appear to use trailing edge as the torpedo moves for- for such a weapon, Barracuda, in 2004. In supercavitation—but if Kanyon is genuine, ward. Theyalso gave ita rocketmotor to ac- 2006 General Dynamics, a big American then thoughts of adding it cannot have es- celerate it to a speed fast enough for that firm, was commissioned to look into the caped its designers. Even if Kanyon is edge to create a cavity consisting of a sin- matter (though its brief did not include the smoke and mirrors, though, Khishchnik gle, giant bubble which envelopes the en- word “torpedo”, referring only to an “un- seems real enough. Perhaps, this time, air- tire torpedo except forthe steering fins. dersea transport”) by the country’s De- craft-carrier skippers should be worried. 7 Books and arts The Economist January 21st 2017 69

Also in this section 70 Emile Zola in London 70 The joys of smoking 70 AIDS in America 71 Hamburg and its Elbphilharmonie 72 Johnson: The story of pinyin

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America’s secret war In his book Mr Kurlantzick paints a viv- id picture of protagonists like Vang Pao, a They just kept coming military leader who emigrated to America, where he was arrested in 2007 for plotting a coup against the Laotian government, and Tony Poe, a hard-drinking CIA opera- tive who lived in the jungle and collected severed enemy ears. Mr Kurlantzick con- America bombed Laos fora decade, killing a tenth ofits population. Why was this cludes that, in the future, “the CIA would not considered more ofan outrage? not lock up men like Poe; instead, it would HE bombing of Laos in the 1960s and A Great Place to Have a War: America in find manymore TonyPoes.” Butthe bookis Tearly1970salwaysused to be referred to Laos and the Birth of a Military CIA. not just a polemic against the agency. Mr asAmerica’s“secretwar”. Thiswasnotjust By Kurlantzick looks into allegations that the a mistake or even a misunderstanding: it Joshua Kurlantzick. Simon & Schuster, CIA sold heroin and opium. He findsno ev- was a terrible misnomer. For the Laotians 320 pages; $28 idence of this, although the agency was who cowered in caves to escape what is happy to look the other way when the considered the heaviest bombardment in mer contributor to this newspaper, enrich- Hmong sold drugs. history, the campaign was certainly not a es his study even furtherby connecting the One question is why the CIA’s conduct secret. America’s involvement was well CIA’s unprecedented paramilitary activi- did not spark outrage, or even much inter- known in the capital, Vientiane, and cov- ties in Laos to the secret wars of today in est, among the American public. More ered in the international press. Eventually Yemen, Somalia and elsewhere. Americans died in Laos than in Cambodia, it became well publicised and was even in- In 1961 Laos was the focal point of but it was the bombing of Cambodia that vestigated by Congress. But the “secret” la- America’s containment strategy against sparked protests including at Kent State bel stuck to America’s war in Laos, in part communism in South-East Asia, with Pres- Universityin Ohio in May1970, where four because of official denials and in part be- ident Dwight Eisenhower giving it priority students were killed by the national guard. cause ofpublic indifference. in a pre-inauguration briefingto his succes- Even a high-profile hearing, when Senator At last the secret is out in full. This was sor, John Kennedy. A CIA operation then Ted Kennedy challenged the war, pro- brought home during President Barack began to train and fight alongside an army voked little public reaction. Heavier media Obama’s visit to the tiny South-East Asian taken mostly from the Hmong ethnic mi- coverage of the bombing in Cambodia nation in September, when he pledged nority against the Pathet Lao—translated as may have contributed, as did the CIA’s at- more money to remove unexploded “Lao Nation”—who were backed by North tempts at a cover-up in Laos and the fact American bombs, though without offering Vietnam. Hitting the Pathet Lao in the that the American dead were clandestine any formal apology. For those looking for north and on the Ho Chi Minh trail in the advisers rather than young draftees. more, the war’s entire compelling tale can south, the American air force unleashed Laos was a model. Successive Ameri- be found in the lucid prose and revelatory an average of one attack every eight min- can administrations went on to wage “se- reporting of Joshua Kurlantzick’s new utes for nearly ten years. By 1970 tens of cret” wars in Central America and the Mid- book, “A Great Place to Have a War”. Fresh thousands of American-backed fighters dle Eastwith minimal American casualties interviews and newly declassified records were involved, at an annual cost of $3.1bn and without congressional interference. document how American involvement es- in today’s dollars. By the time the cam- The CIA viewed its Laotian operation as a calated and then swiftly ended, leaving paign ended in 1973, a tenth of Laos’s pop- success, even though the Pathet Lao took America’s Laotian partners holding the ulation had been killed. Thousands more over after America’s withdrawal, and are bag. But Mr Kurlantzick, a senior fellow at accidental deaths would follow from still in power. In Laos, however, the the Council on Foreign Relations and a for- unexploded bombs left in the soil. wounds have yet to heal. 7 70 Books and arts The Economist January 21st 2017

19th-century French literary history cling, taking photographs, communicating with his friends and family in France, pon- When Emile Zola dering “the effect of the capital ‘I’ on Eng- lish character”, complaining about the fled Paris tasteless food and bemoaning the fact that British journalists wrote anonymously— still the practice in The Economist. The Disappearance of Emile Zola: Love, Zola’s wife joined him from time to time, and so, foridyllic weeks and with her Literature and the Dreyfus Case. By Michael permission, did Jeanne, his other, younger, Rosen. Faber & Faber; 302 pages; £16.99 chère femme, and the children he had had MILE ZOLA came to London in1893 and with her, whom he adored. Theirhopes for Ewas “received like a prince”. Some dis- his swift return from exile were contin- approving bishops and headmasters ually disappointed, as was his desire that thought his novels, particularly “La Terre” his son, Jacques, should work hard and (“The Earth”), to be corrupting. Butwith his come top of the class. Eventually the wife, Alexandrine, he stayed in the Savoy French government relented, the innocent Hotel, met leading literary figures and Dreyfus’s case was reopened, though he addressed thousands at banquets at Crys- was not yet pardoned, and Zola could re- tal Palace and the Guildhall. By contrast, turn to France. However, there was no hap- when he arrived at Victoria Station in July py ending: in 1902 Zola died, possibly mur- 1898 he was alone, a fugitive, carrying a dered, ofcarbon-monoxide poisoning. nightshirt wrapped in newspaper. In “J’ac- Accuser-in-chief Some of the book’s charm lies in its cuse”, his open letter in L’Aurore, a French snippets ofinformation: in France children newspaper, he had attacked the authori- the story of this little-known episode that are happy as chaffinches, rather than larks; ties for their shameful anti-Semitic con- MichaelRosentellsincharacteristically en- “a big snooze” is un gros dodo. A chillier ductin the political scandal thatcame to be gaging style. Assisted by one of his English note appears towards the end. Forty years known as the Dreyfus affair. Found guilty translators, Ernest Vizetelly, Zola moved after Zola’s death “a tragic rerun” of anti- of libel and sentenced to prison, Zola fled from one safe-house to another before tak- Semitism saw Mr Rosen’s great-uncles de- to England with no idea of when it might ing refuge “in a suburban hotel in Nor- ported to Auschwitz, along with 76,000 be safe to return. wood”. There he established his routine: other French Jews. Religious divisions in He was to stay foralmost a year, and it is writing “Fécondité” (“Fruitfulness”), cy- France have a doleful way ofenduring. 7

The joys of smoking The AIDS crisis in America Naughty, but nice Chronicles of death foretold

Nicotine. By Gregor Hens. Translated by were a signal, medication, a stimulant or How to Survive a Plague: The Inside Story Jen Calleja. Other Press; 176 pages; $16.95. a sedative, they were a plaything, an of How Citizens and Science Tamed AIDS. Fitzcarraldo Editions; £12.99 accessory,a fetish object, something to By David France. Knopf; 640 pages; $30. help pass the time, a memory aid, a Picador; £25 REALLYshouldn’t be writing this communication tool or an object of “Ibook. It’s too much ofa risk,” notes meditation. Sometimes…all at once.” EWS of a fatal new disease affecting Gregor Hens, a German author and an Cigarettes represent youth, rebellion, Ngay men first broke in 1981. But it took accomplished translator, at the start ofhis wilful disregard forsensible advice. many years and very many deaths before memoir about smoking. Yet write it he They function as punctuation forlife. the public noticed. In New York, the does, disguised as a quest to understand They make it coherent and add drama, plague’s epicentre, a new case ofAIDS was why: why did he do it? And, though this inserting commas and semi-colons and soon being diagnosed every day, yet Ed is a modest bookconcerned only with ellipses (and, in the end, an inarguable Koch, the mayor, did next to nothing to pre- the memories and motivations ofits and often premature full stop). “Whether vent its spread. According to a new book, author, why, by extension, does anyone? I actually smoke or not, my personality is “How to Survive a Plague”, the virus had The fact is, as every smoker knows but a smoker’s personality,” MrHens writes. infected 7,700 people in America by 1984 few admit, nicotine is easy enough to To stop smoking isn’t just to give up the and killed 3,600, yeta question aboutit ata kick. The physiological addiction can be intake ofthat toxic, redeeming air into White House press conference aroused overcome with patches, with hypnosis, your lungs. It is to cease being yourself. laughter. It was only in 1985, after Rock with self-help books, with good old- That is why quitting is so hard. Hudson, a Hollywood star, was hospital- fashioned will power. Nicotine is the Readers and smokers and especially ised with AIDS, that President Ronald Rea- least ofany smoker’s problems. The truth readers who smoke will be grateful that gan publicly acknowledged the virus. But is that every ex-smoker is and always will Mr Hens wrote “Nicotine” despite the he did little to help the epidemic’s largely be a smoker. This bookis, he admits, “a riskofrelapse. It is that rare book on gay victims. In 1987, after nearly 20,000 continuation ofmy addiction via other addiction: neither preaching nor self- Americans had died, he quipped: “When it means.” loathing, lapsing only occasionally into comes to preventing AIDS, don’t medicine Why do smokers do it? Because, as Mr romanticism. And like the best cigarettes, and morality teach the same lessons?” Hens writes, “every cigarette that I’ve it is over too soon. Though any more David France’s masterful account ofthe ever smoked served a purpose—they would probably be too much. epidemic offers plenty of opportunity for outrage. America’s response to this public-1 The Economist January 21st 2017 Books and arts 71

2 health crisis was one offederal neglect, bu- researchers eventually took note of what spoken culture senator, neatly summed up reaucratic incompetence, corporate greed they were saying. Never before had a her fellow-citizens’ ambivalence: “The Elb- and brazen prejudice. AIDS would claim group of patients done so much to guide philharmonie is very dear to us, in both over 300,000 Americans—a third of them the agenda ofso-called experts. senses ofthe word.” in New York—before a pharmaceutical As a gay man in New York during this The tallestbuildingin town, its roofcov- breakthrough in 1996 enabled the infected time, Mr France buried many friends and ered in giant sequins, it sits on the end of a to lead ordinary lives. For those who have lovers. His own story is one of those he busy wharfand has been likened to a crys- survived, Mr France writes that the betray- knitstogetherin thisrivetingaccount ofthe tal on a rock, a bubble-wrapped ice-cube al of so many politicians, doctors, clergy- men and women who refused to surren- and a ship under sail. The hull has been men and family members remains “im- derin the face ofAIDS. Despiteits grim sub- constructed from a converted cocoa ware- possible to forget”. ject, this is an inspiring book. At a time house. The sails are a technical marvel: At a time when several states still when many Americans are worried once 1,000 plate-glass panels, heated to 600°C banned gay sex, many Americans saw again about the wisdom and compassion to curve, bulge or pucker, each imprinted AIDS as a punishment for sinful behav- of their elected leaders, “How to Survive a with a seemingly random pattern of metal iour. Early patients were thrown out of Plague” offers a salient reminder of what dots that change colour in response to the hospitals, ignored by ambulances and can be achieved by citizens who remain shifting light. This is kinetic art on a gargan- locked out of their homes. Nearly every unbowed and unbroken. 7 tuan scale. NewYorkundertakerrefused to handle the The hall had to fit into a very small foot- corpses. The popular press initially avoid- print, so the architects had to think verti- ed the story; it took two years and 600 The Elbphilharmonie cally. Their acoustics expert was the cele- dead before the New York Times covered it brated and demanding Yasuhisa Toyota. on the front page. When reports became Worth the wait, His 30-year-old Suntory Hall in Tokyo is inevitable, editorials frequently castigated still a benchmark for acoustic refinement gay men as public-health menaces. Anti- and the cost and visual elegance. His customary ter- gay hate crimes surged, rarely resulting in raced “vineyard” seating design—pioneer- arrests. Gay foreigners entering the coun- HAMBURG ed at the Berlin Philharmonie in the try were often quarantined and deported. 1960s—is now widely adopted. The tradi- A new concert hall will make the HIV, which causes AIDS, was a tena- tional “shoebox” design has good seats Hanseatic city a cultural destination cious foe, genetically far more complex and bad seats, but the more democratic than other known retroviruses. AIDS sup- N OCTOBER 31st, the lights on the “vineyard” has no “best” seats. At the Elb- pressed the immune system and by 1990 Onew concert hall in Hamburg spelled philharmonie in Hamburg no one is more one American was dying from the disease out fertig—“finished”, and the city heaved a than 30 metres from the stage. every 12 minutes, often after succumbing sigh of relief. The history of the crazily am- Achieving the sound that Mr Toyota to a preventable infection. But even as hos- bitious project known as the Elbphilhar- wanted meant hanging the hall like a co- pitals overflowed with AIDS patients, the monie had been chequered. Conceived in coon from the roofand surroundingit with federal government failed to help states 2003 at a projected cost of€77m ($82.3m), it feather pillows to isolate the building from treat and prevent the disease, and federal ended up costing ten times that and was external industrial noise. The interior is research remained sluggish and disorgan- completed seven years late. It survived dis- clad with 10,000 distressed gypsum pan- ised. Drugs that officials called promising putes, lawsuits and a parliamentary inqui- els, each individually computer-designed in 1985 had still not been tested five years ry. No wonder its architects, Jacques Her- both to diffuse the sound and to keep it later. Others that were transforming lives zog and Pierre de Meuron—creators of Tate rich. Hollowed-out like a cave, and con- in off-market experiments, such as an anti- Modern and, along with Ai Weiwei and ceived in curves and swirls with not a blindness drug called DHPG, still awaited others, of the “bird’s nest” Olympic Stadi- straight line in sight, the space feels as if it clinical trials, ensuring that many AIDS pa- um in Beijing—feared at one point that the has been crafted entirely by hand. tients would go blind unnecessarily.Feder- job would destroy their Basel-based firm. The inaugural concert on January 11th, al officials dithered for years before issuing In 2011 Barbara Kisseler, Hamburg’s out- programmed to show offthe acoustic flexi- guidelines on treatable infections. Nine bility, was a triumph. Whether for a small years of the country’s war on AIDS had ex- period-instrument ensemble or a massive tended the average 18-month lifespan of Wagnerorchestra, forSirBryn Terfel’sclari- patients by a mere three months. on baritone or Philippe Jaroussky’s ethere- Public indifference and political inepti- al falsetto, the sound was balanced and tude drove activists to take matters into warm with absolute clarity of detail. The their own hands. Gay men began circulat- bare oak foyers, with their vast flights of ing materials promoting “safe sex” in 1983. stairs, are spartan, reflecting the tastes of a Condoms became popular, bath houses city that is elegant yet restrained. closed and transmission rates forall sex-re- The main hall is only part ofthe project. lated diseases slowed dramatically. Yet it There is also a smaller chamber hall and a would take over a decade for Washington substantial education department. The to fund a safe-sex campaign nationally. resident NDR Elbphilharmonie Orchester The government’s flat-footed strategy for is there, as is Resonanz, a radical experi- researching and testing new drugs and the mental string ensemble. What impresses cripplingly high costs of developing thera- most is the programme being devised by pies spurred black-market clubs that ped- Christoph Lieben-Seutter, the Elbphilhar- dled unapproved drugs by the truckload. monie’s general director. This features not Activists staged protests to highlight the just glittering names, though there are cost of federally approved drugs, and they plenty of those, but also breadth and vari- learned enough about virology, chemistry ety, and a determined drive to bringin new and immunology to propose essential audiences. “Salaam Syria” in mid-March drug-trial innovations. Federal and private Making waves will be a three-day festival devoted to the 1 72 Books and arts The Economist January 21st 2017

2 music of the world’s most strife-torn coun- residents. Two years ago the superb Phil- ($493m), has its cheerleaders in the press. try, with performances from the players of harmonie de Paris opened its doors to But the project, promoted with implausi- the Syrian Expat Orchestra. Since Ham- near-universal acclaim, after a three- ble bombast about “outreach” but increas- burg is home to many migrants, this is decade campaign for its creation led by ingly seen as a metropolitan vanity, has more than a gesture. It is telling that every Pierre Boulez and other French musicians. few friends even in the music profession, concert in the opening season sold out In Paris the mainspring was left-wing poli- let alone outside it. It would of course be within hours oftickets going on sale. tics: the Philharmonie makes a point of nice for London to have its own state-of- Concert halls are increasingly a politi- drawing audiences from poor areas, and it the-art concert hall, but with the already- cal matter. Angela Merkel and ﬁve other encourages children to learn to play instru- existing Southbankand Barbican halls, im- members of the federal government at- ments from other cultures. Yet another perfect though they may be, musical life is tended the birth of the already-beloved hall, the mostly publicly funded Seine perfectly liveable without one. Hamburg, “Elphie”. Four months ago the depressed Musicale, is due to open in Paris soon. however, is a diﬀerent story. One of the Ruhr-valley city of Bochum opened a London may be the outlier here. A pro- richest cities in Europe, it has never been charming new concert hall which had posed new hall for the Barbican Centre, seen as a top-tier cultural destination. The been in part crowdfunded by 20,000 local which would probably cost £400m Elbphilharmonie may change that. 7 Johnson One country, two systems

The coexistence ofpinyin and Chinese characters highlights the role ofemotion in language decisions EW people live to 111. Fewer still leave ed plausibly with a huge boost in literacy Fasbiga markon linguisticlives asZhou in China. Even the Taiwanese, who abhor Youguang, who died on January 14th. Mr Mao’s simplified characters, are gradually Zhou was the chiefarchitect ofpinyin, the adopting Mr Zhou’s pinyin (which they system that the Chinese use to write Man- had also once abhorred), making the use darin in the roman alphabet. of pinyin one of the few practical things Pinyin has not, of course, replaced the the two countries can agree on. Chinese characters. Rather, it is used as a Why don’t the Chinese just adopt pin- gateway to literacy, giving young children yin? One is the many homophones a systematic way to learn the sounds of (though these are not usually a problem the thousands of characters required to in context). Another is that Chinese char- be literate in Chinese. Pinyin is also used acters are used throughout the Chinese- by most Chinese people to input Chinese speaking world, not just by Mandarin- characters into computers: type a word speakers but also speakers of Cantonese, like wo (meaning “I”) and the proper char- Shanghainese and other varieties. These acter appears; if several characters share are as different from each other as the big the same sound (which is common in Romance languages are, but the writing Chinese), users choose from a short menu system unifies the Chinese world. In fact, ofthese homophonic characters. character-based writing is, in effect, writ- In other words, the primary way that ten Mandarin. This is not obvious from the Chinese interact with their language looking at the characters, but it is obvious in the digital age is via an alphabet bor- if you look at pinyin. If China adopted it rowed by Communist China from its other overseas Chinese communities still wholesale, the linguistic divisions in Chi- ideological enemies in the 1950s. The tale use the traditional characters. na would be farmore apparent. isan odd one. Mao Zedong(who wasMao Mr Zhou, who had been working for a But there is another reason for attach- Tse-tung before pinyin, under the “Wade- Chinese bank in New York (he was largely ment to the characters. They represent tra- Giles” romanisation system) wanted a self-trained as a linguist), had returned dition, history, literature, scholarship and radical break with old ways after 1949, home in a burst of patriotic optimism after even art on an emotional level that many when the civil war ended in mainland 1949. He was drafted by Zhou Enlai, Mao’s foreigners do not understand. Outsiders China. He was hardly the first to think premier, in the 1950s to create a system not focus so much on efficiency probably be- that China’s beautiful, complicated and to replace, but to complement, the Chinese cause those who do try to learn the char- inefficient script was a hindrance to the characters. After three years’ work, pinyin acters cannot help but be struck by how country’s development. Lu Xun, a cele- was ready. It used just the standard Roman absurdly hard they are to master. brated novelist, wrote in the early 20th letters and a few (often omitted) diacritical There is a real trade-off between effi- century: “If we are to go on living, Chi- marks, especially over vowels to show the ciency and culture. English-speakers have nese characters cannot.” “tones”: steady, rising, dipping or falling rejected most efforts to clean up the lan- But according to Mr Zhou, speaking to pitch. People joked that Mr Zhou’s team guage’s notorious spelling, making coff, the New Yorker in 2004, it was JosefStalin had taken three years to deal with just 26 ruff, thru, tho and bow from cough, rough, in 1949 who talked Mao out of full-scale letters. But pinyin dealt neatly with all of through, though hand boug . The Irish ac- romanisation, saying that a proud China the sounds of Mandarin with a minimum cept the expense of keeping Irish on signs needed a truly national system. The re- of tricky typography: even q and x were and in classrooms, even if it isn’t efficient. gime instead simplified many Chinese used (for what had been ch’ and hs in In language, as in love, the heart is often characters, supposedly making them eas- Wade-Giles). These letters do not always the master of the head. Pinyin, which has ierto learn—but causinga split in the Sino- sound the same as they do in Western lan- helped the Chinese have a bit of both, phone world: Taiwan, Hong Kong and guages, but pinyin overall was a hit, credit- will long outlast the long-lived Mr Zhou. Courses 73

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The Economist January 21st 2017 Tenders 75

The Economist January 21st 2017 76 Economic and ﬁnancial indicators The Economist January 21st 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* 2016† latest latest 2016† rate, % months, $bn 2016† 2016† bonds, latest Jan 18th year ago United States +1.7 Q3 +3.5 +1.6 +0.5 Dec +2.1 Dec +1.4 4.7 Dec -476.5 Q3 -2.6 -3.2 2.35 - - China +6.7 Q3 +7.4 +6.7 +6.2 Nov +2.1 Dec +2.0 4.0 Q3§ +264.6 Q3 +2.3 -3.8 2.99§§ 6.83 6.58 Japan +1.1 Q3 +1.3 +0.9 +4.6 Nov +0.5 Nov -0.2 3.1 Nov +189.1 Nov +3.7 -5.6 0.05 113 117 Britain +2.2 Q3 +2.3 +2.0 +1.9 Nov +1.6 Dec +0.7 4.8 Oct†† -138.1 Q3 -5.6 -3.7 1.37 0.81 0.70 Canada +1.3 Q3 +3.5 +1.2 +1.6 Oct +1.2 Nov +1.5 6.9 Dec -53.6 Q3 -3.5 -2.5 1.71 1.31 1.45 Euro area +1.7 Q3 +1.4 +1.6 +3.2 Nov +1.1 Dec +0.3 9.8 Nov +384.3 Oct +3.3 -1.8 0.36 0.94 0.92 Austria +1.2 Q3 +2.4 +1.5 +0.2 Oct +1.4 Dec +1.0 5.8 Nov +8.0 Q3 +2.2 -0.9 0.52 0.94 0.92 Belgium +1.3 Q3 +0.7 +1.2 +2.8 Oct +2.0 Dec +1.9 7.6 Nov +3.4 Sep +0.9 -3.0 0.73 0.94 0.92 France +1.0 Q3 +1.0 +1.2 +1.8 Nov +0.6 Dec +0.3 9.5 Nov -28.6 Nov‡ -1.2 -3.3 0.78 0.94 0.92 Germany +1.7 Q3 +0.8 +1.8 +2.1 Nov +1.7 Dec +0.4 6.0 Dec +296.9 Nov +8.8 +1.0 0.36 0.94 0.92 Greece +1.6 Q3 +3.1 +0.4 +2.3 Nov nil Dec nil 23.0 Oct -1.0 Oct -0.3 -7.7 7.05 0.94 0.92 Italy +1.0 Q3 +1.0 +0.9 +3.2 Nov +0.5 Dec -0.1 11.9 Nov +49.5 Oct +2.4 -2.6 1.97 0.94 0.92 Netherlands +2.4 Q3 +3.1 +2.1 +2.9 Nov +1.0 Dec +0.2 6.6 Nov +57.1 Q3 +8.6 -1.1 0.43 0.94 0.92 Spain +3.2 Q3 +2.9 +3.2 +4.6 Nov +1.6 Dec -0.3 19.2 Nov +23.0 Oct +1.7 -4.6 1.40 0.94 0.92 Czech Republic +1.6 Q3 +0.9 +2.4 +7.1 Nov +2.0 Dec +0.6 5.2 Dec§ +3.7 Q3 +1.5 nil 0.35 25.3 24.9 Denmark +1.1 Q3 +1.5 +1.0 +13.3 Nov +0.5 Dec +0.6 4.2 Nov +23.9 Nov +7.5 -1.0 0.38 6.95 6.86 Norway -0.9 Q3 -1.9 +0.6 +2.6 Nov +3.5 Dec +3.5 4.8 Oct‡‡ +18.0 Q3 +4.4 +3.5 1.62 8.45 8.90 Poland +2.0 Q3 +0.8 +2.6 +3.3 Nov +0.8 Dec -0.7 8.3 Dec§ -3.1 Nov -0.5 -2.7 3.63 4.08 4.10 Russia -0.4 Q3 na -0.5 +2.6 Nov +5.4 Dec +7.0 5.4 Nov§ +22.2 Q4 +2.3 -3.7 8.19 59.3 79.1 Sweden +2.8 Q3 +2.0 +3.1 +0.1 Nov +1.7 Dec +1.0 6.2 Nov§ +22.2 Q3 +4.9 -0.3 0.60 8.91 8.59 Switzerland +1.3 Q3 +0.2 +1.4 +0.4 Q3 nil Dec -0.5 3.3 Dec +68.2 Q3 +9.4 +0.2 -0.18 1.00 1.01 Turkey -1.8 Q3 na +2.7 +4.6 Nov +8.5 Dec +7.8 11.8 Oct§ -33.7 Nov -4.7 -1.8 11.33 3.77 3.03 Australia +1.8 Q3 -1.9 +2.4 -0.2 Q3 +1.3 Q3 +1.3 5.8 Dec -47.9 Q3 -3.2 -2.1 2.68 1.32 1.45 Hong Kong +1.9 Q3 +2.5 +1.6 -0.1 Q3 +1.3 Nov +2.4 3.3 Nov‡‡ +13.3 Q3 +2.9 +1.6 1.76 7.76 7.80 India +7.3 Q3 +8.3 +7.0 +5.7 Nov +3.4 Dec +4.9 5.0 2015 -11.1 Q3 -0.6 -3.8 6.45 68.1 67.7 Indonesia +5.0 Q3 na +5.0 -2.3 Nov +3.0 Dec +3.5 5.6 Q3§ -19.2 Q3 -2.1 -2.3 7.48 13,343 13,933 Malaysia +4.3 Q3 na +4.3 +6.2 Nov +1.8 Dec +2.1 3.4 Nov§ +5.6 Q3 +1.7 -3.4 4.26 4.44 4.40 Pakistan +5.7 2016** na +5.7 +8.0 Nov +3.7 Dec +3.8 5.9 2015 -5.0 Q4 -1.4 -4.6 8.03††† 105 105 Philippines +7.1 Q3 +4.9 +6.9 +14.6 Nov +2.6 Dec +1.8 4.7 Q4§ +3.1 Sep +0.9 -2.3 4.29 49.8 47.7 Singapore +1.1 Q3 +9.1 +1.8 +11.9 Nov nil Nov -0.5 2.1 Q3 +63.0 Q3 +22.5 +0.7 2.32 1.42 1.44 South Korea +2.6 Q3 +2.5 +2.7 +4.8 Nov +1.3 Dec +1.0 3.2 Dec§ +99.0 Nov +7.2 -1.3 2.13 1,167 1,211 Taiwan +2.0 Q3 +3.9 +1.1 +8.8 Nov +1.7 Dec +1.4 3.8 Nov +74.7 Q3 +13.0 -0.4 1.18 31.5 33.6 Thailand +3.2 Q3 +2.2 +3.2 +3.8 Nov +1.1 Dec +0.2 1.0 Nov§ +47.9 Q3 +11.8 -2.3 2.61 35.3 36.3 Argentina -3.8 Q3 -0.9 -2.1 -2.5 Oct — *** — 8.5 Q3§ -15.7 Q3 -2.6 -5.3 na 16.0 13.4 Brazil -2.9 Q3 -3.3 -3.4 -1.1 Nov +6.3 Dec +8.4 11.9 Nov§ -20.3 Nov -1.2 -6.3 10.77 3.22 4.03 Chile +1.6 Q3 +2.5 +1.8 -1.4 Nov +2.7 Dec +3.8 6.2 Nov§‡‡ -4.8 Q3 -1.9 -2.7 4.16 659 730 Colombia +1.2 Q3 +1.3 +1.6 +1.6 Nov +5.7 Dec +7.5 7.5 Nov§ -13.7 Q3 -4.8 -3.7 6.91 2,935 3,301 Mexico +2.0 Q3 +4.0 +2.1 +1.3 Nov +3.4 Dec +2.9 3.6 Nov -30.6 Q3 -2.8 -3.0 7.74 21.8 18.3 Venezuela -8.8 Q4~ -6.2 -13.7 na na +424 7.3 Apr§ -17.8 Q3~ -2.9 -24.3 10.43 10.0 6.31 Egypt +4.5 Q2 na +4.3 -1.2 Nov +23.3 Dec +13.2 12.6 Q3§ -20.8 Q3 -6.8 -12.2 na 18.9 7.83 Israel +5.2 Q3 +3.6 +3.3 -0.8 Oct -0.2 Dec -0.5 4.5 Nov +13.3 Q3 +2.8 -2.4 2.32 3.81 3.95 Saudi Arabia +1.4 2016 na +1.4 na +2.3 Nov +3.6 5.6 2015 -46.8 Q3 -5.5 -11.2 na 3.75 3.75 South Africa +0.7 Q3 +0.2 +0.5 +0.5 Nov +6.8 Dec +6.3 27.1 Q3§ -12.3 Q3 -3.9 -3.4 8.64 13.5 16.8 Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. ~2014 **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. ***Official number not yet proved to be reliable; The State Street PriceStats Inflation Index, Nov 35.38%; year ago 25.30% †††Dollar-denominated bonds. The Economist January 21st 2017 Economic and ﬁnancial indicators 77

Markets % change on New passenger-car registrations 2016, % change on a year earlier Dec 31st 2015 China’s car industry boomed last year: 24 18 12 6 0+– 6 12 18 Index one in local in $ the world’s largest auto market saw the 1.8 Jan 18th week currency terms number of passenger cars sold swell by Italy United States (DJIA) 19,804.7 -0.7 +13.7 +13.7 15%, thanks to government tax incen- China* 24.3 China (SSEA) 3,259.8 -0.7 -12.0 -16.4 Japan (Nikkei 225) 18,894.4 -2.4 -0.7 +5.4 tives. Growth will probably slow this year Spain 1.1 Britain (FTSE 100) 7,247.6 -0.6 +16.1 -2.8 as the stimulus is phased out. New pas- Belgium 0.5 senger-car registrations in the European Canada (S&P TSX) 15,397.9 -0.6 +18.4 +25.6 European 14.6 Euro area (FTSE Euro 100) 1,114.0 -0.5 +1.8 +0.2 Union rose for the third consecutive year. Union Euro area (EURO STOXX 50) 3,294.0 -0.4 +0.8 -0.8 Although Volkswagen saw its share of the France 2.0 Austria (ATX) 2,659.3 -0.4 +10.9 +9.2 European market shrink following its Germany 3.4 Belgium (Bel 20) 3,584.3 -1.0 -3.1 -4.6 emissions-testing scandal, it remained Britain 2.7 France (CAC 40) 4,853.4 -0.7 +4.7 +3.0 the best-selling brand. Sales in Britain United 17.6 Germany (DAX)* 11,599.4 -0.4 +8.0 +6.3 do not seem to have been strongly aﬀect- States*† Greece (Athex Comp) 643.5 -3.0 +1.9 +0.3 Japan 4.1 Italy (FTSE/MIB) 19,358.1 -0.7 -9.6 -11.0 ed by the Brexit referendum; and low Russia*‡ 1.4 Netherlands (AEX) 484.8 -0.4 +9.7 +8.0 interest rates could keep sales buoyant. Spain (Madrid SE) 946.8 -0.3 -1.9 -3.4 Although 17.6m cars were sold in the Brazil Total, m 1.7 Czech Republic (PX) 925.9 -0.2 -3.2 -4.7 United States last year, sales are expect- Sources: ACEA; AEB; *Sales Denmark (OMXCB) 805.2 -0.7 -11.2 -12.3 ed to plateau or decline. ANFAVEA; Autodata; †Includes light trucks JAMA; Thomson Reuters ‡Includes light commercial vehicles Hungary (BUX) 32,841.3 -0.4 +37.3 +38.7 Norway (OSEAX) 774.5 nil +19.3 +25.0 Poland (WIG) 53,431.9 -0.5 +15.0 +11.3 Other markets The Economist commodity-price index Russia (RTS, $ terms) 1,151.7 -0.3 +23.6 +52.1 2005=100 % change on % change on Sweden (OMXS30) 1,516.0 +0.3 +4.8 -0.9 Dec 31st 2015 one one Switzerland (SMI) 8,312.4 -1.4 -5.7 -5.8 Index one in local in $ Jan 10th Jan 17th* month year Turkey (BIST) 82,779.3 +6.6 +15.4 -10.6 Jan 18th week currency terms Dollar Index Australia (All Ord.) 5,733.7 -1.5 +7.3 +10.6 United States (S&P 500) 2,271.9 -0.2 +11.2 +11.2 All Items 144.7 148.1 +4.3 +19.8 Hong Kong (Hang Seng) 23,098.3 +0.7 +5.4 +5.3 United States (NAScomp) 5,555.7 -0.1 +10.9 +10.9 Food 157.0 161.0 +4.0 +10.7 India (BSE) 27,257.6 +0.4 +4.4 +1.5 China (SSEB, $ terms) 332.4 -2.9 -18.0 -22.0 Indonesia (JSX) 5,294.8 -0.1 +15.3 +19.1 Japan (Topix) 1,513.9 -2.4 -2.2 +3.9 Industrials Malaysia (KLSE) 1,665.0 -0.6 -1.6 -5.0 Europe (FTSEurofirst 300) 1,434.0 -0.6 -0.2 -1.8 All 131.9 134.7 +4.7 +33.4 Pakistan (KSE) 48,642.2 -1.5 +48.2 +48.1 World, dev'd (MSCI) 1,785.7 +0.4 +7.4 +7.4 Nfa† 141.9 146.4 +7.3 +37.4 Singapore (STI) 3,000.2 nil +4.1 +3.9 Emerging markets (MSCI) 897.9 +1.3 +13.1 +13.1 Metals 127.6 129.7 +3.6 +31.5 South Korea (KOSPI) 2,070.5 -0.2 +5.6 +6.1 World, all (MSCI) 431.1 +0.5 +7.9 +7.9 Sterling Index Taiwan (TWI) 9,342.0 nil +12.0 +16.7 World bonds (Citigroup) 892.6 +1.5 +2.6 +2.6 All items 216.0 223.3 +6.8 +40.4 Thailand (SET) 1,560.8 -0.8 +21.2 +23.5 EMBI+ (JPMorgan) 785.4 +0.9 +11.5 +11.5 Argentina (MERV) 18,870.1 +2.2 +61.6 +30.9 Hedge funds (HFRX) 1,207.2§ -0.3 +2.8 +2.8 Euro Index Brazil (BVSP) 64,149.6 +2.7 +48.0 +81.9 Volatility, US (VIX) 12.5 +11.3 +18.2 (levels) All items 169.9 173.7 +2.1 +23.1 Chile (IGPA) 21,264.1 +1.3 +17.1 +25.9 CDSs, Eur (iTRAXX)† 70.0 +1.2 -9.3 -10.7 Gold Colombia (IGBC) 10,161.5 -1.2 +18.9 +28.6 CDSs, N Am (CDX)† 66.4 +0.3 -24.8 -24.8 $ per oz 1,188.1 1,202.5 +6.3 +10.7 Mexico (IPC) 46,360.6 +0.9 +7.9 -14.5 Carbon trading (EU ETS) € 4.9 -4.0 -42.1 -43.0 West Texas Intermediate Venezuela (IBC) 30,166.8 -7.9 +107 na Sources: Markit; Thomson Reuters. *Total return index. $ per barrel 50.8 52.5 +1.1 +85.0 Egypt (EGX 30) 13,304.4 +1.6 +89.9 -20.9 †Credit-default-swap spreads, basis points. §Jan17th. Israel (TA-100) 1,261.0 -1.2 -4.1 -2.0 Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO; Indicators for more countries and additional ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Saudi Arabia (Tadawul) 6,853.5 -0.6 -0.8 -0.8 Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional South Africa (JSE AS) 52,933.3 +0.9 +4.4 +20.0 series, go to: Economist.com/indicators †Non-food agriculturals. 78 Obituary Clare Hollingworth The Economist January 21st 2017

anonymous source. At an age when most journalists are contemplating retirement, she moved to Beijing to open the Daily Telegraph bureau. Though she spoke not a word of Chinese (languages were not her thing) she became a notable China-watcher. Scoops there included Mao’s stroke in 1974 and Deng Xiaoping’s rise. Both were met with scepticism; both proved true. It all started in August 1939, when, aged 27 and a foreign correspondent for barely four days, she commandeered a British consulate car and drove into Germany from Poland. A gust of wind lifted a road- side hessian screen, revealing Hitler’s army, mustered for the invasion. It was to be the scoop of the century, though at first nobody believed her. On her return she had to produce her shopping—German products unavailable in Poland—to show she had crossed the border. It was a similar story with her next scoop, thatthe invasion had started. The official line was that talks were still continuing—so she held her telephone out of the window to prove to Warsaw that tanks were indeed roaring into battle. When she deduced that Kim Philby, a former British Sniffing the breezes spy, had defected to Moscow, her editors sat on that story for three months (she later took over his job, writing for this paper from Beirut). She was sometimes thought to be a spy herself—a notion she airily dismissed by saying that there was no need: ifshe found Clare Hollingworth, foreign correspondent, died on January10th, aged 105 out anything like that she would tell the ELL into her 80s Clare Hollingworth Her wiles were legendary.She ruthless- British military attaché anyway. In fact, the Wwould sleep on the floor every week ly trounced rivals, broke rules and exploit- spy world originally regarded her with or so, just to prevent her body from getting ed an unmatched array of contacts. When deep mistrust for helping some undesir- “too soft”. Her passport was to hand, with India banned foreigners from covering the able communists reach Britain (part of her visas up to date, just in case the foreign war with Pakistan in 1965, she cajoled the unsung, pre-journalistic work with refu- desk rang. She liked to have two packed prime minister, Indira Gandhi—whom she gees in pre-war Poland). suitcases, one forhotclimates, one for cold, knew from a previous posting in Paris— though her wardrobe was notoriously into making an exception. She then asked Pots and kettles sparse: in later life she was seldom seen in to bring along two “servants” (in fact, they She was loyal when it mattered. In Algiers anything but a safari suit and cloth shoes. were colleagues). She had a knack for the she marshalled herfellowsinto a 30-strong And all you really needed, she said, were telling detail: still-wet concrete in a Polish posse to accompany (and save the life of) a the “T&T”—typewriter and toothbrush. gun emplacement as the country buckled journalist arrested by paramilitaries. But Hardiness and bravery were her hall- under the German assault, or insanitary she was mostly a difficult colleague. As an marks. Neither shot nor shell ruffled her— plumbing in a supposedly advanced Chi- editor in London, she habitually second- excitement trumped fear, she said. She ad- nese arms factory. guessed her correspondents: “clare- mitted to disliking only rickety lifts, and Laconic and unadventurous in print, voyance”, they called it crossly. She struck fleas in her hair. But she didn’t mind bed- she was better at getting the story than tell- most people as driven and unreflective. bugs, going without food for five or six ing it. Her husband, Geoffrey Hoare, also a But a biography compiled from diaries and days, or not washing for even longer (de- journalist, would briskly correct the spell- letters revealed a more three-dimensional spite entreaties from her colleagues). ing, enliven the prose, and unearth the picture, including a conversion to Catholi- She could swim, ride, ski, fly a plane lead—which she tended to bury five para- cism prompted by her husband’s adultery and jump with a parachute. And shoot: graphs down, prefaced, cryptically, with (she also threatened to shoot his mistress). during the war she slept with a revolver “according to certain sources”. Her own love life was discreetly lively, too. under her pillow; spares included a small And what sources they were. She She was ferociously competitive, un- pearl-handled one for her evening bag. quizzed and befriended generals, prime abashedly criticising female colleagues for Aged nearly 80, she was seen climbing a ministers and spymasters, politely but re- being “pushy”, or for—perish the thought— lamppost to gain a better look at the crack- lentlessly. She gained the first interview using their femininity to get ahead. Retire- down in Tiananmen Square. She once with the last Shah of Iran in 1941; after his ment was also anathema. Even in her final, avoided arrest in Bucharest by staying fall in 1979, he said he would speak only to half-blind years she haunted the Foreign wrapped only in a towel. Romanian secret her. Another scoop, in 1968, was the plans Correspondents’ Club in Hong Kong, por- police might strip a woman, she reckoned, for peace talks to end the Vietnam war, ing over the news, with passport at the but would not dress one by force. brought to her in Saigon cathedral by an ready, just in case. 7