Time to be tougher on Iran

The man who would beat Le Pen

Should robots pay tax?

The last diamond mine FEBRUARY 25TH–MARCH 3RD 2017 Clean energy’s dirty secret

Contents The Economist February 25th 2017 5

8 The world this week Asia 31 Women in South Asia Leaders The missing middle 11 Renewable energy 32 Mongolia’s finances Clean energy’s dirty secret This might yurt 12 Gender budgeting 32 Security in Pakistan Making women count Role reversal 12 Brazil’s pensions 33 Mining in South-East Asia Geronto-generosity Shafted 13 Iran and America 34 Buddhism in Thailand The challenger to Le Pen No blank cheque The missing monk 35 Banyan Emmanuel Macron has gone 14 Diamonds and marriage from no-hoper to a serious A girl’s new best friend The Philippine pivot to China candidate. Now comes the On the cover hard part, page 43. Populists The renewables revolution is Letters are on a roll, but Marine Le Pen wrecking the world’s China faces an uphill battle, page 15 On Kenya, American law, electricity markets. Here’s 44. Martin Schulz breathes voting, Russia, data 37 Punishing North Korea how to fix them: leader, page Of killers and coal new life into Germany’s Social 11. Wind and solar energy are Democrats, page 45 38 Ethnic harmony disrupting a century-old Briefing Tourism in the troubled approach to providing 18 Renewable energy west electricity, pages18-20 A world turned upside down Middle East and Africa The Economist online 39 Iran and America United States Daily analysis and opinion to A new confrontation 21 Environmental protection supplement the print edition, plus 40 Western Sahara audio and video, and a daily chart Revenge of the polluters The never-ending dispute Economist.com 22 A new NSA 41 South Africa E-mail: newsletters and McMaster and servant Letting the mentally ill die mobile edition 23 Replacing Obamacare 41 The battle for Mosul Economist.com/email Cost-sharing is caring Raging Diamonds The sparkling Print edition: available online by 23 Deporting migrants 42 Education engagement ring may not 7pm London time each Thursday Dragnet and scissors Lessons from Liberia have a future as a symbol of Economist.com/print 24 The Democrats courtship: leader, page 14. De Audio edition: available online Boot-edge-edge Beers is ramping up production Europe to download each Friday 25 Wrongful convictions at a giant new project in Economist.com/audioedition Criminal injustice 43 France’s Europhile Canada. It could be the world’s candidate last big diamond mine, page 50 26 Lexington Macron on the march Dissent in the age of Trump 44 Mme la Presidente? Marine Le Pen’s odds The Americas 44 Western Balkans Volume 422 Number 9029 27 Brazil’s pensions Russian overtures Stop showering the old 45 The German left is back Published since September1843 with gold to take part in "a severe contest between SPD recovery intelligence, which presses forward, and 28 Protecting wildlife an unworthy, timid ignorance obstructing 46 Charlemagne our progress." Saving jaguars The armies of Europe Editorial offices in London and also: 28 Chile’s plutocrats Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago, Bashing billionaires Lima, Mexico City, Moscow, Mumbai, Nairobi, New Delhi, New York, Paris, San Francisco, 30 Bello São Paulo, Seoul, Shanghai, Singapore, Tokyo, The costs of crime Iran The Trump administration Washington DC is right to keep up the pressure on a belligerent force in the Middle East: leader, page 13. How far is America prepared to go? Page 39

1 Contents continues overleaf 6 Contents The Economist February 25th 2017

Britain Science and technology 47 Reducing immigration 67 Space weather Keep out Tales of wonder 48 Agriculture and Brexit 68 Asthma Picking fights Four good bugs 49 Bagehot 68 Oceanography What next for Remainers? Fruits de mer 69 Epidemiology International Snap! 50 The last diamond mine 70 Peopling the Americas Women Powerful female Norma McCorvey The “Jane The future of forever Checkpoint politicians in South Asia have Roe” of Roe v Wade, America’s not empowered the women who most controversial court vote for them, page 31. An idea Business Books and arts decision: Obituary, page 78 to make governments live up 53 The semiconductor 71 International corruption to their promises to women: Jackpots for despots industry Subscription service leader, page12. A mechanism Silicon crumble 72 Sleeper trains to generate policies that For our latest subscription offers, visit 54 3G’s model End of the line Economist.com/offers support equality between men Barbarians at the plate 72 “Les Misérables” For subscription service, please contact by and women is good for growth, telephone, fax, web or mail at the details Novel of the century page 65 55 Independent films provided below: Indie blues 73 Richard Holmes North America The Economist Subscription Center 55 Toy companies in Japan Romantic biographer P.O. Box 46978, St. Louis, MO 63146-6978 A grown-up business 74 Boris Nemtsov, the movies Telephone: +1 800 456 6086 Facsimile: +1 866 856 8075 56 Aarusha Homes A future that wasn’t E-mail: [email protected] Room to grow Latin America & Mexico The Economist Subscription Center 57 French entrepreneurship 76 Economic and financial P.O. Box 46979, St. Louis, MO 63146-6979 Deep-tech startups indicators Telephone: +1 636 449 5702 Facsimile: +1 636 449 5703 58 Schumpeter Statistics on 42 economies, E-mail: [email protected] Tech-firm valuations plus a closer look at Subscription for 1 year (51 issues) sovereign-wealth funds United States US $158.25 (plus tax) Canada CA $158.25 (plus tax) Finance and economics Obituary Latin America US $289 (plus tax) Kraft Although their bid 59 Fintech in China The age of the appacus 78 Norma McCorvey failed, the investors who took Roe v Wade’s Jane Roe Principal commercial offices: on Unilever are nevertheless 62 Trade statistics 25 St James’s Street, London sw1a 1hg upending the food industry, Lies, damned lies and… Tel: +44 20 7830 7000 page 54 62 Securitisation in Europe Rue de l’Athénée 32 Limping along 1206 Geneva, Switzerland Tel: +4122 566 2470 64 Fannie Mae and 750 3rd Avenue, 5th Floor, New York, NY 10017 Freddie Mac Tel: +1212 5410500 Still possessed 1301Cityplaza Four, 65 Feminism and fiscal policy 12 Taikoo Wan Road, Taikoo Shing, Hong Kong Gender budgeting Tel: +852 2585 3888 66 Free exchange Other commercial offices: Chicago, Dubai, Frankfurt, Los Angeles, Should robots pay tax? Paris, San Francisco and Singapore

Robots A tax on automation is an intriguing but misguided solution to workers’ woes: Free exchange, page 66. Three tests for telling whether tech firms are in a bubble: Schumpeter, PEFC certified page 58. Artificial intelligence This copy of The Economist is printed on paper sourced is creating variety in the chip from sustainably managed market and trouble for Intel, forests certified to PEFC page 53 PEFC/29-31-58 www.pefc.org

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8 The world this week The Economist February 25th 2017

failing to declare that he had José Serra resigned as Brazil’s terrorism ofthe other leader of Politics rented a flat in the Chinese city foreign minister, because of the party. The trial also began ofShenzhen from a major health problems. He was twice of47 formersoldiers for shareholder in a broadcast an unsuccessful candidate for alleged involvement in last company that Mr Tsang the presidency. years’ coup attempt. approved licences for. The last redoubt Tightening the border Iraq’s army launched its main America’s Department of assault on western Mosul, Homeland Security published having captured the eastern guidelines to implement halfofthe city from Islamic Donald Trump’sexecutive State last month. The fighting order cracking down on illegal in the western halfis expected immigrants. Among other to be harder. In Syria, Kurdish things, the new rules make it groups advanced against IS much easier to deport people positions in the country. A series ofterrorist attacks who cannot prove they have struckPakistan, including one been living in the United States An Israeli soldier who killed a on a Sufi shrine that killed 88 for two years. wounded Palestinian attacker Britain’s Brexit bill, which will people. The army blamed in Hebron a year ago was permit the government to infiltrators from Afghanistan, Mike Pence went to Europe to sentenced to 18 months in jail. negotiate the country’s depar- sealed the border and shelled assure America’s allies that it is Many were outraged, either ture from the EU, was debated what it said were terrorist still committed to NATO, because they thought the by the House ofLords, Parlia- bases on the Afghan side. whatever his boss may have sentence too light; or because ment’s unelected upper house. said. But the vice-president they thought he should not Theresa May raised eyebrows In Afghanistan, police also called on Europeans to have been charged at all. by perching herselfon the surrounded the house of boost defence spending to steps ofthe royal throne; it is Abdul Rashid Dostum, the honour their commitment to South Africa’s High Court three decades since a prime vice-president, in an attempt to the military alliance. blocked a move by the coun- minister last attended a debate arrest nine bodyguards, who try’s president, Jacob Zuma, to in the Lords. Meanwhile, Jean- have been accused ofbeating withdraw from membership Claude Juncker, the president and raping a political rival. ofthe International Criminal ofthe European Commission, Court, saying that he may not warned Britain that it should A formerpoliceman from the do so without consulting expect a hefty bill and would Philippine city ofDavao parliament. Some Africans see not leave the EU “at a discount claimed he had run a vigilante the court as targeting Africa or at zero cost”. group that had murdered disproportionately. criminals at the behest ofthe Cressida Dickwas appointed mayor at the time, Rodrigo A famine was declared in parts as the new commissioner of Duterte, who became presi- ofSouth Sudan, caused by a London’s Metropolitan Police, dent in June. civil war and economic the first woman to head Brit- collapse. It is the first famine to ain’s biggest force. Ms Dickwas The IMF agreed to lend Mr Trump selected a new be declared anywhere in the in command ofa botched Mongolia $440m to help it national security adviser world in six years. operation that led to the killing weather a balance-of-pay- following the defenestration ofan innocent man after the ments crisis, paving the way ofMike Flynn. Lieutenant- The centre ground terrorist attacks on London’s forfurtherloans from the General H.R. McMaster is an In another twist to the French transport networkin 2005. A Asian Development Bank, army officer who was widely presidential race, François subsequent inquiry exonerat- Japan and South Korea. praised forhis command Bayrou, a centrist politician, ed her ofany blame. during the Iraq war, where he announced that he would not China said it would suspend pursued a successful counter- run but would instead back Matteo Renzi stepped down as imports ofcoal from North insurgency strategy in the city Emmanuel Macron, a former the leader ofItaly’s ruling Korea, all but eliminating one ofTal Afar. economy minister who is Democratic Party amid criti- ofthe isolated communist running as an independent. cism that he has failed to meet state’s main sources ofrev- Too close to call Although Mr Macron’s cam- the challenge ofthe Five Star enue. Malaysia, meanwhile, Ecuador’s presidential elec- paign has gathered momen- Movement, a rising populist said it was looking forseveral tion looked likely to go to a tum, Marine Le Pen, the leader party. MrRenzi resigned as North Korean officials in con- second round in April, accord- ofthe right-wing National prime minister in December. nection with the murder ofthe ing to the electoral commis- Front, still leads polls for the half-brother ofKim Jong Un, sion. With nearly all the votes first round. Keeping it in the family the North Korean dictator. counted, Lenín Moreno, the The president ofAzerbaijan, candidate backed by the presi- Selahattin Demirtas, the leader Ilham Aliyev, appointed his A court in Hong Kong sen- dent, Rafael Correa, is well ofthe pro-Kurdish Peoples’ wife as vice-president. Mehri- tenced the territory’s former ahead but appears to have Democratic Party in Turkey, ban Aliyeva is a member of chiefexecutive, Donald Tsang, fallen short ofthe 40% re- was convicted ofinsulting the parliament who runs a foun- to 20 months in prison for quired to avoid a run-off. He Turkish state (ie, criticising the dation named after the previ- misconduct while in office. Mr will probably face Guillermo president). The same day, a ous president, who was Mr Tsang was found guilty of Lassom a conservative banker. court upheld a conviction for Aliyev’s father. 1 The Economist February 25th 2017 The world this week 9

presence in Britain recently. core, which is also a commod- light years away, fairly close as Business American tech companies ity trader, rose 18% to $10.3bn. these things go. Scientists think seem to be less worried than BHP Billiton’s profit for the last it offers the best chance yet to As transient as it was titanic, a financial firms about the pros- halfof2016 was $3.2bn; in the discover evidence oflife, or proposed $143bn takeover bid pect ofBritain leaving the EU. same period a year earlier it why life hasn’t evolved, on by KraftHeinz for Unilever had recorded a $5.7bn loss. planets other than Earth. was withdrawn just a few days Jio, a mobile networkin India after it was leaked to the press. that has shaken the country’s Special prosecutors in South The deal would have been one telecoms industry by offering a Korea questioned in custody ofthe biggest mergers on free service, announced that it the de facto head ofSamsung record, creating a behemoth in would start charging a small Electronics, following his consumer products. Kraft’s fee forunlimited data. Calls arrest in an influence-peddling major shareholders are Berk- will still cost nothing. scandal that has rocked the shire Hathaway, Warren Buf- government. Lee Jae-yong is fett’s investment company, and Cheap as ships being investigated foralleged- 3G Capital, a Brazilian private- Hanjin Shipping was declared ly paying $36m in bribes in equity firm with a reputation officially bankrupt and its order to smooth the merger of forstringent cost-cutting at its remaining assets ordered to be two Samsung affiliates in 2015. takeover targets. Unilever liquidated. The South Korean swiftly rejected its advances, container line filed forbank- A write-down in the valuation Tributes were paid to Kenneth but in a rapid response it ruptcy protection last August, ofits Swiss private bankcon- Arrow, who has died aged 95. launched a wide-ranging which led to its ships being tributed to a 62% fall in annual His writings in economics review ofits business. denied entry to ports in case pre-tax profit at HSBC, to advanced the study ofgame they could not pay the port $7.1bn. Revenue dropped, by a theory, social choice, majority Discount offer fees. Hanjin was one ofthe fifth. Meanwhile, Lloyds voting, welfare theory, endoge- Ending months ofuncertainty world’s biggest shipping com- Banking Group, another nous growth, contracts, and about a takeover deal that was panies a decade ago. It was British bank, made an annual more. He was a co-recipient of signed last summer, Verizon sunkby a worldwide glut in profit of£4.2bn ($5.7bn), its best the Nobel economics prize in said it would pay $350m less shipping capacity and an since 2006. The government 1972 forhis workon the general for Yahoo following two big unsustainable debt load. has reduced the stake it took in equilibrium ofmarkets. Then cyber-attacks on the internet Lloyds during the financial aged 51, he remains the youn- company’s users that took BHP Billiton, Anglo Ameri- crisis and the bankis expected gest economist to be awarded place before the deal was can and Glencore were the to return to full private the prize. At the time he was agreed, but which came to light latest mining companies to ownership this year. described in the New York only late last year. The hacking report healthy profits, helped Times as “a humanist, a schol- ofup to one billion Yahoo by cost-cutting and a rebound Alien habitats? ar who has always tried to accounts was the largest in commodity prices. Anglo Astronomers discovered apply fundamental theory breach ofprivate data yet, American reported an annual seven planets about the size to…social problems”. prompting a rethinkat Verizon profit of$1.6bn; in 2015 it had ofEarth orbiting a dwarfstar about its offer. It will now pay made a loss of$5.6bn. Core some 380trn kilometres (235trn Other economic data and news $4.5bn forYahoo. earnings forthe year at Glen- miles) from our own. That is 40 can be found on pages 76-77

Apple lodged an appeal at the European Court ofJustice against the European Commis- sion’s ruling that the company owes Ireland €13bn ($14bn) in backtaxes because ofillegal state aid. Apple said, among other things, that the commis- sion had overstepped its mark, did not understand Irish law, and denied it had received preferential tax treatment from the Irish government. Its main contention is that the centre of its profit-driving activities is America and that is where it should be taxed. A hearing will be held in the autumn.

Amazon announced that it would increase its British workforce by a quarter, adding 5,000 jobs to its current head- count. Apple, Facebookand Google have made similar commitments to increase their WHEN WE HAVE THE TOOLS TO PREDICT IT’S AMAZING WHAT WE CAN PREVENT

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optum.com/healthier Leaders The Economist February 25th 2017 11 Clean energy’s dirty secret

The renewables revolution is wrecking the world’s electricity markets. Here’s what to do LMOST150yearsafterphoto- wholesale power markets and hence deterred investment. Avoltaic cells and wind tur- Second, green power is intermittent. The vagaries of wind bines were invented, they still and sun—especially in countries without favourable weath- generate only 7% of the world’s er—mean that turbines and solar panels generate electricity electricity. Yet something re- only part of the time. To keep power flowing, the system relies markable is happening. From on conventional power plants, such as coal, gas or nuclear, to being peripheral to the energy kick in when renewables falter. But because they are idle for system just over a decade ago, long periods, they find it harder to attract private investors. So, they are now growing fasterthan any other energy source and to keep the lights on, they require public funds. their falling costs are making them competitive with fossil fu- Everyone is affected by a third factor: renewable energy has els. BP, an oil firm, expectsrenewablesto accountfor halfofthe negligible or zero marginal running costs—because the wind growth in global energy supply over the next 20 years. It is no and the sun are free. In a market that prefers energy produced longer far-fetched to think that the world is entering an era of at the lowest short-term cost, wind and solar take business clean, unlimited and cheap power. About time, too. from providers that are more expensive to run, such as coal There is a $20trn hitch, though. To get from here to there re- plants, depressing power prices, and hence revenues for all. quires huge amounts ofinvestment overthe next few decades, to replace old smog-belching power plants and to upgrade the Get smart pylonsand wiresthatbringelectricityto consumers. Normally The higherthe penetration ofrenewables, the worse these pro- investors like putting their money into electricity because it of- blems get—especially in saturated markets. In Europe, which fers reliable returns. Yet green energy has a dirty secret. The was first to feel the effects, utilities have suffered a “lost de- more it is deployed, the more it lowers the price ofpower from cade” of falling returns, stranded assets and corporate disrup- any source. That makes it hard to manage the transition to a tion. Last year, Germany’s two biggest electricity providers, carbon-free future, during which many generating technol- E.ON and RWE, both split in two. In renewable-rich parts of ogies, clean and dirty, need to remain profitable ifthe lights are America power providers struggle to find investors for new to stay on. Unless the market is fixed, subsidies to the industry plants. Places with an abundance of wind, such as China, are will only grow. curtailing wind farmsto keep coal plants in business. Policymakers are already seeing this inconvenient truth as The corollary is that the electricity system is being re-regu- a reason to put the brakes on renewable energy. In parts of Eu- lated as investment goes chiefly to areas that benefit from pub- rope and China, investment in renewables is slowing as subsi- lic support. Paradoxically, that means the more states support dies are cut back. However, the solution is not less wind and renewables, the more they pay for conventional power plants, solar. It is to rethinkhow the world prices clean energy in order too, using“capacitypayments” to alleviate intermittency. In ef- to make better use ofit. fect, politicians rather than markets are once again deciding how to avoid blackouts. They often make mistakes: Ger- Shock to the system many’s support for cheap, dirty lignite caused emissions to At its heart, the problem is that government-supported renew- rise, notwithstanding huge subsidies for renewables. Without able energyhasbeen imposed on a marketdesigned in a differ- a new approach the renewables revolution will stall. ent era. Formuch ofthe 20th century, electricity was made and The good news is that new technology can help fix the pro- moved by vertically integrated, state-controlled monopolies. blem (see page 18). Digitalisation, smart meters and batteries From the 1980s onwards, many ofthese were broken up, priva- are enabling companies and households to smooth out their tised and liberalised, so that market forces could determine demand—by doing some energy-intensive work at night, for where best to invest. Today only about 6% of electricity users example. This helps to cope with intermittent supply. Small, gettheirpowerfrom monopolies. Yeteverywhere the pressure modular power plants, which are easy to flex up or down, are to decarbonise power supply has brought the state creeping becoming more popular, as are high-voltage grids that can back into markets. This is disruptive forthree reasons. The first move excess power around the networkmore efficiently. is the subsidy system itself. The other two are inherent to the The bigger task is to redesign power markets to reflect the nature of wind and solar: their intermittency and their very new need for flexible supply and demand. They should adjust low runningcosts. All three help explain why powerprices are prices more frequently, to reflect the fluctuations of the weath- low and public subsidies are addictive. er. At times of extreme scarcity, a high fixed price could kick in First, the splurge of public subsidy, of about $800bn since to prevent blackouts. Markets should reward those willing to 2008, has distorted the market. It came about for noble rea- use less electricity to balance the grid, just as they reward those sons—to counter climate change and prime the pump for new, who generate more of it. Bills could be structured to be higher costly technologies, including wind turbines and solar panels. or lower depending how strongly a customer wanted guaran- But subsidies hit just as electricity consumption in the rich teed power all the time—a bit like an insurance policy. In short, world was stagnating because of growing energy efficiency policymakers should be clear they have a problem and that and the financial crisis. The result was a glut ofpower-generat- the cause is not renewable energy, but the out-of-date system ing capacity that has slashed the revenues utilities earn from ofelectricity pricing. Then they should fix it. 7 12 Leaders The Economist February 25th 2017

Gender budgeting Making women count

An idea to help governments live up to theirpromises T IS easy to be cynical about budgeting brings women’s issues right to the heart of govern- Igovernment—and rarely does ment, the ministry of finance. Governments routinely bat such cynicism go unrewarded. away sensible policies that lack a champion when the money Take, for instance, policy to- is handed out. But if judgments about what makes sense for wards women. Some politicians women (and the general good) are being formed within the fi- declare that they value wom- nance ministry itself, then the battle is half-won. en’s unique role, which can be Gender budgeting is not new. Feminist economists have ar- shorthand for keeping married gued for it since the 1980s. A few countries, such as Australia women at home looking after the kids. Others create whole and South Africa, took it up, though efforts waxed and waned ministries devoted to policies for women, which can be a de- with shifts in political leadership—it is seen as left-wing and vice for parking women’s issues on the periphery of policy anti-austerity.The Nordic countries were pioneers in the West; where they cannot do any harm. Still others, who may actual- Sweden, with its self-declared “feminist government”, may be ly mean what they say,pass laws giving women equal oppor- the gold standard. Now, egged on by the World Bank, the UN tunities to men. Yet decreeing an end to discrimination is very and the IMF, more governments are taking an interest. They different from bringing it about. should sign on as the results are worth having. Amid this tangle of evasion, half-promises and wishful Partly because South Korea invested little in social care, thinking, some policymakers have embraced a technique women had to choose between havingchildren, which lowers called gender budgeting. It not only promises to do a lot of labour-force participation, or remaining childless, which re- good for women, but carries a lesson for advocates of any duces the country’s fertility rate. Gender budgeting showed cause: the way to a government’s heart is through its pocket. how, with an ageing population, the country gained from spending on care. Rwanda found that investment in clean wa- What counts is what’s counted ter not only curbed disease but also freed up girls, who used to At its simplest, gender budgeting sets out to quantify how poli- fetch the stuff, to go to school. Ample research confirms that cies affect women and men differently (see page 65). That leaving half a country’s people behind is bad for growth. Vio- seemingly trivial step converts exhortation about treating lence againstwomen; failingto educate girlsproperly; unequal women fairly into the coin of government: costs and benefits, pay and access to jobs: all take an economic toll. and investmentsand returns. Youdon’thave to be a feminist to Inevitably there are difficulties. Dividing a policy’s costs recognise, as Austria did, that the numbers show how lower- and benefits between men and women can be hard. Some- ing income tax on second earners will encourage women to times, as with lost hours ofschool, the costs have to be estimat- join the labour force, boosting growth and tax revenues. Or ed. Redesigning the budgeting process upends decades of that cuts to programmes designed to reduce domestic violence practice. If every group pressing for change took the same ap- would be a false economy, because they would cost so much proach, it would become unmanageable. In a way, though, in medical treatment and lost workdays. that is the point. Governments find it easy to pay lip-service to As well as identifying opportunities and errors, gender women’s rights. Doing something demands tough choices. 7

Brazil’s pensions Geronto-generosity

At last the government is trying to fixa system that threatens the country’s future LESSED with tropical beach- just 25 years in the classroom to get a full pension and even Brazil’s pensions B es, bossa nova and balletic fewer for a partial one; many leave before they turn 50. Wid- Government spending as % of GDP footballers, Brazil seems like a ows inherit theirspouses’ full pension (provided they are 44 or 15 marvellous place to be young. It older) without giving up their own. In the OECD, a club of 10 is an even better place to grow mostly rich countries, pensions replace an average of around 5 old. That is because Brazil has 60% ofpre-retirement income; in Brazil, 80%. 0 among the world’s most gener- Plush pensions have their origins in the constitution adopt- 1991 2000 10 16 ous pension systems. Sadly, the ed in 1988, which sought to conferas many rights as possible on past is now beginning to catch up with it. Brazilians who had suffered under two decades of military Brazilians start drawing their pensions when they are 58 rule. The constitution also recognises rights to education and years old on average, eight years younger than Americans and health, but giving a pensioner a monthly cheque is easier. 14 than Mexicans (see page 27). Members of some groups can Geronto-generosity hurts everyone else. The pensions bill retire even earlier. Female teachers, forexample, need to spend consumes more than half the government’s non-interest1 The Economist February 25th 2017 Leaders 13

2 spending and, if nothing is done, will within ten years gobble mum wage, which increased by 80% in real terms in the de- up 80%. As a share of GDP, Brazil spends 50% more on pen- cade to 2015. Beneficiaries will not be able to draw more than sions than do members ofthe OECD on average. Yetit has only one pension; widows will receive smaller ones. half as many over-65-year-olds as a share of the population. IfMr Temergets this through the reform-shy congress with- The skewed system diverts money from schools, clinics and out disfiguring changes, it will be an astounding achievement. infrastructure and lurespeople outofthe workforce. The ongo- Besides mitigating the pension crisis, it would raise hopes for ing pension deficit from year to year accounts for more than otherreformsofBrazil’sbigbutineffective state, forexample of half the budget deficit of 8.9% of GDP. That is a big reason why labour laws and taxes. The real has appreciated against the Brazil’sbenchmarkinterestrate isashigh as12.25%. Extravagant dollar by more than any other emerging-market currency over pensions thus make it hard forthe economy to grow.The coun- the past year, a sign that markets are betting on success. try is undergoing the longest and deepest slump on record. If That is not certain. MrTemerhas already enacted one bigre- Brazil is to restore confidence in its economic future, it must do form, a constitutional freeze on increases in public spending something about its pensions. above inflation, but that made nobody feel poorer. The pen- sion plan is the main way of putting the freeze into practice. It A good start will be felt, especially by people near retirement, who will Michel Temer, Brazil’s president, therefore deserves credit for have to work longer than they were expecting. Ms Rousseff’s proposing reforms that would make a big difference. Earlier left-wing Workers’ Party (PT), now the main opposition, hopes governments tweaked the system. The reforms proposed by to fan their resentment. The PT thunders that Mr Temer is Mr Temer, who became president last year after the impeach- dumpingthe costs ofthe crisis on workers. The unelected pres- ment of his predecessor, Dilma Rousseff, would go much fur- ident does not have the right to carry out reform, it claims. ther. First, they would apply a minimum pension age of 65 to In fact, MrTemerwon an election as Ms Rousseff’s running- almost everyone (female teachers included). The stipulation mate; his presidency and congress, which began debating the of the pensionable age would be removed from the constitu- reform this month, are constitutionally legitimate. They have tion, makingiteasierto raise the threshold aslives lengthen. To no choice but to act. The reform proposal does not fix pen- qualify for the most basic pension, all but the poorest would sions, but it is a good start. Without it, the economic crisis will have to contribute for 25 years, rather than just 15. Benefits deepen and Brazil’s long-term prospects will darken. It is the above that floor would no longer rise in step with the mini- tonic that the country needs. 7

Iran and America No blank cheque

The Trump administration is right to keep up the pressure on a belligerent Iran VIGDOR LIEBERMAN, Isra- The purpose ofthe deal was to put tight limits on Iran’s des- Ael’s pugnacious defence tabilising enrichment programme—nothing more, nothing minister, is not one to mince his less. Underits terms, Iran agreed to rejiga reactor so that it can’t words. Speaking on February make weaponisable plutonium. It also dismantled most of the 19th at this year’s Munich Securi- centrifuges it had been using to make enriched uranium and ty Conference, he described the eliminated almost all its stockpile of the stuff. The restrictions challenges facing the Middle are to last 15 years and even after that, Iran’s nuclear activities East as “Iran, Iran and Iran”. De- will remain under a highly intrusive inspection regime. In re- legates from the Arab states present might not have relished turn, the rest of the world agreed to lift the UN-mandated eco- being seen to agree with the Zionist enemy, but that did not nomicsanctionsthathad crippled Iran’seconomyafterthe nu- stop them. Saudi Arabia’s foreign minister reckoned that the clear threat started to cause alarm in the mid-2000s. Iranians have only “stepped up the tempo of their mischief” since the negotiation in 2015 of a nuclear deal between Iran Now forthe next step and the world’ssixleadingpowers. And the regional actors are Both sides have kept their part ofthe bargain; the uranium and hardly alone in their hostility. The Trump administration the centrifuges are dealt with, Iran shows no sign of deliberate placed Iran “on notice” at the start of this month and imposed cheating, and the UN Security Council’s nuclear-related eco- a limited new set of sanctions, following a medium-range bal- nomic sanctions have all been lifted. Although Donald Trump listicmissile test(see page 39); Iran responded bytestinganoth- has inveighed against the deal, in office he has shown no sign er one. Is a fresh confrontation, even a conflict, brewing again ofseekingto scrap it. Mostobservers, includingeven the Israeli so soon after the deal of2015 was supposed to have ushered in army and intelligence services, think it would be a mistake to an era ofpeaceful coexistence? do so. However—and this is a crucial point—othersanctions on Perhaps not; but that depends above all on Iran. The hard- Iran remain. America, in particular, still has a large array of liners who are in charge in Tehran need to reconsider their pri- them, imposed a decade earlier to penalise a number of Irani- orities. Judgingbytheiractionsand rhetoric, theyappear to be- an transgressions, especially human-rights abuses, support for lieve that the nuclear agreement (formally known as the Joint terrorism and the development of weapons of mass destruc- Comprehensive Plan ofAction) marked the end ofa process of tion, including the missiles that can be used to deliver them. rehabilitation. In fact, it goes only part ofthe way. These sanctions were tightened several times by the gener-1 14 Leaders The Economist February 25th 2017

2 ally doveish Barack Obama to punish Iran for a missile test. lah, an Iranian marionette, is the strongest force in Lebanon The law that mandates them was extended for ten more years and menaces Israel. In Syria Iran props up the vile regime of in December. The vote in Congress was hardly a cliffhanger: Bashar al-Assad. In Yemen it arms and trains the Houthi rebels the Senate backed the extension by 99-0 and the House by who overthrew the government two years ago. Bahrain and 419-1. American firms are still banned from doing business Saudi Arabia, which both have large Shia populations, accuse with Iran, though the president can always waive sanctions. it oforganising terror cells in their countries. After the nuclear deal, Mr Obama did so in many areas, for in- America should not tear up the nuclear deal. It is not per- stance letting Boeing join Airbus in selling planes to Iran. fect, but it was better than confronting an Iran only months None of these prior sanctions had anything to do with the from possessing nukes. But sticking with the nuclear deal does nuclear programme and everything to do with Iran’s record of not stop America from being tough elsewhere. Indeed, re- making trouble, which it continues unabated. Iran is helpful in sponding to missile-tests and other transgressions signals that taking on Islamic state. But, as Mr Lieberman noted, it still the world will react to nuclear breaches, too. Until Iran stops poses the largest threat to the stability of the Middle East. Its acting as though it is hellbent on recreating the Sassanian em- Shia proxy armies, aided by the Quds force, its own overseas pire, Mr Trump is right to apply targeted sanctions against the special-forces unit, have extended its hard power far beyond individuals and companies that are helping the Middle East’s its borders. Iraq is now virtually an Iranian client state. Hizbul- chiefempire-builder puffitselfup. 7

Diamonds and marriage A girl’s new best friend

The diamond engagement ring may not have a future as a symbol ofcourtship. What could replace it? EACOCKS strut; bowerbirds jargon, they are “Veblen goods”, named after a 19th-century Pbuild lovenests; spiders gift- economist: prestige-enhancing trinkets for which a higher wrap flies in silk. Such courtship price encourages buyers. With most products, lower prices in- rituals play an important role in crease demand; with diamonds, they could kill it. whatCharlesDarwin called sex- Greater equality for women might seem to render male- ual selection: when the female courtship displays redundant. But mating preferences evolved of a species bears most of the over millennia and will not change quickly. Ifdiamonds were costs of reproduction, males use to cease being a way to signal a man’s marriageability, what extravagant displays and gifts to demonstrate their “reproduc- might take their place? tive fitness” and females choose between them. For human A different gift, perhaps. In China skewed sex ratios mean males, shards of a crystalline form of carbon often feature. A that a prospective bridegroom must own an apartment and diamond engagement ring signals a man’s taste, wealth and shower his future in-laws with cash. But a glittering stone goes commitment, all to persuade a woman that he is a good bet. to the woman, not her family. And it is more than a gift: it is a This particular courtship gift was dreamed up by an ad status symbol, demonstrating that even as a man approaches agency for De Beers, the cartel that sold almost all of the the expensesofmarried life, he can still splash out on a bauble. world’s diamonds throughout the 20th century. In the 1930s it Ora man could rely on more generic formsofdisplay, such as a started to promote a linkbetween diamonds and marriage. Di- fancy degree, good job or sharp suit. But these can impress one amonds’ unmatched hardness would symbolise love’s endur- woman as easily as another, or several simultaneously. He ance and their“fire”, orbrilliance, its passion. Two months’ sal- must show commitment—a need not unique to courtship. Sal- ary, the firm suggested, was what the ring should cost—a good vadoran gangsters get extravagant tattoos; Japanese yakuza cut investment since, as the admen said, “Adiamond is forever.” off a fingertip. These visible signs of allegiance make it hard to Now, that promise is dimming (see page 50). Though a defect, and impose heavy costs. But as marriage proposals growing Chinese middle class will probably prop up demand they would fall short. Few women would feel proud to carry for a while, millennials in Western countries seem keener on around their fiancé’s severed pinkie. memorable experiences than on bling. Diamonds’ image has been blemished by some beingmined in warzones and sold to Love is a multifaceted thing pay forthe fighting. Meanwhile, laboratory-grown “synthetic” Many millennial women seek a mate who is creative, charita- diamonds, long fit only for industrial use, are becoming good ble and earns enough not to live with his parents. The million- enough to compete with gems from out ofthe ground. aire founder ofa startup that makes an app to teach yoga to or- But the long-term threat to diamonds’ lustre is more surpris- phans would be ideal. As a token of his commitment, a suitor ing: that their price could plummet. In recent years regulators might offer the object of his affections 51% of his shares—so (and market forces) have undermined De Beers’s cartel by lim- much nicer than a joint bank account. Less eligible men could iting the share of other producers’ stones that it can buy. Now offer instead to link Uber accounts, thus entwining the cou- responsible for just a third ofglobal sales, the company can no ple’s reputations: their joint five-star rating would be at risk if longer manage supply by stockpiling gems when demand either misbehaved. Uber-linking would also allow each to turnsdown. Itisspendinglesson advertising, since itno longer keep track of the other’s whereabouts, discouraging infidelity. gets the lion’s share of the benefits. But the very value of dia- Whatever ultimately replaces diamonds, it will surely be digi- monds lies in being scarce and coveted—that is, costly. In the tal, not worn on a digit. 7 Letters The Economist February 25th 2017 15

Fighting terror in Kenya Moreover, it was Repub- experience helps develop The real question is not about lican appointees on the economic literacy.Lowering grand bargains but whether “Food forthe hyenas” (Febru- Supreme Court who aban- the voting age to include Donald Trump should be ary18th) misrepresented the doned a century ofprecedent people who lackthis would do looking forless dramatic ways workcarried out by the in the Citizens United cam- more harm than good. to improve relations. Kenyan government in battling paign-finance decision. The JACOB LADNER The list ofproblems where jihadism. Our domestic securi- same five-to-fourmajority also Phoenix common ground is worth ty operations are not the rene- gutted the statutory Voting looking for is long: Islamic gade actions that you portray. Rights Act, holding its core The obvious answer to apathy extremism, cyber-warfare, They form part ofa national provision to be unconstitution- among millennials is to turn strategic arms reduction and strategy to counter violent al based in part on the “ex- voting into a video game. At nuclear terrorism. But the key extremism, launched in Sept- ternal information” that, in the the start players would be able issue where polite opinion ember 2016. The suggestion Republican appointees’ view, to vote for, say,dog-catcher. But continues to insist on ob- that they will lead to election “things have changed dramati- as they acquired more points duracy is economic sanctions. violence is not credible. The cally” 50 years after its forexperience, they would be Really? I have not met a West- vote in 2013 passed offpeace- enactment. entitled to vote in more impor- ern official who can explain fully despite the doom-mon- As forAntonin Scalia’s tant elections. what sanctions are now for. gering ofmany international focus on “original intent” to Joking aside, there is some- They have changed Russian observers and Kenya today is keep the constitution and laws thing to be said for“earning” policy not a jot. The economy, even more secure. from being “stretched by un- the right to vote by requiring at predicted to implode, is now Our plan includes the elected judges”, it seems im- least a token effort. People who growing again. Vladimir Putin reintegration ofreturning possible to adhere fully to that are disinclined to vote are also is still president and rides high jihadists and pre-emptive view.The Supreme Court’s disinclined to study the issues. in the polls. Indeed he may be anti-radicalisation measures. It ruling in Brown v Board of Youropinion ofmeasures quietly relying on the mainte- is formulated in tandem with Education (1954), holding that aimed at making voting effort- nance ofsanctions to get those the UN Global Counter- racially segregated public less depends on whether you extra nationalist voters out on Terrorism Strategy and education violates the equal thinkthe primary purpose of his behalfat the presidential integrates ideas put forward by protection clause ofthe14th democracy is fosteringthe election in March 2018. Are the UN secretary-general and Amendment, is universally illusion ofparticipation, or they really worth it? the African Union. accepted as the right decision. fostering good government. SIR TONY BRENTON Like many countries, Kenya Yet when Congress sent the CHRIS TRUAX British ambassador to Russia faces serious challenges with 14th Amendment to the states San Diego 2004-08 domestic and international forratification in1866, schools Cambridge, Cambridgeshire terror networks. But attacks in the District ofColumbia, Back to reality have decreased and co-oper- established by Congress, were Data is no singular exception ation between police and segregated by race. informants is on the up. We THOMAS ROWE A letter from David Chaplin in will face down extremism Professor of law emeritus the February11th issue promot- forcefully,diligently,and fairly. Duke University ed the use of“data” as a singu- MAJOR-GENERAL (RTD) JOSEPH Durham, North Carolina lar noun. This missed the point NKAISSERRY that the word is routinely Interior cabinet secretary Voting block awarded its due as a plural Nairobi noun in scientific and medical Being myself15 years old, I read literature in accord with its Legal opinion with interest your leader call- Latin etymology. Pointing to ing forthe voting age to be other plurals that have been Yourreview ofStephen Press- lowered to 16 (“Vote early, vote reduced to singulars is like er’s bookwas fartoo simplistic often”, February 4th). You saying that several crimes on the liberal-conservative argued that “Alower voting Grand bargains are very rare in against the English language divide over how to understand age would strengthen the international life, and the justify yet another. the “rule oflaw” (“Whose voice ofthe young and signal atmospherics forone between The use of“datum”, I admit, rules, whose law”, February that their opinions matter.” America and Russia couldn’t is unusual. However, the 4th). Yousaid that Republicans However, you must consider be worse (“Courting Russia”, attribution of“data” as a singu- see this as “based on precedent precisely what citizens ofmy February11th). Ministers and lar noun would yield sen- and written statutes”, whereas age would be inclined to vote even sensible commentators tences such as “The editors of Democrats thinkit should “be for. For example, the vast ma- talkglibly ofa new cold war, The Economist is uneducated discretionary values and jority ofDemocratic primary without really reflecting on the in the Latin derivation of allowed to incorporate voters aged 18-24 supported costs and hazards ofthe old English terms.” external information”. But Bernie Sanders, partly because one. The relationship between BARRY MALETZKY liberal legal thinkers, like ofhis irresponsible promise of Russia and the West sank Portland, Oregon 7 conservatives, also believe in free college education. dangerously low last autumn; precedent and following stat- Adding a large number of there was a real possibility of ute. Disagreements arise over people like me to the voter military confrontation. We Letters are welcome and should be addressed to the Editor at the scope ofprecedents and rolls, all ofwhom have little need to find a way backfrom The Economist, 25 St James’s Street, interpretation ofstatutes, but experience in the workforce, all this. And the initiative will London sw1A 1hg no one (save possibly Clarence would increase support for need to come from the over- E-mail: [email protected] Thomas) gives no weight to Sanders-style populism over whelmingly stronger, and thus More letters are available at: precedent. Clinton-style pragmatism. Job less at risk, ofthe two sides. Economist.com/letters 16 Executive Focus

The Economist February 25th 2017 Executive Focus 17

The OPEC Fund for International Development (OFID)

The OPEC Fund for International Development (OFID), based in Vienna – Austria, is the development fi nance institution established by the Member States of OPEC in 1976 as a collective channel of aid to the developing countries. OFID works in cooperation with developing country partners and the international donor community to stimulate economic growth and alleviate poverty in all disadvantaged regions of the world. To date, OFID has made fi nancial commitments of more than US$ 20.3 billion to over 3,600 operations across 134 countries worldwide. In pursuit of its Organizational Strengthening Program, OFID has openings and seeks to fi ll the following vacancies: Senior Director, Corporate Services Department – (Ref.: VA508/2017) Economist – (Ref.: VA204/2017) OFID offers an internationally competitive remuneration and benefi ts package, which includes tax-exempt salary, dependent children education grant, relocation grant, home leave allowance, medical and accident insurance schemes, dependency allowance, annual leave, staff retirement benefi t, diplomatic immunity and privileges, as applicable. Interested applicants are invited to visit OFID’s website at www.ofi d.org for detailed descriptions of duties and required qualifi cations, as well as procedure for applications for the above mentioned positions and other vacant positions listed on OFID’s website. Consideration will only be given to applications of nationals from OFID Member Countries. The deadline for receipt of applications is March 17, 2017. Due to the expected volume of applications, OFID would only enter into further correspondence with short-listed candidates. The Economist February 25th 2017 18 Briefing Renewable energy The Economist February 25th 2017 bents in the generation and transmission businesses. It is also becoming a problem for the renewables themselves, and thus forthe efforts to decarbonise the electricity supply that justified their promotion in the first place. In 2014 the International Energy Agen- cy (IEA), a semi-official forecaster, predict- ed that decarbonising the global electricity grid will require almost $20trn in invest- mentin the 20 yearsto 2035, atwhich point the process will still be far from finished. But an electricity industry that does not produce reliable revenues is not one that people will invest in.

Less dear, still disruptive The fight against climate change has seen huge growth in the “new” renewables, wind and solar power, over the past de- cade, both in developed countries and de- veloping ones. In 2015 governments poured $150bn into supporting such in- vestment, with America, China and Ger- many taking the lead. But Wildpoldsried is still very much the exception, not the rule. In 2015 such sources accounted for only 7% of electricity generated worldwide. Over 80% of the world’s energy still comes from fossil fuels (see chart 1 on next page). In terms of reducing climate risks there is a long way to go. The good news is that a decade of subsi- dy-driven growth has brought with it fall- ing costs. Renewables are still on the pricey side in many places, but they are getting less so; in some places wind, in particular, is reasonably competitive. This suggests thattheirgrowth mightsoon need a lot less subsidythan ithasattracted to date. Robust carbon prices would give renewables fur- ther advantages, but they have as yet A world turned upside down proved hard to provide. The EU’s emis- sions-trading scheme is a perennial disap- pointment: still, hope springs eternal, as witness a recent attempt to persuade the WILDPOLDSRIED newAmerican administration ofthe bene- fits of a revenue-neutral economy-wide Wind and solarenergy are disrupting a century-old model ofproviding electricity. carbon tax devoted to providing $2,000 to What will replace it? every family offourin rebates. ROM his office window, Philipp lagers are handsomely rewarded for their But pushing renewables into the elec- FSchröder points out over the Bavarian greenness; in 2016 they pocketed about tricity market has had effects on more than countryside and issues a Bond villain’s €6m ($7m) from subsidies and selling their theirprice; it has hit investment, too. In rich laugh: “In front of you, you can see the surplus electricity. countries governments have imposed re- death of the conventional utility, all fi- It hardly looks like the end ofthe world; newables on electricity systems that had nanced by Mrand Mrs Schmidt. It’s a beau- but Mr Schröder, who works at Sonnen, an no need for new capacity, because de- tiful sight.” The wind blowing across Wild- energy-storage firm, has a point. Many en- mand is in decline. Investment in supply poldsried towards the Alps lazily turns the vironmentalists want the world’s energy beyond what the market required has pro- turbines on the hills above. The south-fac- system to look like Wildpoldsried’s. And duced gluts and pushed down prices. In ing roofs of the houses, barns and cow- the things it is based on—subsidies for in- America this has been somewhat masked sheds are blanketed with blue photovolta- vestment, very little spending on fuel, and by the shale-gas revolution, which has ic (PV) solar panels. The cows on the green moving electricity generation to the edge caused a bigger shift in the same direction. fields produce manure that generates bio- of, or off, the grid—are anathema to elec- In Europe the glut of renewables is more gas which warms the Biergarten, the sports tricity markets and business models devel- starkly seen for what it is. Wholesale elec- hall and many of the houses where the oped for the fossil-fuel age. tricity prices have slumped from around 2,600 villagers live, as well as backing up Few greens would mourn them. But the €80 a megawatt-hour in 2008 to €30-50 the wind and solar generators in winter. fall in utility revenues that comes with the nowadays. All told, the village produces five times spread of places like Wildpoldsried is not The result has been havoc for the old- more electricity than it needs, and the vil- just bad news for fossil-fuel-era incum- style utilities. Germany’sbiggest electricity1 The Economist February 25th 2017 Briefing Renewable energy 19

2 companies, E.ON and RWE, both split in problem. Grids with lots of storage capaci- the world is caught in a vicious circle: sub- two last year, separating their renewables ty built in; grids big enough to reach out to sidies fosterdeployment ofrenewables; re- and grid businesses from indebted and faraway renewables when the nearby newables depress power prices, increasing loss-making conventional generation. EY, ones are in the doldrums; grids smart the need forfinancial support. Theoretical- a consultancy, calculates that utilities enough to help customers adapt demand ly, ifrenewables were to make up 100% of across Europe wrote off €120bn of assets to supply: all have their champions and the market, the wholesale price of electric- because oflow powerprices between 2010 their role to play. ity would fall to zero, deterring all new in- and 2015. Investment in non-renewables is But long-run solutions do not solve vestment that was not completely subsi- very low. “Never in recent history has the short-term constraints. So for now coun- dised. He calls this vicious circle the deployment of capital been more difficult tries with lots of renewables need to keep clean-energy paradox: “The more success- than it is right now within the energy in- older fossil-fuel capacity available as a ful you are in increasing renewables’ pene- dustry,” says Matt Rennie, who analyses standby and to cover peaks in demand. tration, the more expensive and less effec- the global-utilities market at EY. This often means additional subsidies, tive the policy becomes.” It is not just that efforts to shift to renew- known as capacity payments, for plants Francis O’Sullivan, of the Massachu- able power have added new sources of that would otherwise be uneconomic. setts Institute ofTechnology, says the trend supply to an already well-served market. Such measures keep the lights on. But they is already visible in parts of America with In an industry structured around marginal also mean that fossil-fuel production ca- abundant solar energy. Utilities which are costs, renewables have a disruptive punch pacity clings on—often in particularly dirty required to have renewables in their port- above their weight. forms, such as German power stations folios, such as those in California, used to Electricity markets, especially those powered by brown coal, or backup diesel offer companies investing in that capacity that were deregulated in the late 20th cen- generators in Britain. generous long-term contracts. But research tury, typically work on a “merit order”: at byBloombergNewEnergyFinance (BNEF), any given time they meet demand by tak- From dull to death spiral a consultancy, shows that, as such utilities ing electricity first from the cheapest sup- Properly structured capacity payments come closer to meeting their mandates, so- plier, then the next-cheapest, until they make it sensible to invest in generators that lar-power developers are being offered have all they need; the price paid to all con- can be switched on when renewable ener- shorter-term fixed prices with a higher cerned is set by the most expensive source gy is not available. But what will make it subsequent exposure to variable whole- in use at the time. Because wind and solar sensible to continue investing in renew- sale prices. That reduces the incentive to in- do not need to buy any fuel, their marginal ables themselves? vest. Solar “cannibalises its own competi- costs are low. They thus push more expen- When they are a small part of the sys- tiveness away,” MrO’Sullivan says. “It eats sive producers off the grid, lowering tem, renewables are insulated from the ef- its own tail.” wholesale prices. fects that their low marginal costs have on At the turn of the century, according to If renewables worked constantly that prices, because as long as there are some the IEA, one third ofinvestment in electric- would not, at first blush, look like a pro- plants burning fossil fuels the wholesale ity markets flowed into “competitive” sec- blem for anyone except people generating price of electricity will stay reasonably torsthatwere exposed to wholesale prices; expensive electricity. But renewables are high. So utilities could buy electricity from the rest went into regulated utilities, trans- intermittent, which means that in systems renewable generators, often on fixed-price mission grids and the sort of fixed-price where the infrastructure was designed be- contracts, without too much worry. contracts where the renewables got their fore intermittency became an issue—al- But the more renewable generators start. By 2014 the share ofinvestment in the mostall ofthem, in practice—fossil-fuel, hy- there are, the more they drag down prices. competitive sectors was just 10% of the to- droelectric and nuclear plants are needed At times when renewables can meet all the tal. It is a fairbet that, the more renewables more or less as much as ever at times when demand, making fossil-fuel prices irrele- are exposed to competition by contracts the sun doesn’t shine and the winds don’t vant, wholesale electricity prices col- pegged to wholesale prices, the more peo- blow. And if such plants are shut out of the lapse—or sometimes turn negative, with ple will shy away from them as well. market by low-cost renewables, they will generators paying the grid to take the stuff Ever-lower capital costs, particularly in not be available when needed. away (the power has to go somewhere). solar, could go some way to bucking this In the long run, and with massive fur- The more renewables there are in the sys- trend, making investments cheaper even ther investments, electricity grids rede- tem, the more often such collapses occur. as they become more risky.But if low-mar- signed for systems with a lot of renewable Rolando Fuentes of Kapsarc, an energy ginal-cost renewables continue to push energy could go a long way to solving this think-tank based in Saudi Arabia, claims prices down, there will come a time when private investment will dry up. As Mal- colm Keay of the Oxford Institute for Ener- Big growth, small share 1 gy Studies puts it, “The utility business model is broken, and markets are, too.” Non-hydro renewables, share of power generation Primary-energy consumption, worldwide By region, % Tonnes of oil equivalent, bn Renewables do not just lower prices; Non-hydro renewables when used by customers, they also eat into 12 14 demand. Consider Australia. It has 1.5m Europe and Eurasia Nuclear households with solar cells on their roofs. S. & Central America 10 12 Hydroelectric There are a number of reasons for this. It is North America 10 8 a sunny place; installing PVs was until re- World Natural gas Asia Pacific 8 cently generously subsidised; and electric- Africa 6 ity bills are high. In part that is to pay for 6 Middle East Coal some of the subsidies. In part it is because 4 4 they pay for the grid, which has been be- 2 Oil 2 coming more expensive, not least because it has had to deal with a lot more renew- 0 0 ables. The IEA says that in parts of south- 1995 2000 05 10 15 1995 2000 05 10 15 ern Australia, grid upgrades have doubled Source: BP network costs since 2008-09. Despite cuts 1 20 Briefing Renewable energy The Economist February 25th 2017

The response to these problems is not point where people say, ‘You’re so yester- Who gets the bill? 2 to abandon renewables. The subsidies day. You get your power from the grid.’” California, electricity load requirement have helped costs of wind and solar to fall But peer pressure is unlikely to be decisive. Typical spring day, gigawatts precipitously around the world. Competi- Bruce Huber ofAlexa Capital, which helps tion is often fierce. Recent auctions for off- fund renewable-energy investments, says An increase of 10.9GW 28 over three hours 26 shore wind farms in the North Sea and so- business consumers are probably going to (February 1st 2016) 24 lar developments in Mexico and Abu be more influential in driving the adoption 22 Dhabi have shown developers slashing ofthese technologies than households, be- 2012 prices to win fixed contracts to supply cause they will more quickly see how they 20 2013 clean electricity for decades to come. The might cut their bills by using demand-re- 18 2015 2014 “levellised cost of electricity” for renew- sponse and storage. “For the last 100 years 16 2016 ables—the all-in cost of building and oper- everyone has made money upstream. 14 2017 2019 ating a plant over its lifetime—is increasing- Now the added value is coming down- 12 2018 2020 ly competitive with fossil fuels in many stream,” he says. 10 places. Especially in sunny and windy de- veloping countries with fast-growing de- Waiting forenlightenment 00:00 06:00 12:00 18:00 24:00 mand, they offer a potentially lucrative, Mr Huber likens the upheaval facing utili- Source: California ISO subsidy-free investment opportunity. ties to that seen in the telecoms industry a But it does mean changing the way the generation ago, when a business model 2 to subsidies, Australian PV installations are world buys, sells, values and regulates based on charging per second for long-dis- expected to triple over the next decade. electricity to take account of the new tance calls was replaced by one involving When fewer people rely on the grid, means by which it generates it. “Thinking the sale of services such as always-on there are also fewer left to share the costs. of wind and solar as a solution by them- broadband. This is bad news for the verti- Phil Blythe of GreenSync, a Melbourne- selves is not enough. You need flexibility cally integrated giants that grew up in the based company that works with utilities to on the otherside. Itonlymakessense ifthis age of centralised generating by the giga- moderate the fluctuations of renewable is a package deal,” says Simon Müller of watt. Jens Weinmann, of ESMT Berlin, a energy, warns that his country faces an in- the IEA. Elements of that package are al- business school, names dozens oftech-like cipient “utility death spiral”. The more cus- ready appearing. Markets that sell com- firms that are “nibbling” away at bits of tomers generate their own electricity, the moditised kilowatt-hours need to be trans- utilities’ traditional business models more utilitieshave to raise pricesto the cus- formed into markets where consumers through innovations in grid optimisation tomers that remain, which makes them pay for guaranteed services. A lot more and smart-home management systems. more likely to leave the grid in turn. It storage will be needed, with products like With a colleague, Christoph Burger, he has won’t happen overnight, he says: but it is those of Sonnen in Wildpoldsried and the written of the “big beyond” in which do- “death by a thousand cuts”. Powerwalls made by Tesla fighting for mestic energy autonomy, the use of the space in people’s homes. Smart grids bol- blockchain in energycontracts, and crowd- From dromedary to duck stered by big data will do more to keep de- sourcingofPV installations and other tech- In California there is an icon for the effect mand in line with supply. nological disruptions doom the traditional that domestic renewables have on the de- In Wildpoldsried Mr Schröder dreams utility. Already, big Silicon Valley firms mand for grid electricity, and thus on the of electricity-users inviting friends round such as Google and Amazon are attempt- revenues of utilities: it is called the duck fora glass ofwine to showofftheir newso- ing to digitalise domestic energy, too, with (see chart 2). Every year more Californian lar kits and batteries. “We’ll soon be at a home-hubs and thermostats. consumers have solar cells. As a result, ev- But how this nibbling leads to a system ery year electricity demand during the day that all can rely on—and who pays for the falls, and revenue falls accordingly.Similar parts of it that are public, rather than priv- effects are seen in Germany, where there ate, goods—remains obscure. The process are now1.4m PV users—mostly domestic. It will definitely be sensitive to politics, be- is one of the reasons—subsidies are anoth- cause, although voters give little thought to er—why domestic electricity prices have electricity markets when they are working, stayed high there while wholesale prices they can get angry when prices rise to cov- have fallen. er new investment—and they scream blue These home generators are not just re- murder when the lights go out. That sug- ducing demand for grid electricity; often gests progress may be slow and fitful. And they are allowed to feed surplus power it is possible that it could stall, leaving cli- from their PVs into the grid, competing mate risks largely unabated. with other generators. In many American Gettingrenewablesto today’srelatively states utilities grumble about the “net me- modest level of penetration was hard and tering” rate they are required to pay such very expensive work. To get to systems people—especially in states like Nevada where renewables supply 80% or more of where they have been required to credit customers’ electricity needs will bring the electricity fed in at the retail price, rath- challenges that may be far greater, even er than the wholesale price. And rooftop though renewables are becoming compar- solarinstallationscontinue to grow,with12 atively cheap. It is quite possible that, as Mr states more than doubling their deploy- Schröder predicts, Mr and Mrs Schmidt in ment in 2016, according to BNEF. Business- Wildpoldsried will lay waste the world’s es and industrial users are also becoming conventional electricity utilities while big consumers ofrenewable energy,which sharing Riesling and gossip with the neigh- potentially reduces their dependence on bours. But that does not mean that they the grid, and thusthe amounttheywill pay will be able to provide a clean, green alter- forits services. It may not get all the way there native foreveryone. 7 United States The Economist February 25th 2017 21

Also in this section 22 A new national security adviser 23 Replacing Obamacare 23 Deporting undocumented migrants 24 The future of the Democratic Party 25 Wrongful convictions 26 Lexington: Cheerful dissent

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

Environmental protection spread of television, which publicised such disasters as Californian peasoupers Revenge of the polluters and the burning Cuyahoga river in Ohio, had helped foster public demand for ac- tion; the CWA passed the Senate 86-0. This provoked a backlash from indus- WASHINGTON, DC try, which in turn led Ronald Reagan, and more forcefully George W. Bush, to turn Scott Pruitt, scourge ofenvironmental protection, takes overthe Environmental against environmental protection. Both Protection Agency appointed weak EPA directors and tried to O STAND on a pontoon besides the dreds of other polluted waterways, is a re- replace environmental rules with weaker TAnacostia River, which runs for 8.5 buke to the argument, levelled by Donald alternatives. Yet they ended up retreating miles through Maryland and the southern Trump and otherRepublicans, that the EPA under the legal furore this caused. The po- part ofWashington, DC, is to gauge the pro- is runningwild. At a rally in Florida on Feb- litical argument against environmental gress America has made in cleaning up its ruary 18th, Mr Trump said the agency was protection isnotoften legallybased—as the waterways. The Anacostia, which empties “clogging up the veins of the country with fate of Mr Pruitt’s challenges to the EPA, al- into the Potomac close to the Capitol, was the environmental impact statements and most all of which were co-sponsored by once a slow-flowing garbage dump; on a all of the rules and regulations”. Address- representatives from industry, indicates. recent sunny afternoon, hardly a soda can ing staff at the EPA on February 21st, its in- None ofthe 14 has so farsucceeded. or plastic bag ruffled its sluggish brown coming director Scott Pruitt, who as attor- Mr Pruitt claimed to be championing surface, over which cormorants fizzed like ney-general of Oklahoma sued the agency states’ rights. His critics say he was an in- arrows, rigid with intent. They are a sign 14 times, suggested the unclogging would strument of industry, and they seem to that the river’s ravaged fish stocks are be- involve ending the agency’s regulatory have a point. The EPA wasformed, with au- ginning to recover. But you still wouldn’t “abuses”. As The Economist went to press, thority to dictate standards to the states want to eat them. Mr Trump was reported to be preparing ex- and intervene where they fail to imple- Forty-five yearsafterthe federal govern- ecutive decrees to begin that effort. He is ment them, precisely because their envi- ment became obliged, under the Clean expected, for example, to try to replace the ronmental stewardship had proved to be Water Act (CWA), to try to make America’s Clean Power Plan (CPP), Barack Obama’s inadequate. MrPruitt’slegal argumentsare main waterways “fishable and swimma- main effortto reduce greenhouse-gasemis- a mixed bag, moreover. His most impor- ble”, the Anacostia is, despite the recent sions from thermal power-stations. tant, that the CPP stretches the EPA’s au- progress, in a disgusting state. Each year, This is such a familiar Republican as- thority, is taken seriously by legal experts. two billion gallons of sewage and storm- sault—even if Mr Trump may mean to go But other challenges brought by Mr Pruitt, water flow into it, making the water so further than his predecessors—that it is including a failed attempt to scupper a cloudy with faeces that light cannot pene- worth noting that environmental protec- multi-state clean-up ofChesapeake Bay, on trate it. The weeds and mussels that once tion was once a bipartisan concern. The which some of the recent progress on the carpeted the river-bed are long gone. It is EPA was founded by Richard Nixon, in Anacostia is built, appeared frivolous. coated with black ooze, over ten feet deep 1970, to implement a flurry ofenvironmen- His lack of success also indicates how in places, saturated with polychlorinated tal laws, including the CWA and Clear Air hard it will be to poleaxe the EPA, as the biphenyls, heavy metals and other indus- Act, that were also backed by Republicans. president has vowed to do. Some of Mr trial pollutants. Anacostia fish, often cov- Two decades ofrapid post-war growth had Obama’s recent regulations, including one ered with toxic lesions, are poisonous, yet put America’s air and waterways under to control methane leakage from drilling frequently consumed, a study suggests, by great pressure, which the states, locked in operations on federal lands, are liable to be 17,000 mostly poor people. feverish economic competition with each scrapped by the Republican-controlled The state of the Anacostia, and hun- other, had proved incapable of easing. The Congress, under a little-used procedure 1 22 United States The Economist February 25th 2017

2 called congressional review. Most cannot damaging; though perhaps less so than Mr eral McMaster arrived there, the city had be, however. They would have to be re- Trumpmight expect. Farfrom beingthe lib- been overrun by insurgents and retaken placed, through a long process of drafting eral attack-dogofhisimagining, the agency bloodily by the Americans, but with too and review, then defended against legal is already thinly stretched and environ- few American or Iraqi troops to control it. challenges. To replace the CPP would take mental groups correspondingly accus- Acting largely on his own initiative, he Mr Pruitt at least a couple ofyears. tomed to filling in the gaps. proceeded to put in place a model counter- Reducing the EPA would be easier if The most hopeful development on the insurgency regime. He ensured his officers Congress were to amend the environmen- Anacostia, for example, takes the form of a studied Islamic culture, which at that time tal legislation underpinning the EPA’s $2bn sewage overflow system, which is few American soldiers did, used force se- rules—for example, by binning the provi- due to come into use in 2018. It has been lectively and sparingly, and took pains to sionsofthe Clean AirActon which the CPP built by DC Water, which manages much understand and work with the grain of rests. But there is currently no chance this of Washington’s sewage system, after it Afari ethnic politics. He was lionised by could evade the Democratic filibuster in was sued over its discharges into the river American journalists, who, it is true, tend the Senate, and many Republican con- by environmental groups. They had tired to lose their hearts to any successful battle- gressmen would not welcome the fight. of the EPA’s failure to take action. Though field commander; Tal Afar, now the scene Around 60% of Americans say they are in 168 drains will still flow into the river, of a fierce battle between the Iraqi army favour ofmore environmental protection. bringing dog faeces and gasoline from the and Islamic State, did not stay quiet for A third possibility is more insidious. Mr capital’s roads, this should make the Ana- long. Yet in his hunger to listen and learn— Pruitt could try to sabotage his agency by costia swimmable for the first time in de- from Iraqis, his soldiers and even visiting ordering it to provide less regulatory over- cades. “We’re getting close to dramatic pro- journalists—General McMaster stood out. sight. That would get ugly; EPA workers are gress,’ says Emily Franc, who serves as the His subsequent career has if anything already rebellious, as illustrated by a recent Anacostia’s riverkeeper, a non-govern- been more distinguished. Championed by protest by dozens against their new boss’s mental watchdog role. “This is no time for another charismatic counter-insurgency nomination, in Chicago. It would also be the EPA to pull back.” 7 specialist, General David Petraeus, who was also considered by Mr Trump for the vacant national security post, but in effect A new national security adviser ruled himself out of contention by insist- ing he be allowed to pick his staff, General McMaster and servant McMaster helped run operations for the NATO mission in Afghanistan, after it was reinforced by Barack Obama in 2010. More recently, as head of the Army Capabilities Integration Centre, based in FortEustis, Vir- WASHINGTON, DC ginia, he hasled an effortto design and pre- pare the future American force that will H.R. McMasteris an improvement on his predecessor emerge from the two wars in which he HE 22 national security advisers who armed forces. General McMaster is hugely made his name. He has received fresh plau- Tserved Donald Trump’s predecessors respected by his peers, among whom he is dits in that role; David Barno, a former included two army or marine generals. On considered one of America’s most American commander in Afghanistan, February 20th Mr Trump equalled that thoughtful soldiers. called him perhaps “the 21st-century tally in less than a month, by appointing He is perhaps best known for his ex- army’s pre-eminent warrior-thinker”. Lieutenant-General H.R. McMaster to suc- ploits in the second Iraq war. Deployed in This does not mean General McMaster ceed the disgraced Mike Flynn. 2005 to the northern city of Tal Afar, in will be a good national security adviser, a Like the belligerentMrFlynn, whom Mr command of a cavalry regiment, he perniciously difficult job, at which only a Trumpsacked after 24 days in the job, after showed it was possible, at least temporar- few have excelled. And they—led by Brent it was revealed that he had lied about a ily,to pacify even the most violent and baf- Scowcroft, who advised Gerald Ford and private conversation with a Russian dip- fling parts of the country.By the time Gen- George H.W. Bush, and Stephen Hadley, 1 lomat, General McMaster appears to con- formto the president’s idea ofa fire-breath- ing war-fighter. He is stocky, bullishly charismatic and as a tank commander in the first Iraq war was decorated for battle- field prowess. After bumping into an Iraqi armoured column, General McMaster’s troop of nine American tanks destroyed over 80 Iraqi tanks and other vehicles without suffering a loss. Also like MrFlynn, who wasonce an in- novative intelligence officer, General McMaster is a freethinker. His doctoral the- sis in military history was a ruthless take- down of the pliant Vietnam-era military leadership, later published as a book enti- tled “Dereliction of Duty”. Yet there the comparison ends. By the time of his ap- pointment, Mr Flynn was known as a bad manager, obsessed with jihadism and so feverishly partisan that he represented a threat to the treasured neutrality of the HR sent this guy The Economist February 25th 2017 United States 23

2 who steered George W.Bush—tended to be The tax exemption cost $268bn (1.4% of known for tact and scrupulous impartial- GDP) in 2016, enough to pay for Obama- ity.General McMaster is better known as a care’s subsidies six times over (see chart). straight talker and a risk-taker, albeit by the Hated by economists, it encourages firms conformist standards of his profession. Mr to give their workers more generous health Trump, who is as prickly and ill-informed benefits rather than more pay.One-third of about global affairs as he is admiring of the benefit flows to the top fifth of earners. generals, may not find him easy to work Unfortunately, Mr Obama could not with. Indeed, General McMaster is so dif- shrink the tax-break, having vilified John ferent from Mr Flynn it is tempting to won- McCain, hisopponentin the 2008 election, deron whatcriteria MrTrumpappoints his forproposingto scrap it. Instead, he created national security advisers. Even so, at the the so-called “Cadillac tax” on expensive second attempt, he has picked well. plans, which is due to come into effect in This also points to the biggest puzzle 2020. Messrs Price and Ryan would do about the 45th president. Mr Trump has away with that and instead cap the exemp- surrounded himself with amateurish and tion—a simpler approach. It would be best ideological advisers, led by Stephen Ban- to get rid of it completely. Doing so could non, who have been responsible for much fund a universal tax credit of $1,500 with- of the administration’s early haplessness. out touching Obamacare’s means-tested He has also hired some sensible and ac- The opposition payments, The Economist reckons. Unfor- complished cabinet secretaries, such as tunately,killingthe perkwould be very un- James Mattis, the defence secretary, and, number. And because the old pay more for popular. Just askMr McCain. based on early reports, Rex Tillerson, the health insurance than the young—a gap Making premiums affordable is only secretary of state. This group is believed to that will widen if the Republicans loosen the first step. People must also be able to be opposed to, and possibly contemptu- restrictive pricing regulations—increasing pay their medical bills up to the point ous of, Mr Bannon’s agenda—and General subsidies with age makes some sense. where their insurance coverage kicks in. McMaster looks like a fine addition to it. So Such a tax credit, though, would not be The ACA limits such payments for low- whose advice will Mr Trump follow? The generous enough for all buyers. The aver- earners, and reimburses insurers accord- answer is unclear. Yet the stability of the age Obamacare subsidy adds up to about ingly. Those reimbursements, though, are world may depend on it. 7 $3,600 per person. Many receive much currently held up in court after the House more. Two non-smoking 55-year-olds to- sued to stop them in 2014. On February 21st gether earning $56,500, the median house- it filed to delay legal proceedings. Deciding Replacing Obamacare hold income, get $4,800 each just to help what to do about the case—in which Mr pay for premiums, according to the Kaiser Price is now the defendant—is yet another Cost-sharing is Family Foundation, a think-tank. Accord- headache for the Republicans. 7 ing to The Economist’s calculations, if Mr caring Ryan spread the cash around all 22m Americans who buy health insurance di- Deporting undocumented migrants WASHINGTON, DC rectly, rather than through their employer, it would average only about $2,000 each. The perils ofreplacing Obamacare’s The dragnet and That is close to what Tom Price, the new subsidies forthe poor health secretary, proposed in 2015 for 35-to the scissors S REPUBLICAN congressmen were be- 49-year-olds (older folk would have got Arated by constituents this week for $3,000). Republicans say it is enough, be- LOS ANGELES their desire to repeal the Affordable Care cause costs will fall once insurance is de- Congress and the courts will poke holes Act (see Lexington), wonks in Washington regulated. But unless prices falldramatical- in the president’s deportation plans continued to work on a replacement. Paul ly, many low-earners would probably Ryan, the Speaker of the House, has prom- have to downgrade to insurance covering T ONE point as a candidate for presi- ised a health-care bill soon after politicians onlycatastrophes. Afterderegulation, such Adent, Donald Trump vowed to expel return from their districts on February plans might include chilling limitations, all 11m undocumented immigrants esti- 27th. If they are to cool the protesters’ zeal, such as caps on how much insurance will mated to live in America. At other points Republicans must keep health insurance pay ifa person becomes chronically ill. he also talked about concentrating depor- affordable foreveryone who alreadyhas it. That would be sickening, especially as tation efforts on “bad people”, which is in That means deciding what to do about the most affluent Americans benefit from sub- fact a fair description of his predecessor’s subsidies Obamacare gives to 10m low- sidised health care. Fully 155m workers get policy. “They will be out so fast your head and middle-earners who buy coverage health insurance from their employer will spin,” he told Bill O’Reilly, a television through government-run websites. Mr withoutpayingtaxon thisincome-in-kind. host, last August. Two Department of Ryan promises to replace the law’s means- Homeland Security (DHS) memos pub- tested tax credits with a discount for every- lished on February 21st offer a detailed one, varyingnotwith income butwith age. Unhealthy budgeting look at Mr Trump’s definition of badness, Subsidy per Would such a switch work? US federal subsidies for health person, $’000 and it is broad. The documents refer to the Republicans have always hated the insurance for under-65s proposed wall along the southern border, 2016, $bn* ACA’s handouts. Because they shrink if 0 100 200 300 reaffirm the goal of increasing the number people earn more, theydiscourage toil. The Medicaid/CHIP† 4.1 of border patrol and immigration officers, Congressional Budget Office has estimated Employer coverage 1.7 and herald the revival of a policy encour- that Obamacare reduces the total number aging local law enforcement agencies to of hours worked by 1.5-2%, which is equiv- Health exchanges 3.6 act as immigration agents. The memos also alent to 2.5m full-time jobs by 2024. Mak- Sources: CBO; *Including tax exclusions †Children’s signal an overhaul of priorities on whom The Economist Health Insurance Programme ing tax credits universal would lessen that to deport, with the aim of increasing the 1 24 United States The Economist February 25th 2017

The future of the Democratic Party Boot-edge-edge

CHICAGO Who should lead the Democrats after theircalamitous defeat? N TERMS of the next chair of the DNC, “Ihowever, the question is simple,” ac- cording to Bernie Sanders. “Do we stay with a failedstatus-quo approach or do we go forward with a fundamental restructur- ing of the Democratic Party?” For Senator Sanders the way forward is Keith Ellison, a congressman from Minnesota, whom he is backing as next boss ofthe Democratic Na- tional Committee (DNC). The endorse- ICE air to Guatemala ment came shortly after Joe Biden, the for- mer vice-president, announced his 2 number who could be removed speedily. immigration laws. The country has immi- support for Tom Perez, a veteran of the Towards the end ofhis second term, Ba- gration laws that have not been enforced. Obama administration. rack Obama ordered federal agents to fo- But even the supposedly softer Obama re- The contest for the DNC chair, which cus on deporting undocumented immi- gime deported hundreds of thousands ev- will be decided on February 25th in Atlan- grants suspected of terrorism and those ery year. It spent more on immigration en- ta, hasbecome a proxyfightbetween those with criminal convictions. In 2011 67% of forcement than on the FBI,Drug who believe that the party must move left those removed from the interior of the Enforcement Agency, US Marshals and Bu- to prosper and those who thinkthis would country had criminal records. By 2016 the reau of Alcohol, Tobacco and Firearms, be suicide. Mr Ellison is backed by Eliza- share had increased to 92%. The new guid- combined. The Trump administration beth Warren, the populist senator from ance says that federal agents should not would spend even more: completinga bor- Massachusetts, as well as the AFL-CIO, a target only those convicted of crimes. “Un- der wall, recruiting 10,000 new Immigra- federation of unions with 12m members, der Obama there were 2m people eligible tion and Customs Enforcement (ICE) offi- but also by pragmatic establishment types forremoval. Now the number could be be- cers and 5,000 border patrol agents. such as Chuck Schumer, the Senate’s mi- tween 8 and 11m. Basically everyone with- Just the border-patrol part of that could nority leader, and his predecessor, Harry out papers has become a priority,” says add $910m to a $3.8bn staffing budget. A Reid, who are intent on making use of the Jose Magaña-Salgado of the Immigrant Le- leaked DHS document suggests the wall Sanders supporters’ momentum. Neither gal Resource Centre, an advocacy group. could cost $21.6bn. The abolition of catch- BarackObama norHillaryClinton explicit- The government plans to end a policy and-release policies would require more ly backed Mr Perez, but an endorsement by colloquially known as “catch-and-re- lock-ups, which now house around the loyal Mr Biden is almost as good as a lease”. This allows unauthorised immi- 40,000 detainees and cost the government nod from the former president and the grants who are deemed not likely to ab- around $128 per inmate each day.Convinc- Democratic presidential nominee. scond ora threatto publicsafety,to waitfor ing Congress to appropriate enough mon- The tussle between Mr Perez and Mr El- the results of their cases outside detention. ey might prove difficult, despite Republi- lison, the front-runners among the nine 1 Under the new guidelines, immigrants can dominance of Congress. “This pits the with pending deportation cases will either traditional concerns of Republicans be locked up or monitored, for example around governmentspendingagainsttheir with ankle bracelets. The administration is desire forborder security,”says John Sand- also reconsidering who should be eligible weg, a former ICE chiefunder Mr Obama. forextra-swift removal. The courts may also take a pair of scis- At present, only undocumented immi- sors to a deportation dragnet. “Embedded grants caught within 100 miles of the bor- in the memos is the idea that the govern- der who have been in the country for less ment is going to put due process to the side than 14 days can be deported without a in order to pursue a plan of mass deporta- hearing. The administration may change tion,” says Omar Jadwat, a lawyer for the the rules so that any unauthorised immi- Immigrants’ Rights Project of the Ameri- grant who has been in America for less can Civil Liberties Union, another advoca- than two years can be deported without cy group. He says expanding the list of going before a judge. This would be much those eligible for speedy removal is likely speedier than the standard deportation to invite lawsuits. In the meantime, says process, under which immigrants must re- Matt Barreto of the University of Califor- ceive a removal orderfrom an immigration nia, Los Angeles, the new guidance will court. The system is a mess. Nationally have another effect on undocumented im- there are over 500,000 immigration cases migrants. They are likely to withdraw from pending with around 300 judges to hear wider society.He suspects they will be less them. The average immigration case has likely to report crimes, visit hospitals, or been open for677 days. even send their children to school for fear The president has a mandate to enforce ofbeing caught. 7 Buttigieg, Maltese falcon The Economist February 25th 2017 United States 25

2 contenders for the job, could be a boon for Wrongful convictions Pete Buttigieg (pronounced boot-edge- edge), the 35-year-old mayor of South Bend, Indiana. “We don’t want to relive Criminal injustice 2016,” says Mr Buttigieg, alluding to the fierce battles between Mr Sanders and Mrs Texas is generous when fixing its mistakes Clinton in the Democratic primaries. Mr Buttigieg presents himself as the compro- N NOVEMBER1999, a 25-year-old Kan- son. In California, they receive $100 per mise candidate who can bridge the divide Isan named TomBledsoe confessed to day,or $36,500 per year. In Wisconsin, between the Sanders and Clinton camps, the rape and murder ofa14-year-old girl. one ofthe least-generous states, exonerat- build alliances with progressive organisa- Just days later, however, Mr Bledsoe ed individuals are entitled to just $5,000 tions such as the American Civil Liberties recanted, pinning the crime instead on forevery year spent behind bars. Union and connect with the white work- his younger brother, Floyd. When the Mistakes by the criminal-justice sys- ing class as well as minorities. jury gave its verdict in April 2000, it was tem are not uncommon. According to the Mr Buttigieg joined the race late, but Floyd, not Tom, who was sent to prison, a National Registry ofExonerations, at picked up momentum quickly. He bagged wrongful conviction that would cost him University ofMichigan Law School, the endorsementoffive formerDNC chairs more than15years ofhis life before he courts overturned165 wrongful convic- as well as nine mayors of cities such as was exonerated in December 2015.With tions in 2016, or more than three a week. New Orleans and Austin, Texas. Howard cases like this in mind, Kansas legislators Since1989 it has recorded a total of1,991. Dean, another former DNC chair and for- are considering introducing a law that Those exonerated in Kansas and the18 mer presidential candidate, thinks Mr But- would give wrongfully convicted Kan- other states without compensation laws tigieg has a shot at winning. If he were sans $80,000 foreach year spent in pri- must instead seekpayment through civil elected, the former Rhodes scholar and son. At the moment, as in some other litigation, or by convincing lawmakers to Harvard graduate would be the youngest, states, Floyd is entitled to nothing. pass separate bills on their behalf.This and first openly gay, chairman of the DNC. Had he been convicted in neigh- can yield generous payouts but is expen- He would bring to the job his experiences bouring Colorado, which passed a law in sive, time-consuming and often un- as mayor, navy officer and nerd at McKin- 2013 giving those exonerated $70,000 for successful. Adele Bernhard at New York sey, a management consultancy (a CV re- each year they are locked up, Mr Bledsoe Law School has likened it to a lottery. markably like that ofTom Cotton, a Repub- would have received $1.1m. Today, 31 Yet compensation statutes remain lican senator with big ambitions). states and the District ofColumbia pro- controversial. Some lawmakers believe How do South Benders see their vide compensation in such cases. Pay- that, since wrongful convictions are rare, mayor? Though he was not the favourite to ments vary considerably by state. In a formal process forcorrecting them is a win, Mr Buttigieg was elected with 74% of Texas, which accounted fora third of all solution in search ofa problem. Others the vote in 2011 and with over 80% of the exonerations in 2016, individuals are argue that money would be better spent vote in 2015. Most of the struggling rustbelt awarded $80,000 forevery year ofpri- on victims ofcrime. Another worry is city’s citizens don’t begrudge him using that statutes written carelessly could South Bend as a springboard for his politi- reward guilty individuals. These con- cal ambition, says Elizabeth Bennion of In- Stateofpay cerns have slowed the passage oflegisla- diana University, South Bend. They see the United States, compensation for wrongful tion. Between 2000 and 2009, more than progress he has made with the demolition imprisonment per year of incarceration, 2017, $’000 a dozen states passed compensation Selected states of 1,000 derelict houses in 1,000 days, the 0 20406080 statutes. Since then, just fourstates— partnership he has fostered with Notre Kansas Proposed Washington, Colorado, Minnesota and Dame, a rich Catholic university outside Texas Michigan—have passed such laws. Sever- the city, and the technology and data com- Colorado al others including Pennsylvania, Geor- panies he is trying to bring in. “There was Florida gia, and Arizona have tried and failed. always a sense that he is destined for big- Michigan The Kansas bill, which would in- troduce a scheme like Texas’s, faces oppo- ger things,” says Ms Bennion. North Carolina Indiana’s Republicans pay Mr Buttigieg sition too. At a hearing on February14th a Virginia compliments in the form of withering re- Republican state senator asked whether marks. He doesn’t see any political future Ohio the proposed law would allow someone for himself in Indiana, which is why he California to engineer their own wrongful convic- needs an exit, says Pete Seat, a spokesman Louisiana tion, serve time in prison and then prove for Indiana’s Republicans. Mr Buttigieg Missouri their innocence, swindling the state out pitches himself as someone who can win Wisconsin ofa big payout. “With all due respect,” Mr even in a staunchly Republican state that is Sources: “Statutory compensation for the wrongly Bledsoe told the committee, “no one in imprisoned”, by Tina Simms, 2016; press reports the home of Mike Pence, the vice-presi- their right mind would do that.” dent, says Mr Seat, but South Bend has tra- ditionally been a Democratic fief. The city last had a Republican mayor in 1972. sent out on February 22nd, the day of a has flirted with black nationalism and The victor will replace Donna Brazile, televised debate on CNN with eight con- marched with the Nation ofIslam, a politi- who took over as interim DNC chairman tenders for the DNC’s top job. Members cal-religious movement founded in De- after Debbie Wasserman Schultz resigned. will vote in as many rounds as are neces- troit, his home town. An early and fervent Her departure followed leaked e-mails sary for one candidate to receive 224 votes. supporter of Mr Sanders, he too favours a from DNC staff about how to obstruct Mr Mr Sanders is right: electing Mr Ellison mix of sensible progressive proposals and Sanders when he seemed to threaten Mrs would mark a new chapter for a party that Utopian schemes. He may not be best- Clinton’s smooth ride to the party’s nomi- is trying to recover from one of the lowest placed to work out how to win back the nation. To be on the ballot, a candidate points in its history. Mr Ellison is the first- statehouses and governors’ mansions needs 20 signatures from among the 447 ever Muslim congressman and co-chair of Democrats have lost in recent years. The voting DNC members. The ballots were the Congressional Progressive Caucus. He Midwestern mayor seems a better bet. 7 26 United States The Economist February 25th 2017 Lexington Dissent in the age of Trump

Protesters are confronting members ofCongress in a way not seen since the Tea Party’s rise special concern for people with pre-existing medical conditions, who have a right to buy insurance cover under the ACA, while paying not much more than healthy folk. A local man with a seri- ous illness told Mr Taylor: “Without the ACA I wouldn’t be alive.” Second, they wanted theirnew congressman to backan indepen- dent investigation into Russian meddling in the presidential elec- tion, and to demand that Mr Trump release his tax returns. Third, as residents of a coastal district, they sought assurances that Mr Taylor takes climate change and the threat ofrising sea levels seri- ously—unlike Mr Trump, who stood accused of being anti-sci- ence. Finally, a striking number of the 700 people filling the audi- torium (a further 200 waited outside) queried the cost of providing Secret Service protection each time Mr Trump spends the weekend at his Florida estate, or for the president’s grown sons when they go on business trips, for instance to open a golf club in Dubai—a “disgusting” expense, one constituent said. As in 2009, forceful complaints have an impact on politicians. Mr Taylor is a fairly conventional small-government Republican who won his heavily military district by 23 percentage points. But the presidentwon the districtbyonlythree points—in part, thinks Mr Taylor, because Candidate Trump dismayed locals by lashing F THE gravest threat to democracy is indifference, have some out at the parents ofa Muslim-American soldier killed in Afghan- Ifaith in Donald Trump’s America. For the president is not just istan, after they rebuked him for anti-Islamic bigotry. Mr Taylor good atrallyingthrongsofhisown supporters. He isalso firingup stressed moments where he has bucked his party, for instance in his critics in a way that offers some echoes ofthe Tea Party move- voting for gay rights. He emphasised his co-sponsorship of a bill ment that sprang up to oppose BarackObama in 2009. to ensure that those with pre-existing conditions must be offered Consider the long lines of constituents wrapped around a insurance (though his bill does not say how to make such cover high school in Virginia Beach on February 20th, sacrificing their affordable). He backed a bipartisan Senate probe into Russian time on a public holiday to meet their Republican congressman, election-meddling and called on Mr Trump to release his tax re- Scott Taylor. Undistracted by a mild, golden-hued evening wor- turns. He said he disagrees with Stephen Bannon, the president’s thyofearlysummer, almost1,000 localswaited in line forseats. A chiefpolitical aide, havinga principal’sseaton the National Secu- minority were conservatives, wearing the Make America Great rity Council. He condemned talk of Muslim travel bans as “un- Again hats that signal Trump-allegiance or carrying signs de- constitutional”, though he defended MrTrump’srightto order ex- manding that Mr Taylor—a 37-year-old former Navy SEAL com- tra vetting forarrivals from terror-prone countries. He fudged the mando, elected to Congress for the first time last year—should question ofwhether humans are to blame for climate change. vote to repeal the Affordable Care Act (ACA), also known as Oba- macare. A larger number carried home-made signs that spoke of Herbal tea “resistance” to Mr Trump or demanded that Mr Taylor “Choose There are also differencesfrom 2009. In theirheyday, Tea Party ac- our Country over your Party!” Some were old hands at activism, tivists ringingly promised to take their country back, certain that alerted to attend by the local Democratic Party or by Indivisible, America is a majority-conservative country. Jump eight years, an anti-Trump group with chapters nationwide. Others used the and—at least in Republican-leaning Virginia Beach—demonstra- Town Hall Project, a new volunteer-run database that logs oppor- tors sounded more anxious, even defensive. They talked of pre- tunities to meet elected politicians—after rowdy meetings in serving as much of Obamacare as they could, and of stiffening places including Utah and California, some skittish members of their congressman’s spine to serve as a check on Mr Trump. Congress declined to hold public events in the recess that began Aware that the president has called critics “paid protesters” and on January17th, orheld virtual “tele-townhalls” instead. “so-called angry crowds”, they brought voting cards showing As was the case with many Tea Party groups eight years ago, their local addresses and wore stickers bearing their postal zip the crowd at Kempsville High School was older, whiter and more codes. “We weren’t bused in,” a woman assured Lexington. affluent than the national average. A forensic scientist queuing to Those precautions reflect an alarming change since 2009: a see Mr Taylor held a placard opposing a wall on the Mexican bor- collapse in beliefthat there is a single, shared version ofthe truth. der with the (tongue-in-cheek) slogan: “How Will We Get Avoca- Too often, today’s political opponents do not just disagree, they dos?” As in 2009, some concerned citizens noted that this was express disbelief. “There’s room for nuance,” Mr Taylor pleaded theirfirst time at a political meeting, and expressed fears that a ty- at one point, defending his view that environmental regulations rannical president is about to wreckthe country. are necessary but can go too far. A woman silently held up a sign Backin Mr Obama’s first term, Tea Partytypes fretted that gov- reading “Not True”. A bloc of Trump voters, who had taken the ernment-run health care amounted to European-style socialism. president’s description of the press as “the enemy” to heart, Some muttered that the first black president might be a secret yelled “Bullshit!” or “Fake news!” when he was criticised. A dis- Muslim. In 2017 Trump-sceptic citizens in Virginia Beach voiced mayingly plausible scenario involves Mr Trump’s election tear- four broad worries. First, they questioned Republican promises ing the country furtherapart. Still, the deadliest foe ofdemocracy to repeal and replace Obamacare as soon as possible, expressing is sullen, despairing apathy. Celebrate dissent. 7 The Americas The Economist February 25th 2017 27

Also in this section 28 Saving jaguars from themselves 28 Bashing Chile’s billionaires 30 Bello: The costs of crime

Brazil’s pensions nomic recovery and Brazil’s financial sta- bility depend on its success. The burden on the young Brazil’s geriatric generosity came from laudable impulses. The constitution adopt- ed in 1988 sought to break away from the country’s history of elitism and inequality, further entrenched under two decades of RIO DE JANEIRO military dictatorship. Among the new rights was a basic pension for men over 65 The president has a chance to enact a landmarkreform and women over 60, whether or not they HE faded modernist façades along Co- the OECD, a club of mostly rich countries paid into the system. People who do pay Tpacabana’s beachfront hark back to that have many more senior citizens (see in, like Ms Ribeiro, can claim benefits earli- Brazil’s optimistic past. The seaside prome- chart). The combined annual shortfall of er. The government linked benefits to the nade, where walking sticks outnumber G- the pension schemes is 4.8% ofGDP, equiv- minimum wage, ensuring that they would strings, offers a glimpse of its demographic alent to more than half the government almost always go up and never down. future. A quarter of the inhabitants of this budget deficit. The state of Rio supports This has made Brazil a land of youthful part of Rio de Janeiro are 65 or older, mak- more public-sector pensioners than work- and prosperous pensioners. Its citizens col- ing it one of the oldest places in Brazil. But ing civil servants; for every police colonel lect pensions when they are 58 on average; the rest of the country is catching up fast, on active duty five are retired. The state is Mexicans toil into their 70s. Brazilians on thanksto a drop in birth ratesand rising life nearly bankrupt. Without corrective ac- average incomes get pensions worth four- expectancy. Over-65s, who make up 8.5% tion, Brazil faces an equally bleakfuture. fifths of their pre-retirement earnings, of the population now, will reach Copaca- Michel Temer, the country’s centre- which is generous by most countries’ stan- bana’s share by 2050. The country is dan- right president, hopes to arrange for a dards. Widows and widowers inherit the gerously unprepared forthat shock. brighter one. He took office last year after full pensions of their deceased spouses, To see why, visit the Copacabana the impeachment of his left-wing prede- which they can combine with their own. branch of the National Institute of Social cessor, Dilma Rousseff, and in the midst of This accumulation of rights has be- Security (INSS), which administers state the country’s worst recession on record. come an economic cluster bomb. Inflated pensions for Brazilians employed in the This month congress began debating his by big increases in the minimum wage, private sector. Elizete Ribeiro, a vivacious plan to reform the pension system. Eco- pensions now account for more than half masseuse, does not look ready to be pen- of the government’s non-interest spend- sioned off. She isjust 56 years old. But, hav- ing. The recession has brought down the ing paid into the system for 30 years, she is Brazil’s golden oldie blowout revenues to pay for them. Without a entitled to a basic pension worth the mini- Latest available change, government pension spending mum wage (937 reais, or $304, a month). could reach a fifth of GDP by 2060. Public The lawyer helping her, Jorge Freire, bene- 20 debt will jump to scary levels sooner: by fits from a separate public-sector scheme. Italy 2019 it could be 98% of GDP, up from 70% France He retired as an employee of Rio de Janei- 15 now. That prospect is one reason for Bra- Brazil Greece Poland ro’s state court system when he was 52. His Japan zil’s double-digit interest rates. The pen- retirement cheque, at first the same as his 10 United States sion splurge hurts the economy in other final salary, is bumped up every time cur- Turkey OECD average ways, for example by withdrawing em- 5 rent court workers get a pay rise. China ployees prematurely from the workforce Government spending on Government

The form-filling at the INSS outpost, re- pension benefits, % of GDP and taking money away from education Mexico South Korea peated millionsoftimes, meanstrouble for 0 and infrastructure. Brazil. Pension spending is already the 0 5 10 15 20 25 30 The reform Mr Temer is proposing equivalent of 12% of GDP, half as much Population aged 65 years and over, as % of total would reduce the pension problem to again as the average among members of Sources: OECD; World Bank; Previdência Social more normal proportions. It would set a 1 28 The Americas The Economist February 25th 2017

2 minimum pensionable age of 65 years for Chile’s plutocrats men and women, and oblige them to work longer than they do now in order to claim Bashing the maximum allowable pension. Future rises in the retirement age to keep up with billionaires longer lives would not require amending the constitution. Only the lowest pensions would be linked to the minimum wage. SANTIAGO Widows’ benefits would be reduced. A tight-knit elite provokes resentment These and other measures would sta- bilise pension spending at around current AST year ended triumphantly for An- levels, says Paulo Tafner, a pensions ana- Ldrónico Luksic, head of Chile’s richest lyst. They would give the economy a short- family. On December 23rd he won a slan- term boost, in part by encouraging the cen- der suit against a politician who had called tral bank to reduce interest rates more rap- him a “criminal” and “a son of a whore”. idly. The stockmarket has strengthened on But his sense of vindication was clouded hopes that congress will enact it. by pain. Four days earlier, as he left the Because the reform requires a constitu- courthouse, a mob, angry about a hydro- tional amendment, both houses must pass electric project in which he had invested, it with three-fifths majorities. Ms Rous- threw stones at him. One struckhim on the seff’s Workers’ Party decries it as an attack head; police whisked him away. on the poor, though it will not touch bene- Red hide, black belt Plutocrats are unpopular in lots of ficiaries of the lowest pensions. A politi- places, but Chileans seem to regard theirs cian from Mr Temer’scoalition accuses the hides. But they have an unfortunate habit with particular suspicion. MORI, a polling government of “demographic scaremon- offleeing in all directions when danger ap- firm, asked Chileans in 2015 to choose gering”—as ifageing were unpredictable. proaches. Panthera’s idea is to replace pan- which among five power centres had the Despite such grumbling, Mr Temer has icky Zebu with cattle that stand their most clout: 59% chose businessmen over a good chance of getting the reform ground, or to interbreed the two. Esteban the government, the presidency, congress through reasonably intact. A poll for his Payán, who directs Panthera’s operations and the media. Asked by Latinobarómetro, Party of the Brazilian Democratic Move- in northern South America, chose San another pollster, if they had any confi- ment reportedly shows that Brazilians are Martineros, a little-known subspecies of dence in private enterprise, just 32% said split evenly forand against the reform. The Criollo cattle descended from Spanish yes, the second-lowest rate among18 coun- government is trying to tip the balance, fighting bulls. Few jaguars dare to chal- tries. Chileansoften saythatseven families with adverts in newspapers and videos lenge a massed group of 500kg (1,100- “own” the country. Together, their wealth beamed at passengers in airports. Mr pound) San Martineros, their horns lev- is the equivalent of17% ofGDP. The Luksics Temer himself is unpopular. But if he elled. Docile with humans, they are fierce alone are worth $14bn, equivalent to about cleans up the pension system, Brazilians defenders of territory and their young. Mr 6% ofGDP, according to Forbes. will have reason to thankhim. 7 Payán recountsthatSan Martineroschased Chile is in many ways the most modern away a puma before it could eat a capybara country in South America. Its institutions it had killed in their paddock. function reasonably well, its educational Protecting wildlife Eugenics seems to work. Since 2012 Mr standards are among the highest and its Payán has been working with Eduardo En- levels of crime and corruption are among Stand your ciso, a rancher in Meta, who already had the lowest. Yet that has not brought equali- some San Martinero cattle. Mr Enciso re- ty. Although poverty has fallen sharply, in- ground beef ports that both purebred San Martinero come distribution is more skewed in Chile cows and the offspring of Zebus that have than in any other member of the OECD, a SAN MARTÍN, META DEPARTMENT been inseminated by San Martinero bulls club of mainly rich countries (though not do indeed stick together when jaguars ap- unusually so for Latin America). Just 5% of Cows that are good at self-defence are proach. Cattle that are just a quarter San Chileans regard the distribution of income also good forjaguars Martinero may be just as brave, says Mr as “fair” or “very fair”, the lowest share in ANCHERS in Colombia’s Meta depart- Payán. No jaguars have attacked cattle on Latin America, says Latinobarómetro. “It’s Rment can be vengeful folk. From time Las Pampas, Mr Enciso’s 4,000-hectare precisely because Chileans can see how to time jaguarsemerge from a clump offor- ranch, since the programme began, he wealthy their country is—from the est, streak across the savannah and attack says. Zebu-only ranches in the area suffer a Porsches and Maseratis in the streets of one of a panic-stricken herd of cows. dozen attacks a year. some areas—that they’re so angry about When that happens, ranchers hunt the of- Panthera is trying to get other ranchers how that wealth is shared out,” says Marta fender down and shoot it. That practice is to adopt the technique, but just four have Lagos ofLatinobarómetro. endangering the cats’ survival. Panthera, a so far expressed interest. Some contend Mr Luksic, the grandson of a Croatian charity that manages “corridors” for jag- that smaller San Martinero bulls cannot immigrant and a Bolivian heiress who set- uars that stretch from Argentina to Mexico, mount their Zebu cows, though Mr Enciso tled in Antofagasta a century ago, is typical guesses that just 5,000 ofthe cats are left in denies this. Certainly, there is nothing of his class. He attended The Grange, a los llanos, Colombia’s scorching savannah. wrong with their libidos, he says. Perhaps posh private school in Santiago. The Luk- It has come up with a less violent way of more important, butchers think San Marti- sics made their first fortune from mining, protecting both the jaguars and the cattle. neros are scrawny and dislike their reddish then expanded into banking, shipping, the The idea is to teach cattle self-defence, hue (hybrids can look like either variety or media, drinks, energy and manufacturing. or rather to breed the instinct into them. a mix of both). Mr Enciso insists that San Antofagasta plc is listed on London’s stock The cows that graze in los llanos are mostly Martinero meat is more delicious than that exchange. Other businesses are grouped Zebu, which are popular with ranchers for of purebred Zebu. If diners develop a taste into Quiñenco, a family holding company, their fast growth, large size and white forit, perhaps fewer jaguars will be shot. 7 ofwhich Mr Luksic is chairman. 1 SUPPORTED BY

OCEAN

Creating the super reef

films.economist.com/blancpain-ocean 30 The Americas The Economist February 25th 2017

2 Breadth and heft attract hostility. Envi- tition, give such suspicions weight. Firms naked doll confirmed Chileans’ view of ronmentalists say his mining and energy were caught fixing prices and setting mar- the business elite as a boys’ club out of projects scar the landscape. Many Chil- ket quotas in such products as pharmaceu- touch with modern norms. eans think Mr Luksic’s companies, along ticals, poultry, and toilet paper. The three Though Mr Luksic thinks he has been with all Chilean business, should pay price-fixing pharmacy chains control 90% unfairly maligned, he admits that he and higher taxes. Journalists say he wields un- of the country’s drugstore business; the hissorthave a problem. Afterthe politician due influence. His bank made a large loan chicken cheats sell 93% ofthe poultry. defamed him last April he answered with to a company owned by the Chilean presi- A low point for the reputation of busi- a YouTube video, an unusual tactic for dent’s daughter-in-law after he met with ness came a week before Mr Luksic’s vic- someone who usually shuns the limelight. her; he later apologised. Such connections tory in court. At the Christmas dinner of While denouncing his accuser he also con- feed Chileans’ suspicions that the big deci- Asexma, a business association, its chair- fessed that “we’ve made mistakes…. We sions are made by a clique over a bottle of man gave the economy minister an inflat- have to be much more rigorous in how we Carmenère or a game ofgolf. able sex doll, which he suggested might behave.” He was speaking about his busi- Aseries ofcollusion cases, often involv- “stimulate the economy”. Photographs of ness, but it sounded like a mea culpa from ing companies in sectors with little compe- middle-aged men in suits chortling with a Chilean business at large. 7 Bello Stop the carnage

Many Latin American governments are failing in theirmost basic task HIS month police in the Brazilian state the income of the poorest 30% of the pop- tain cities. The vast majority of perpetra- TofEspírito Santo went on strike for ten ulation, points out Laura Jaitman, the re- tors and victims are young men. Often days, during which 143 people were mur- port’s lead author. She stresses that this is a they are badly educated and come from dered and all hell broke loose in Vitória, conservative estimate: it covers only the in- broken families. the state capital. In Reynosa, on Mexico’s come lost by the victims of crime and by A new report by the World Bank rec- border with the United States, two al- prisoners; private spending on security by ommends strategies to prevent crime that leged robbers were beaten, bound with firms (in the formal economy) and house- have worked elsewhere—everything duct tape and dangled from a footbridge, holds; and public spending on policing, from early-childhood education to focus- with a message from a drug baron pinned the criminal courts and prisons. Factor in ingpolice workon crime “hot spots”. That to them. On February 17th a gunman indirect costs, such as investment forgone, would certainly be an improvement on killed five people and injured nine at a and the true cost ofcrime is higher. the “iron-fist” approach favoured by shopping centre in Lima. A day later in The average conceals wide variations. many Latin American politicians, which Flores Costa Cuca, a small town in west- In Honduras the cost of crime is a whop- involves mass incarceration for long peri- ern Guatemala, an 83-year-old woman ping6.5% ofGDP, forexample. Chileans, by ods in hellish prisons and the application and her disabled grandson were mur- contrast, are lesslikelyto be murdered than of a de facto death penalty by security dered, prompting calls for the army to pa- inhabitants of the United States. Murder forces against young male suspects. trol the streets. rates and the cost ofcrime in different parts Yet if crime is so much more prevalent A casual scan of newspapers in Latin of Brazil vary as widely as they do across in Latin America than in other regions it is America and the Caribbean in any week the region as a whole. surely because the returns from it, relative reveals a grave problem: violent crime Organised-crime syndicates, with ori- to those in the legal economy, are higher has become an epidemic. The region ac- gins in the drug trade, help to explain why and, especially, because the chances of counts for only 9% of the world’s popula- murders have soared in recent years in being caught are lower. Less than 10% of tion but 33% of its murders. Its homicide Mexico, parts of Central America, Venezu- murders in the region are solved. rate of24 per100,000 people is fourtimes ela and parts of Brazil. But the problem of That highlights two fundamental fail- the world average. Worryingly, murders violent crime goes well beyond the drug ures. The first is that too many young men have become more common even as so- gangs. In some ways crime in Latin Ameri- command only low-paying and insecure cioeconomic conditions have improved ca is similar to that in the rich world. It is legal jobs. Some 20m 15- to 24-year-olds in (see chart). Robberies are increasing, too; highly concentrated in certain parts of cer- the region neither study nor work at all. some 60% involve violence. No wonder This points to the need for targeted skills polls show that crime has replaced the programmes. economy as the main public concern in Crime and enrichment Second, the police, the courts and the Latin America. Latin America Population, %: prisons often fail to do their jobs. Espírito As well as inflictingimmeasurable suf- Homicide rate Middle class* Santo shows that even a bad police force fering, violent crime is a big obstacle to Per 100,000 people Extremely poor† is better than none. But not much better: economic development. In a pioneering 40 40 last year the state’s murder rate was still report published this month, researchers 37.4 per100,000 people. at the Inter-American Development Bank 30 30 Not all is gloom. Colombia and other (IDB) set out to measure its impact on the parts of Brazil have seen sustained fallsin 20 20 region’s economies. In the average Latin murder rates, partly because ofbetter pol- American country the annual cost of 10 10 icing. In Chile this month a Spaniard was crime is 3.6% ofGDP, they reckon. arrested for attempting to bribe a police- That may not sound much, but it is 0 0 man (with 30,000 pesos, worth $47). Else- twice as high as the equivalent figure in 1995 2000 05 10 12 where, though, many governments are developed countries and is equal to the *Income of $10-50 per day failing in their most basic duty, to keep Source: World Bank †Living on $2.50 or less per day region’sspendingon infrastructure and to their citizens safe. Asia The Economist February 25th 2017 31

Also in this section 32 Mongolia gets another bailout 32 A run of terrorist attacks in Pakistan 33 Trouble for miners in South-East Asia 34 A stand-off at a Thai temple 35 Banyan: the Philippine pivot to China

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

Women in South Asia proportion of women in the lower house was 6%. The missing middle It is only in village and district councils that women hold much sway, but this is partly due to laws that assign either a third or half of seats to female candidates. Earli- er this month tribesmen objecting to ef- DELHI forts to impose a women’s quota in local elections rioted in Nagaland, a state on the Powerful women have not empowered women border with Myanmar that is one of the N THE Indian subcontinent, as in no theycould notvisita shop, oreven a friend, few exceptions to such rules. Naga men in- Oother part of the world, women have without someone else’s approval. For sist that local custom precludes female vil- risen to the pinnacle of politics. Indira many, the very idea of going out was lage chiefs. Gandhi of India, Benazir Bhutto of Paki- alarming: 70% said they would feel unsafe Such troubles reveal one cause of slow stan and AungSan SuuKyi ofMyanmarare working away from home, and 52% progress to sexual equality: Indian politi- all famous names. Less well known is that thought it normal fora husband to beat his cians have generally found it more reward- Sri Lanka was the first country ever to elect wife if she ventured out without telling ing to cater to subgroups defined by caste, a woman prime minister, or that it has also him. In November, following a shock gov- religion, ethnicity, language or local griev- had a female president. For22 ofthe past 25 ernment move to scrap higher-denomina- ance, rather than to broader categories years Bangladesh, a largely Muslim coun- tion banknotes, a domestic violence hot- such as women. This is equally true of fe- try with more people than France and Ger- line in the city of Bhopal in central India male politicians, and of regional leaders many combined, has been led by a wom- registered a doubling of calls, largely from less constrained by democracy. Sheikh Ha- an. And the chief ministers of numerous women whose spouses had discovered sina, the current, iron-fisted prime minister country-sized Indian states, from West they had secretly been saving cash. of Bangladesh, has recently moved to re- Bengal in the east to Tamil Nadu in the duce the legal age of marriage from 18 to 16. south, have also been women. India’s de- On your bike Given that child marriage is already com- mocracy is not pretty; these are the win- For wealthy and middle-class Indian mon, especially in the impoverished coun- ners ofbare-knuckle contests. women, freedoms have steadily grown: tryside, women’s-rights activists are upset. Yet for all such headline-grabbing suc- Anubha Bhonsle, a television anchor, re- But analysts explain that apa, or “big sis- cesses, the fine print tells a different story. calls the strangeness of being the sole fe- ter”, who has hounded opposition parties Although there hasbeen steadyprogress in male driver of a motor scooter on many including Islamists, is looking for ways to such things as stamping out female infanti- streets when she started commuting 15 deflect conservative anger. cide and spreading women’s education, years ago. “No one would give a second In orderto succeed female politicians in statistics continue to reveal a stark sex di- glance now,” she says. Yet in many profes- the region often make a point of acting vide. At 27%, the share of Indian women sions women remain rarities. Barely10% of tough. Mamata Banerjee, the diminutive who work, forinstance, islessthan half the the 700 judges in India’s higher courts are but formidable chief minister of West Ben- level in China or Brazil (and also in neigh- female, and only17% ofthe 5,000 officersin gal, once dragged a male colleague out of bouring Bangladesh, although slightly the Indian Administrative Service, the elite the well of parliament by the collar when higher than in Pakistan). corps ofbureaucrats that runs the country. she was an MP in Delhi. Like Sheikh Ha- In 2012 a household survey found that Women are scarce even in politics. In sina and Mayawati, a formerchiefminister four-fifths of Indian women needed their the lower house ofIndia’s parliament only of Uttar Pradesh, as well as Jayalalithaa, a husband’s or family’s permission to visit a 12% of MPs are women. State legislatures recently deceased former film star and local clinic. A third said they would not be are similarly male. True, women’s share of long-serving chief minister of Tamil Nadu, able to go alone. More than half also said seats has risen, but slowly: 50 years ago the Ms Banerjee has carefully repressed her 1 32 Asia The Economist February 25th 2017

2 sexuality. These women are ostentatiously iticians got a head start. Amrita Basu of Forwomen to playa more normal polit- “married” to their cause or their party. Amherst College finds that more than half ical role in the subcontinent, perhaps itis in Such care is understandable. Male ri- of India’s female MPs in the past decade films, and in popular culture in general, vals have not shied from using sex to ma- had family members who preceded them that change needs to happen first. All too lign female politicians. One party leader in in politics. Quite often such dynastic links often on the region’s screens, actresses Uttar Pradesh lost his job for accusing have been dramatic. Ms Suu Kyi in Myan- who are paid a fraction of what male stars Mayawati, who comes from a downtrod- marand Sheikh Hasina are both daughters get portray women who lack agency in den caste, of “selling tickets like a prosti- of slain independence heroes. Sonia their lives. There is, though, an inkling of tute”. A colleague went further against So- Gandhi and Khaleda Zia, a former Bangla- change. This season’s blockbuster and al- nia Gandhi, the leader of the opposition deshi prime minister and bitter rival to ready the highest-earning film in Bolly- Congress party. Absurdly, he accused the Sheikh Hasina, are both widows of assas- wood history, “Dangal”, tells the heart- head of the Gandhi dynasty of having sinated leaders. Both Jayalalithaa and warming story of sisters who become worked fora Pakistani escort agency. Mayawati entered politics as devoted lieu- champions in the male-dominated sport With so many obstacles blocking the tenants to charismatic, populist politi- ofwrestling. Yetthe main hero isnot one of path to power, it is hardly surprising that so cians; in Jayalalithaa’scase hermentoralso the girls, but the father, a former wrestler, many ofthe region’s successful female pol- played the lead in many ofher films. who bends them to his will. 7

Mongolia’s finances Security in Pakistan This might yurt Role reversal

The IMF bails Mongolia out—again

HEN Jim Anderson first lived in learn the word baikhgui. ISLAMABAD Mongolia in 1993, there was one Enter the IMF. This month it agreed to W Pakistan blames Afghanistan fora spate local word foreigners could not help but lend Mongolia about $440m over three ofterrorist attacks learn: baikhgui, which translates as “ab- years to help it avoid default and rebuild sent” or “unavailable”. Bread? Rice? its reserves. Assuming the agreement is N THE space offive days in mid-February, Electricity? Often as not, they were baikh- approved by the fund’s board, it should IPakistan suffered ten acts ofterrorism, af- gui, he recounts in a blog post forthe unlockanother $3bn or so from the Asian fecting all four of its provinces. On Febru- World Bank, forwhich he has returned to Development Bank, the World Bank, ary 13th a suicide bomber killed 15 people Mongolia as country director. Even those Japan, South Korea and others. outside the provincial assembly in Punjab, lucky enough to have American currency China should also help. Irked by the including two senior police officers. On to spend in “dollar shops” received sticks Dalai Lama’s visit in November, it im- February 16th more than 80 were killed ofchewing gum as change. posed new duties on Mongolian goods and over 200 injured when another sui- Mongolia thought it had left those and delayed lorries at the border. A little cide bomber targeted the throngs of wor- days farbehind. A mining boom (copper, over 50% ofMongolians identify as Bud- shippers at Lal Shahbaz Qalandar, a Sufi coal, gold) has transformed the country, dhist. But almost all the country’s exports shrine in the southern province of Sindh. filling the shops with goods and the cities (84%) are sold to China, making it the Yet more bombs killed police and soldiers with cranes. From 2009 to 2014, the econ- most China-dependent exporter in the in Balochistan, Khyber Pakhtunkhwa and omy grew by 70%. In 2012 alone, it attract- world (see chart). Mongolia’s govern- the Federally Administered Tribal Areas ed foreign-capital inflows equivalent to ment has apologised forthe “misun- (FATA), along the border with Afghanistan. some 54% ofits GDP. But since 2014 com- derstanding” caused by the visit and said The attacks are all the more shocking modity prices have fallen, foreign-direct it will not permit a repeat. It now hopes because deaths from terrorism in Pakistan investment has reversed and a number China will extend a 15bn yuan ($2.2bn) have fallen dramatically in recent years ofdaunting debt payments have crept swap line. (see chart), the result of a sustained coun- closer. Mongolia’s foreign reserves have The strings attached to the IMF’s loan ter-terrorism campaign by the security ser- dwindled from over $4bn in 2012 to little are more conventional. They include vices. Swathes of territory once lost to mil- more than $1bn at the end ofSeptember, keeping the central bankout of“quasi- itants have been recovered. Operation equivalent to about fourmonths’ im- fiscal” activities: it had bought cheap-rate Zarb-e-Azb, launched in 2014 to retake ports. Foreign creditors were about to mortgages worth 1.95trn togrog ($787m), North Waziristan, a part of FATA that had 1 helping to support a housing bubble in a country known fornomadism. At the The great thrall IMF’s urging, the government is also Waning horror Goods exports to China, % of total, 2015 distancing itselffrom the management of Pakistan, deaths from terrorism, ’000 the Development BankofMongolia, a 0 306090 4.0 state lender that accounts forover a fifth Mongolia ofcredit in the country. 3.5 North Korea Mongolia’s prospects should improve. 3.0 Turkmenistan Copper and coal prices have recovered 2.5 somewhat. The economy will also bene- 2.0 Solomon Islands fit from heavy investment in Oyu Tolgoi, 1.5 Hong Kong a copper mine operated by Rio Tinto. But 1.0 Myanmar Mongolia has turned to the IMF twice in eight years. Ifit does not manage the next 0.5 Australia commodity cycle better, it might find that 0 Source: IMF its benefactors’ patience is baikhgui. 2008 09 10 11 12 13 14 15 16 17* Source: South Asia Terrorism Portal *To February 19th The Economist February 25th 2017 Asia 33

2 become a jihadist stronghold, was a turn- ing point. Until then, fretful politicians had postponed confrontation with the Teh- reek-e-Taliban Pakistan (TTP), the Pakistani offshoot of the militant Muslim group that ruled Afghanistan until the American in- vasion of 2001 and threatens its govern- ment to this day. It was a faction of the TTP that claimed responsibility for the attack on the Punjab assembly. Islamic State, the extremist group that controls parts of Iraq and Syria, said it was responsible for the bombing of the Qalandar shrine, although it is likely to have worked through a local group. But Pakistan’s army identified a third culprit: Afghanistan. It said the Afghan govern- ment was not doing enough to stamp out militant groups, and that the militants, in turn, were using Afghanistan as a base to plan attacks in Pakistan. It closed all border crossings and shelled what it said were Mining in South-East Asia militant camps on the Afghan side of the border. The army also demanded the im- Shafted mediate arrest of 76 terrorists it said were living in Afghanistan. It is true that Islamic State, the TTP and many other groups have bases inside Af- ghanistan. Afghan spooks may well pro- JAKARTA AND MANILA vide them some assistance (in 2013 Ameri- Indonesia and the Philippines tell a gifthorse to open wide can special forces caught a leader of the TTP on his way to Kabul for secret talks). N THE more rugged, poor and far-flung value, so it was exempted.) Mining col- But the beleaguered government in Kabul, Iareas of the vast archipelagoes of Indo- lapsed: the output of bauxite, from which which has lost much of its territory to the nesia and the Philippines, mining is one of aluminium is refined, fell from 56m tonnes Taliban insurgency, is in no position to sat- the few industries that shows much pro- in 2013 to 1m tonnes in 2015 (see chart). isfyPakistan’s demand that it detain partic- mise. Last year the Philippines exported Some firms did begin building expensive ular militants. They are based in areas nearly $1.7bn of minerals and ore—4% of smelters—but not nearly enough to process where its writ is minimal or non-existent. the country’s exports. Mining employs all the ore that had previously been mined. Moreover, the Afghan government is over 200,000 people. By the same token, Indonesia now has the capacity to process beleaguered in partbecause the Afghan Ta- the Indonesian unit ofFreeport McMoRan, 3m tonnes of bauxite a year, for example. liban has itself long enjoyed sanctuary on an American firm that operates Grasberg, a Instead, the law’s most noticeable effects Pakistan’s side ofthe border. This week the vast copper and gold mine high in the were the closure ofhundreds ofmines, the Afghan government announced that its mountains of Papua, has paid more than loss of thousands of jobs and a collapse in forces had killed Qari Saifullah Akhtar, a $16.5bn in taxes over the past16 years. Free- government revenue from mining. Taliban leader repeatedly captured and re- port plans to expand Grasberg; over the In January the government—in search leased by Pakistan. With many more of the next 25 years it expects to cough up a fur- of jobs and revenue—relaxed the ban, al- Taliban’s leaders, bomb-makers and in- ther $40bn. Yet the governments of both lowing some exports of unprocessed nick- doctrinators beyond the reach of Afghan countries are imperilling this bonanza. el and bauxite for the first time in four troops and their allies in NATO, it has Three years ago, in an effortto boost the years. But, perhaps to show that it was not proved impossible to defeat the 16-year in- economybyspurringdomesticprocessing, a soft touch, it also insisted that all mining surgency. Yet Pakistan has shielded the Ta- Indonesia banned the export of unrefined firms operating under an older, more se- liban because it sees the group as its only metal ores. (Smelting copper ore adds little cure form of mining licence, including ally in Afghanistan, a country it fears is too Freeport, convert them into a newer sort in cosy with India, its arch-rival. order to receive export permits. Freeport, While the army harasses Afghanistan, In a hole which has a controversial history in Indo- there is much that Pakistan could do to Indonesia, mining production, 2010=100 nesia, has refused. It has halted production fight terrorism domestically. A National and suspended investment. It is also laying Action Plan drawn up in the wake of the 300 off workers. “You cannot produce a pro- Nickel ore massacre of more than 130 schoolboys by 250 duct that you are not allowed to sell,” says the TTP in Khyber Pakhtunkhwa in 2014 its boss. The company has also muttered has not been fully implemented. Regula- 200 about international arbitration, eliciting Bauxite tion and reform of madrassas, religious 150 splutters from the minister ofmines. schools that fostermilitancy, has been half- Indonesia’s ore-export ban made the hearted. Notorious peddlers of sectarian- 100 Philippines the world’s leading nickel pro- ism remain at large. It does not help that 50 ducer, but that may soon change. On Feb- the army wants an even bigger role in do- Copper concentrate ruary 3rd Gina Lopez, the environment mestic security—a source of tension with 0 secretary (and a longtime green activist be- 2010 11 12 13 14 15 the civilian authorities. There is nothing fore joining government), ordered 23 ofthe Source: United States Geological Survey Afghanistan can do about all that. 7 country’s 41 mines to close permanently, 1 34 Asia The Economist February 25th 2017

2 and another five to suspend operations in- mended fines orsuspensions, not closures. credit union.) Thailand’s ruling junta wor- definitely,foralleged environmental viola- They fear that Ms Lopez intends to inter- ries that the movement’s leaders are sym- tions. Most of the mines to be closed pro- pret environmental regulations so strictly pathetic to the cause of Thaksin Shinawa- duce nickel, and are responsible foraround as to make mining impossible. tra, a populist former prime minister half the country’s annual output of Both countries may yet pull back from toppled in 2006 whose lingering influence 530,000 tonnes. On February 14th Ms Lo- the brink. In the Philippines, mines remain the generals and their backers are deter- pez cancelled another 75 mining projects, open during what will doubtless be a mined to stamp out. some still in the exploratory stage, on the lengthy appeal process. Carlos Domin- Last year the junta abandoned several grounds that they would harm ecological- guez, the finance minister, says that he re- attempts to drag Phra Dhammachayo out ly sensitive areas. minded Ms Lopez that “it was important for questioning, fearful of the outrage that The industry has cried foul. Ronald Re- for her to follow due process.” A lawyer in might follow were soldiers to be pictured cidoro ofthe ChamberofMinesin the Phil- Jakarta predicts that “mine owners will be manhandling monks. The latest effort ippines, a trade group, said that his mem- given relatively short extensions of the looks more concerted. It may not be a coin- bers had not seen copies of the audits that right to export and this will be reviewed on cidence that the operation began shortly led to the closures, nor have there been a regularbasis with the threat ofbeing shut after the installation of a new Supreme Pa- cases filed against them for violations of down.” Miners make convenient political triarch (Thai Buddhism’s most senior the clean water and air acts (Ms Lopez has villains. But neitherIndonesia northe Phil- monk). That job is usually filled according invited companies to inspect the audits in ippines can afford to let political posturing to a strict hierarchy but had been held heroffice).Healsonotesthatagovernment deprive them of much-needed revenue open for several years after conservative team that reviewed the audits recom- from rising commodity prices. 7 clergy refused to endorse the expected suc- cessor—in part because of worries that he was too close to Dhammakaya. The junta Buddhism in Thailand tookthe unusual step ofaskingKingVajira- longkorn, who succeeded his father in De- The missing monk cember, to solve that dispute; he anointed a less controversial alternative, Somdet Phra Maha Muniwong, who hails from the smaller and more orthodox of Thailand’s two main Buddhist orders. PATHUM THANI Monks at the Dhammakaya temple say that they have not seen their former abbot The junta feuds with an influential sect for months. They say the real aim of the OME people think he has fled abroad. complacent and materialistic. They insist, raid is to shut the entire temple down. The SOthers say he may have died. For more rather grandly, that the Bangkok com- generals may yet decide to backaway from than a year the authorities in Thailand pound, with its vast stadium, is meant to the fight, as they have done previously. have been trying to get hold ofPhra Dham- become a kind ofBuddhist Vatican. Theycould perhapsclaim thatthe searches machayo, the reclusive former leader of a But Dhammakaya has fierce opponents they have already conducted are enough controversial Buddhist sect who is wanted both within the Buddhist establishment to declare the operation complete. That for questioning in a fraud case. On Febru- and outside it. Critics denounce it as a cult might look like a defeat, but it is hard to es- ary 16th a group of officers finally gained that peddles wacky theology, and warn cape the conclusion that the Dhammakaya access to the vast religious complex which that it misleads wealthy urbanites into movement is running out of powerful his Dhammakaya movement maintains thinking that they can purchase religious friends. With the royal succession—which on the outskirts of Bangkok. Instead of lo- merit. (The most serious ofthe several alle- some had feared would be tumultuous— cating the septuagenarian monk—often gations against Phra Dhammachayo re- safely behind it, Thailand’s conservative pictured in signature sunglasses—they lates to a case in which an acolyte funded a establishment is reasserting itself, in reli- found an empty bed stuffed with pillows. donation with cash embezzled from a gion as in politics. 7 By February 22nd more than 4,000 po- lice and soldiers were lingering outside the Dhammakaya compound—waiting to complete a full sweep of the massive site but apparently hindered by monks and devotees who had blocked its dozen en- trances. A spokesman for the sect claimed that 30,000 people were still inside the property, having ignored orders to leave; there have been scuffles at its gates. Apira- dee, a retired civil servant helping to feed Dhammakaya followers who had gath- ered in support outside the police cordon, said she has never seen anything like it. Founded in the 1970s, the Dhamma- kaya movement claims about 3m follow- ers around the world. It is by far the most influential temple in Thailand. It bears a loose resemblance to the evangelical mega-churches that increasingly beguile the world’s Christians. Dhammakaya’s mostly middle-class adherents complain that older Buddhist temples have grown The Vatican, Mecca…and Dhammakaya The Economist February 25th 2017 Asia 35 Banyan Pivot or pirouette?

Rodrigo Duterte, the president ofthe Philippines, says he is turning his backon America on a visit to Beijing, “Rody” announced his country’s “separa- tion” from America, and its dependence henceforth on China. The Chinese leadership promised some $24 billion worth of loans and investments. High on Mr Duterte’s wishlist is a new railway to connect Manila with development zones at Subic Bay and Clark Field, former American bases abandoned in the early 1990sduring a previous surge ofFilipino nationalism. China in and America out: on the face ofit a geopolitical revo- lution is under way, breaking the chain of American alliances in the Pacific that contain China. Control ofScarborough Shoal, and a friendly government in Manila, would make it easier for Chi- nese nuclear submarines to slip into the Pacific Ocean within missile range ofAmerica. Yet, rhetoric aside, strikingly little has changed. American forces are still helping Filipino ones against jihadists and upgrad- ingFilipino bases to challenge China’s ambition in the South Chi- na Sea. The promised billions have yet to materialise. To some, MrDuterte’spivotisa pirouette, intended to getboth powers, and Japan, to woo the Philippines. More plausibly, he is spinning in contradictions. Mr Duterte says that only two out offive ofhis ut- terances are true, and the rest “jokes”. But which is which? OR some relief from the congestion, fumes and hustle of Ma- Grown-ups in the cabinet are masters at managing his tan- Fnila, take a day-cruise to the island ofCorregidor. Guarding the trums. The “separation” from America is recast as diplomatic “di- entrance to Manila Bay, the “Gibraltar of the East” has seen the versification”, while keeping close ties with America. The threat junksthatbroughtChinese trade and Islam, galleonsthat brought to abandon the mutual defence treaty of 1951 is but a revision to Spanish Catholicism and, in 1898, the warships of Commodore annual jointexercises. The call to “setaside” the rulingofan inter- George DeweythatbroughtAmerican rule. In 1941came Japanese national tribunal against China’s trespass on the Philippines’ ex- invaders who, as tour-guides tell it, made sport ofthrowing Filipi- clusive economic zones around Scarborough Shoal and the no babies in the air and catching them on bayonets. Spratlys is no surrender, just a choice not to discuss it for now. The shared memory of the second world war—the rearguard Mr Duterte’s anti-Americanism is real enough. He bears per- defence ofCorregidorbyAmerican and Filipino soldiers, the hor- sonal grudges against Americans (and claims to have been mo- rors of occupation such as the “Bataan death-march” of POWsto lested as a boy by an American priest). A self-declared leftist, he distant internment camps, and the triumphant return of General blames America for the legacy of violence of his home island of Douglas MacArthur in 1944—goes a long way to explain the affec- Mindanao, plagued by communist and Muslim insurgencies. tion ofmany Filipinos forAmerica. It is hard to imagine other for- But the president, although popular, is constrained by a pro- mer colonised peoples putting up, or putting up with, the “Broth- American system. Westerners are told to heed what the govern- ers in Arms” statue on Corregidor: it depicts an American GI (tall ment does, not what Rody says. Rattled businessmen hope the and strong, with a helmet) holdingup a Filipino buddy (short and harm will be limited. It helps that Mr Duterte has stopped insult- wounded, with a bandana). ingAmerica. One reason isthathe hasmore orlesssuspended his Such comradeship assuages some of the resentment Filipinos war on drugs—not because of growing qualms over the death of feel atthe mixofbrutalityand paternalism ofAmerican rule. Sev- thousands of Filipinos, but out of embarrassment over the grisly enty years after independence, the Philippines feels like an off- killing ofa South Korean businessman by crooked policemen. shootofAmerica: in itsspoken English, itssystem ofgovernment, its gun culture, and its love of fast food and Hollywood. The Pew A populist axis Research Centre, which polls global opinion, ranks the Philip- The other reason is the arrival of Donald Trump, whom Mr Du- pines as the most pro-American ofthe countries it surveys: 92% of terte regards as a kindred spirit. And yet, even for Mr Duterte, Mr Filipinosexpressed a favourable viewofAmerica in 2015, an even Trump is probably a menace, not a friend. Though suspicious of bigger share than in the United States itself. China, the American president’s resentment of costly alliances These days the expansionist power in Asia is China. A poten- raises doubt about whether he would defend the Philippines. tial flashpoint for a future war lies barely 170 nautical miles from That could invite Chinese adventurism. Corregidor—a ring ofreefsand rocks called Scarborough Shoal. A Mr Trump’s dislike of global trade and immigration presents big fishing ground, and a former bombing range for American another danger. The gift of English has made the Philippines a and Filipino forces, it was seized by China in 2012. Were it to build winner from globalisation: remittances from millions of workers a military base there, as it has done in the nearby Spratly Islands, abroad (many in America), and the outsourcing of call centres Scarborough Shoal would be as a dagger aimed at Manila. and other backroom tasks by big American firms, have powered Itistime, surely, forthe brothersto linkarmsagain. The trouble the economy. Right now, MrTrump may care most about the loss is, Rodrigo Duterte, the hard-man president, wants to turn his of manufacturing jobs to Mexico and the influx of migrants from back on America. The Philippines is not a vassal state, putang-ina the Muslim world. But in trying to make America great again he (“son of a whore”), he exclaimed when asked whether Barack may well make the Philippines poorer. Then Mr Duterte really Obama might object to his bloody war on drugs. A month later, would have good reason to curse America. 7 “First Republic goes above and beyond to help me get what I need when I need it.”

NOAH LICHTENSTEIN Venture Partner, Cowboy Ventures

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Also in this section 38 Tourism and turmoil in the far west

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China and North Korea have hoped that Mr Kim, who favours eco- nomic opening, would one day replace his Shock and ore half-brother. With his death “you lose one option”, saysJia Qingguo ofPekingUniver- sity. It has reminded China that North Ko- rea’s dictator is doggedly determined to rule in his own way, regardless of China’s BEIJING or anyone else’s views. Growing frustration with North Korea Fed up with Pyongyang’s missile tests and murders, China blocks coal imports is evident in China’s more relaxed attitude EWtelevision dramasboasta plot asfar- already bought as much coal from North towards criticism of its neighbour. In 2013 Ffetched as the one that has unfolded in Korea this year as it was allowed to under an editor of a Communist Party-controlled North-East Asian geopolitics over the past the UN’s sanctions, to which China gave its publication was fired forarguing in an arti- two weeks. Days after North Korea tested a approval last March. But North Korea- cle that “China should abandon North Ko- ballistic missile on February 12th, two watchers doubt that China could have im- rea.” These days, academics often air that women assassinated the half-brother of ported its yearly quota of 7.5m tonnes in a idea. Debate about North Korea now rages Kim Jong Un, North Korea’s leader, by mere six weeks. It had not appeared likely openly online, largely uncensored (except throwing chemicals in his face at a Malay- to reach its annual limit until April or May. when people use it as a way of attacking sian airport. The alleged killers said they And exceeding that cap had not been ex- their own regime, jokingly referred to as were duped into taking part, believing the pected to matter much to China. In 2016 it “West Korea”). The murder of Kim Jong attackwas a prankfor a TV comedy. Malay- imported about three times the permitted Nam unleashed a torrent of ridicule to- sian police suspect that a North Korean amount, usinga loophole that allows trade wards his country by Chinese netizens. diplomat in Malaysia may have been if it helps the “livelihood” of ordinary China still sees North Korea as a useful amongthe organisers, several ofwhom are North Koreans. bufferagainst America’s army deployed in thought to have fled to Pyongyang. Advancing the date of the suspension, the South. But it increasingly regards the Amid such skulduggery, China’s an- if that is what happened, would certainly North as a liability as well, says Mr Jia. nouncement on February 18th that it have sent a strong message to North Korea, would suspend importsofcoal from North which depends on coal exports for much In America’s court? Korea, from the next day to the end of this of its foreign currency. Announcing the China would clearly like its tough-sound- year, seemed a little mundane. But China’s move so publicly, and unexpectedly, will ing approach to encourage President Don- state-controlled media played up the deci- have shown to North Korea that China is ald Trump to rethink his country’s strategy sion. Global Times, a newspaper in Beijing, ready to take the initiative instead of wait- for dealing with North Korea. America has said the move would make it harder for ing to be prodded by America, as it usually been reluctant to enter direct talks because North Korea to exploit international differ- does when North Korea offends. the North has blatantly cheated on past ences over the imposition of UN sanctions The test of an intermediate-range mis- deals—knowing that China would contin- aimed at curtailing its nuclear programme. sile will have rattled China. It suggested ue to prop it up. With China more clearly China appeared to be signalling to the that North Korea has learned how to fire on America’s side, the Americans would world that it was ratcheting up pressure on such weapons at short notice, from hard- have greater confidence, Chinese officials its troublesome friend, as the Americans to-detect mobile launchers. The murder of hope. Mr Trump has previously said he have long insisted it should. Kim Jong Nam may have been an even big- would be happy to have a hamburgerwith Or it may just be posturing. On Febru- ger blow. Mr Kim had been living on Chi- Mr Kim and try to persuade him to give up ary 21st China’s foreign ministry softened nese soil in the gambling enclave of Ma- hisnukes. The trouble is, MrKim sees those the message somewhat. It said imports cau, probably under Chinese government weapons as the one thing that guarantees were being suspended because China had protection. Some Chinese officials may the survival ofhis odious regime. 7 38 China The Economist February 25th 2017

ing attacks blamed on Uighur terrorists in other parts of the country (unrest in Tibet has tended to be more peaceful). To shore up the battered tourism industry, the gov- ernment tried subsidising hotel rooms and plane tickets. It even offered cash incen- tives of 500 yuan ($80 at the time). This may have helped: there were nearly 60m “visits” to the region in 2015, nearly triple the number in 2007. Few of the tourists, however, go to southern Xinjiang, the area most troubled by separatist unrest and most in need ofan economic lift. Visitors’ fears ofviolence are reinforced, not assuaged, byshows of force such as those staged by the security ser- Ethnic harmony vices in recent days. Armoured personnel carriers are a frequent sight in urban areas. Journeys to the west Airport-style security is ubiquitous. Some buildings are fenced with barbed wire; guards check for bombs under cars enter- ing their grounds. KASHGAR In Kashgar (pictured), where separatist sentiment is strong among Uighurs and at- China hopes that tourism will bind its ethnic-minority regions more closely with tacks blamed on terrorists have been par- the rest ofthe country. The strategy is failing ticularly common, shopkeepers complain AKS graze on grassland near the turqu- tween the Tibetan plateau and Xinjiang that the tourist trade has died. One says his Yoise waters of Karakul, a lake in the far was launched in 2014. Expressways have family has had a hat shop in the city for 40 western region of Xinjiang. Further south, been built across deserts; airports opened years, but sales are down by a third this towards the border with Pakistan, the im- at oxygen-starved elevations. year and prices are falling. At the “Karsu posingwallsofa ruined hilltop fort atTash- In Tibet, these efforts have helped to scenicarea” on the edge ofthe Taklamakan kurgan mark a stop on the ancient Silk fuel a tourism boom. Visits to Tibet in- desertthe toiletand ticketingfacilities have Road (see map). With such a rich landscape creased fivefold between 2007 and 2015 to never even opened. A viewing platform, and history this region should be a magnet 20m, according to government figures. The swings and a shaded area underumbrellas for Chinese tourists. Instead the area that total number is misleading, since a tourist are used mainly by local (Han) staff and accounts for more than one-sixth of Chi- is often counted multiple times, when their families. na’s land mass is better known for violent checking into a hotel or visiting an attrac- All the building of new infrastructure unrest. The picturesque charms of the lake tion, for instance. But the growth appears may be doing little to cheer Uighurs, either. and fortcan be enjoyed in near solitude. to be real, despite annual bans on visits by Many of the workers who are upgrading For decades Xinjiang has been racked foreign tourists from late February to the the highway to Pakistan, a project due to be by a low-level insurgency involving ethnic beginning of April—the traditional season completed this year, are from outside the Uighurs—a mostly Muslim minority many forprotests. The impact on Tibet’s stability, province. And as for bonhomie, evidence of whose members chafe at rule from Bei- however, has been farless impressive. The ofitsspread in Xinjiangisscant. Tourists of- jing. Most recently, on February 14th, at- tourism industry in Tibet is dominated by ten prefer to visit Han-dominated areas; tackers with knives killed five people and ethnic Hans, who can communicate better those who visit Uighurones sometimes of- injured another five in a remote oasis with the travellers. Tibetans often com- fend locals by entering mosques in tight town. Thousands of paramilitary troops plain they have seen little benefit. shorts or ignoring signs telling them not to have since paraded through three cities in By official reckoning, tourist arrivals in climb on ancient ruins. Xinjiang in shows of “thunderous power” Xinjiang have also risen fast, albeit un- It does not help that Tibetans and Ui- aimed at Uighur terrorists. evenly. Numbers dropped in 2014 follow- ghurs are unable to become part ofthe tou- Chinese officials have long hoped that rism boom themselves. Their movement tourism would help to reduce unrest in within China and beyond is restricted. Xinjiang by creating jobs and boosting Beijing Many Tibetans have been refused new wealth. High-spending travellers from Chi- passports since an explosion of unrest na’s interior, they believe, can spread bon- across the region in 2008. Some have been Karakul Urumqi homie and thereby strengthen “ethnic un- Lake ordered to surrender existing ones. Parts of ity” between the Turkic-speaking Uighurs Kashgar XINJIANG Xinjiang launched a similar policy last and the Han Chinese who make up more year. In some areas people need official ap- Taklamakan than 90% of the country’s population. The Tashkurgan Desert proval to travel abroad. authorities in neighbouring Tibet, where Bayingol GANSU The police are also monitoring travel many people similarly resent the central within Xinjiangmore closely. This week all government’s control, have also looked to u vehicles in Bayingol prefecture were or- t e a tourism as a salve. In both regions, how- P l a QINGHAI dered to install a satellite navigation sys- t a n ever, their hopes have been dashed. T i b e tem so people “can be tracked wherever The central authorities have spent bil- TIBET they go”, as an official put it. The authori- lions of dollars trying to make it work. A ties say the measure should “safeguard sta- Lhasa breathtaking high-altitude rail line linking bility”, because terrorists often use cars to Tibet with the national network was stage attacks. Visitors to Bayingol’s scenic opened in 2006. A bullet-train service be- grasslands may not be reassured. 7 Middle East and Africa The Economist February 25th 2017 39

Also in this section 40 Rising tension in Western Sahara 41 A health-care scandal in South Africa 41 The battle for Mosul 42 Education in Liberia

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Iran and America ly taken the nuclear issue off the table for the next decade orso and which has strong A new confrontation international support. Instead, the emphasis will be on rigor- ous enforcement. Minor Iranian transgres- sions, such as the recent breach of the amount of heavy water Iran is allowed to hold for its reactors, will not be tolerated. Should Iran be caught deliberately cheat- How faris the new administration prepared to go? ing, America could try to persuade other HAOTIC, fractious and bafflingly in- tionary Guards Corps has conducted a se- signatories to the deal (France, Germany, C consistent though the Trump adminis- ries of tests of ballistic missiles capable of Britain and the European Union, but prob- tration may be, on one issue it appears un- delivering a nuclear warhead in defiance, ably not Russia or China) that some sanc- ited: Iran. There is ample evidence that though not clear violation, of UN Security tions should “snap back”. since the signing in mid-2015 of the deal to Resolution 2231, which underpins the nuc- The nuclear deal only lifted nuclear-re- curb Iran’s nuclear programme, known as lear deal. The latest, on January 29th, re- lated sanctions on Iran. Others remain in the Joint Comprehensive Plan of Action, sulted in the US Treasury slapping new place, relating to ballistic-missile activity, Iran has taken advantage of the easing of sanctions on several Iranian individuals support for terrorism and human-rights sanctions and the unfreezing of about and companies connected to the missile abuses. More could be imposed forfurther $100bn worth of overseas assets to project programme. The response was measured missile tests or violations of UN embar- its power across the region with greater (and probably dusted off from something goes on arming Hizbullah in Syria and the boldness. Barack Obama, the new team prepared by the Obama administration). Houthisin Yemen. America also maintains believe, let it offthe hook. But it was backed up by a statement from strict rules about illicit financial activity— Since the deal, Iran has stepped up its the short-lived national security adviser, Iran is believed by many to be a serial of- support for Bashar al-Assad in Syria to the Mike Flynn, that Iran was “officially being fender—and doing business with any com- point where, with Russian air support, his put on notice” about its behaviour. mercial entities linked to the Revolution- regime’s survival appears assured for the ary Guards, who have fingers in most of foreseeable future. Iran has also worked What did he mean by that? the Iranian economy. Nor does the Trump with Russia to supply Hizbullah, a Leba- Mr Flynn, however, was vague about what administration have to strain, as John Ker- nese Shia militia fighting in Syria, with that involved. It is one thing to decide that ry (Mr Tillerson’s predecessor) did, to reas- heavy weapons. It has poured other Shia Iran must be confronted and pushed back, sure international banks that they would militias into Syria from Iraq, Afghanistan quite another to know how to do it with- notbe penalised forfinancingdealsin Iran. and Pakistan. In Iraq, meanwhile, Iranian- out running the risk of plunging America Even with Mr Kerry’s encouragement, the backed militias are fighting alongside into another Middle Eastern war and in- banks remained cautious. American-supported Iraqi security forces creasing turmoil in a region that already Alongside sanctions, confrontingIran is against Islamic State (IS). But once IS is has plenty ofit. likely to require a military component, ejected from Mosul, they will be a potent The future of the nuclear deal is also in though it, too, will have to be calibrated. weapon in Iran’s attempt to turn Iraq into a doubt. During the presidential campaign Iran’s aim is to establish an arc of control dependent satrapy. In Yemen the civil war MrTrump described it as the “worst deal in that runs through Baghdad, Damascus and is a proxy struggle between Sunni Gulf Ar- history”, and congressional Republicans Beirut. Mr Mattis has been told to come up abs, who backthe recognised government, have little affection for it. But given the in- with a plan to prevent this. More direct against Shia Houthi rebels whom Iran sup- creased influence of James Mattis, the de- help for the Saudis and Emiratis in Yemen plies with training and weapons, includ- fence secretary, and Rex Tillerson, the sec- is likely, as is aggressive patrolling of inter- ing anti-ship missiles that have been fired retary of state, there is little appetite in the national waters to stop supplies of weap- at American warships in the Red Sea. administration for unilaterally abrogating ons from Iran gettingto the Houthis. Amer- Meanwhile, Iran’s elite Islamic Revolu- an international agreement that has large- ican warships, dangerously buzzed by1 40 Middle East and Africa The Economist February 25th 2017

2 Iranian patrol boats, may not be as re- ing in the fight against IS would be staying gling (but probably also to facilitate trade). strained in their response as before. In Syr- on for some time after the fallofMosul. He Its deployment of security forces with the ia, it looks as if there will be an attempt to knowsthatwithouttheirpresence, and the construction crews was seen as a violation prise apart the alliance between Russia political influence it buys, there will be lit- of the ceasefire agreement. In response, and Iran. There will be an offer to Moscow tle to stop Iran from installing a new gov- Polisario also began building new struc- of military co-operation against IS and rec- ernment ofits choosing. tures and positioning armed elements in ognition of Russia’s role in deciding the Iran may well be, as Senator Lindsey the area. The secretary-general ofPolisario, terms of a future settlement. If that fails, as Graham said on February19th,“a bad actor Brahim Ghali, paid a visit to the region in is probable, Mr Mattis may decide that in the greatest sense ofthe word”. But it is a December, stoking the tension. America will need more than the handful resourceful one. Any attempt to confront it The standoff in Guerguerat is a symp- of special forces it currently has on the risks escalation. Mr Trump’s trusted advis- tom of much deeper problems. While Mo- ground in Syria. He was unimpressed by er, Stephen Bannon, believes that America rocco’s portion ofWestern Sahara contains Mr Obama’s policy to speak loudly and is engaged in a civilisational struggle likely valuable phosphates, oil and fish stocks, carry a small stick. to lead to “a majorshootingwarin the Mid- the Polisario’s third provides little of value. The biggest challenge will be Iraq. Mr dle East again”. It is for Mr Mattis and Mr Many Sahrawis continue to live in refugee Mattis, on a visit to the country this week, Tillerson to plot a course that restrains Iran camps in neighbouring Algeria, which said that the 6,000 American forces assist- without fulfilling that prophesy. 7 supports the cause of Western Sahara. “Refugees born and raised in exile are beat- ing the drums for war,” writes Hannah Western Sahara Armstrong, an analyst. Many Sahrawis also believe that the The never-ending dispute UN will not stand up to Morocco. The king- dom expelled some 70 UN workers last spring after Ban Ki-moon, then the UN’s secretary general, described Morocco’s presence in Western Sahara as an “occupa- LAAYOUNE AND RABAT tion”. (Ithassince letsome, butnot all, back in.) Morocco spends large sums of money Backin the spotlight, the fateofWestern Sahara is no closerto resolution lobbying governments, and threatens CCORDING to the map sold in the gift ger could restart the 16-year war that the those that are unsupportive. It dressed Ashop at the airport in Laayoune, the UN helped end in1991. “The threat to peace down America’s ambassador last year capital of Western Sahara, the territory be- and security is probably the worst we have over a report that criticised its human- longs solely to Morocco. But the airport it- seen since then,” says a UN official. rights record. And it has reacted angrily to self contains signs that this is contested Hostilities between Morocco and Poli- rulings by European courts that dismissed land. Planes bearing the UN’s marking sit sario began shortly after Spain, the colo- its claim to Western Sahara. on the runway, while its soldiers, sporting nial power, withdrew from Western Saha- Some hope that Morocco’s readmission blue berets, roam the arrivals hall. They are ra in 1975, when Morocco annexed the to the African Union (AU) on January 31st there to keep the peace between Morocco territory. A ceasefire agreement in 1991 will help to resolve the dispute. The king- and the Polisario Front, a nationalist move- promised a referendum on independence, dom left the AU’s predecessor, the Organi- ment that has fought for independence for but no vote was held. Morocco was thus sation of African Unity, in 1984 after a ma- morethan40years. left in control of two-thirds of the territory, jority of the member states recognised Fears are growing of a return to armed including Laayoune, while Polisario runs Polisario and granted it membership as the conflict. Provocations by Morocco have in- the remainingpart. Theyare separated bya Sahrawi Arab Democratic Republic furiated Polisario, which has responded in 2,700km (1,700-mile) sand berm, built by (SADR). By returning, Morocco is supposed kind. Since last summer the UN has stood the Moroccan army and sown with mines. to accept the AU’s protocols, which state between the two enemies, just 120 metres Morocco moved south of the berm last that members’ borders (including those of apart, in the remote area of Guerguerat. August, when it began paving a road in the SADR) are inviolable. Diplomats worry that an itchy trigger fin- Guerguerat, ostensibly to combat smug- Others, though, believe Morocco will instead work from within the organisation to undermine the AU’s support for Polisa- rio. Indeed, NasserBourita, Morocco’s dep- uty foreign minister, has said as much. “Not only does Morocco not recognise— and will neverrecognise—thisso-called en- tity,” MrBourita told Le Desk, a website, re- ferring to SADR. “It will redouble its efforts so the small minority ofcountries, particu- larly African, which recognise it, change their positions.” Morocco’s claims to Western Sahara were rejected by the International Court of Justice in 1975, but most Moroccans still feel that it is part of their country and that au- tonomy is a fair solution—or, at least, will be when Morocco fully embraces democ- racy. Most Sahrawis, though, are holding out for the referendum that was promised. The alternative, some now say, is not au- They say they want a referendum tonomy, but a return to war. 7 The Economist February 25th 2017 Middle East and Africa 41

The battle for Mosul Going west

BEIRUT Iraqi forces launch the toughest phase oftheiroperation against Islamic State RAQ’S prime minister, Haider al-Abadi, Ihad vowed to recapture Mosul from the so-called Islamic State (IS) by the end of 2016. In the weeks leading up to the battle for Iraq’s second-largest city, American South Africa military commanders echoed him: victory would be swift, they pledged. But with the Horror show jihadists still in control of half the city and the hardest part of the battle yet to come, these predictions now looknaive. In the rush to dislodge IS from its largest JOHANNESBURG urban stronghold, Iraq’s security forces ap- pear to have underestimated the militants’ The deaths ofmore than100 psychiatric patients have exposed government ability to cause carnage. Although vastly arrogance and neglect outnumbered, the jihadists have used T HAS been a disaster in agonising slow dration. Neighbours ofthe Precious Angels snipers, booby traps, improvised land- Imotion. To cut costs, health officials in home, where 20 people died, reported mines and hundreds of suicide-bombers Gauteng province (South Africa’s eco- hearing screams. Bodies were stacked in a to bog down Iraqi security forces. Elabo- nomic hub, which includes Johannesburg rundown morgue. rate tunnel networks have allowed IS to es- and Pretoria) decided to transfer psychiat- South Africans are shocked that such a cape bombing runs from American war- ric patients from specialised private hospi- tragedy could have happened despite all planes and to ambush Iraqi forces in areas tals to care homes run by charities. Family the warnings. “[Ms Mahlangu] and her ad- supposedly cleared. members, psychologists and advocacy ministration knew of the risks before em- The grinding urban combat has taken a groups all warned that this could be dan- barking on this project and watched as the heavy toll on Iraqi troops. Some units of gerous for the patients. They pleaded with tragedy unfolded,” said Section 27, a civil- the country’s Golden Division—American- Qedani Mahlangu, the provincial health society group. “They did nothing to stop trained special forces that have spearhead- minister, and even went to court to try to it.” Another group, Treatment Action Cam- ed the assault on the city—have seen more stop the move, arguing that vulnerable paign, compared it to the Marikana massa- than half their men killed or wounded. people were being rushed into dodgy cre, when 34 striking mineworkers were The UN said that almost 2,000 Iraqi troops homes. Ignoring their concerns, Ms Mah- shot dead by police. were killed across the country in Novem- langu went ahead. Some 1,300 patients The deaths of more than 100 people, in ber alone, triple the number in the previ- were moved over several months last year. appalling conditions, further dents the ous month, when the battle for Mosul be- An ombudsman’s report described this moral authority of the African National gan. The government refuses to release process as a “cattle auction”, with care Congress (ANC), which hasgoverned since casualty figures, but in December the of- homes jostling over which patients they the end ofapartheid. The scandal may also fensive ground to a halt as commanders wanted. Some sent pickup trucks to fetch damage the party at the polls: the ANC re- waited forreinforcements to arrive. them. Disabled patients were tied down ceived a narrow54% ofthe vote in Gauteng So far Iraqi security forces, backed by with bed sheets for transport. Families did province in the 2014 elections (compared American-led coalition warplanes, have not know where their loved ones had with 62% nationally). Both Johannesburg captured the eastern halfof the city, which gone. Soon, patients were dying. and Pretoria slipped from the party’s con- is split in half by the Tigris river. On Febru- The extent ofthe horroris still beingun- trol in last year’s local polls. ary 19th, more than four months since the covered. Last week South Africa’s health start of the battle, they launched the next ombudsman, MalegapuruMakgoba, told a Letting the vulnerable die phase of the operation: to retake the west. parliamentary committee that more than Ms Mahlangu has resigned—an almost un- The fighting will be even tougher. The old 100 patients had died. More bodies are still heard-ofcase ofa South African official vo- city’s narrow alleyways will force Iraqi unclaimed. His report into the scandal, re- luntarily stepping down as a result of scan- troops to dismount from their armoured leased earlier this month, describes “negli- dal. Opposition parties want to press Humvees, making them easier prey for IS gent and reckless” conduct, including by criminal charges against her. Jack Bloom, suicide-bombers and snipers. government officials and the care homes, the shadow health minister for the opposi- There is also a larger civilian popula- none of which was properly licensed. tion Democratic Alliance, notes that Ms tion in the west, further complicating the Some of the homes are described as “con- Mahlangu admitted that patients had died operation. The Iraqi government has centration camps”: patients were skinny only after he quizzed her about it in the dropped leaflets urging the 750,000 or so and starving. Freddie Collitz, aged 61, who Gauteng legislature. Her disclosure that 36 residents to stay in their homes. But with suffered from depression, died with a head had perished led to the investigation. But heavy fighting and siege-like conditions wound, blisters on his ankles and a sore on even then, the ombudsman’s report said, taking an increasing toll on civilians, the his nose. Carers told his family he had fall- she did not grasp the full extent of the di- UN believesthatasmanyashalfcould flee, en on the lawn. His death was listed as due saster: the death toll at the time was actual- adding to the 160,000 who have already to “natural causes”. Many other patients ly 77. “The horror is that this could have left the city’s east and its surrounding vil- died of pneumonia, diarrhoea and dehy- been covered up,” Mr Bloom says. 7 lages since the battle began. 1 42 Middle East and Africa The Economist February 25th 2017

2 Still, the jihadists are slowly losing con- ing any who were later turned away. trol of their caliphate. The Pentagon be- Late for school The second concern is cost. The govern- lieves many of the group’s senior bureau- Liberia, second-grade* students by actual age ment pays for teachers’ salaries. Operators crats are starting to leave Raqqa, IS’s capital 2015, ’000 also receive $50 per pupil per year from a across the border in Syria, as air strikes on 20 pot of philanthropic cash managed by the that city intensify. With Kurdish-led ministry and Ark, a London-based educa- ground forces slowly encircling Raqqa, 15 tion charity. Most spend extra money on smugglersare helpinggrowingnumbers of top of that. Operators have submitted esti- IS low-level fighters flee the battlefield or 10 mates of their costs ranging from $60 to defect to rival jihadist groups in Syria. The more than $1,000 per child per year. group’s finances have also taken a hit, with 5 ForMrWerner, questionsaboutthe cost revenue (largely from taxation, oil and ran- of the project are most acute when he con- soms) declining from up to $1.9bn in 2014 0 siders the role of Bridge International to, at most, $870m in 2016, accordingto a re- 6789101112131415 Academies. Bridge, a chain of for-profit port from Kings College London. *6- to 7-year-olds schools, has raised $140m from investors in most countries The fall of both Mosul and Raqqa, Source: Ministry of Education such as Mark Zuckerberg. But it is not close which American commanders believe to breaking even, losing about $1m a may happen within sixmonths, will deal a the government. In the PSL scheme eight month as a result of its high fixed costs, huge blow to the jihadists. Even so, IS is operators, three of which are for-profit such as having a research team in America. likely to endure. It has already begun to groups, have taken over a total of 93 public One way Bridge is trying to turn a profit switch to insurgent-style tactics, setting off schools. A randomised controlled trial will is to run public schools as well as private carbombs in Baghdad and east Mosul with analyse whether their pupils do better ones. Liberia is thus a test case. As part of growing frequency. The jihadists may be than peers in traditional schools. the pilot, Bridge runs 25 schools there, down; they are farfrom out. 7 But just six months in, PSL is under fire. more than any other provider. Josh Na- Education International, a global group of than, Bridge’s academic director in Liberia, teachers’ unions, and ActionAid, a charity, said that the firm would like to cover all Education are funding an investigation into the pro- 2,700 schools around the country. gramme. Their opposition is partly ideo- Charles Cooper, a Liberian business- Lessons from logical: they do not like for-profit schools. man, speaks for many sceptics of the But two oftheir concerns are pertinent—in- Bridge method. He says the scripts, which Liberia deed, Mr Werner and the researchers eval- teachers read from tablet devices, are like a uating the PSL project also recognise them. “lobotomy”, as teachers no longer have to PSL MONROVIA The first is that the schools play by thinkforthemselves. The scripts are bossy: different rules. There is a cap of 65 on most teachers must “write today’s date” and A war-ravaged state where little works of their class sizes, for example, which has “erase the board”, for example. But Bridge considers charterschools prompted allegations that some operators says these ensure that teachers teach. T A school in the township of West are turfing out less clever pupils. That Bridge’s financial model is more worry- APoint, Monrovia, a teacher should be would be unfair and against the rules of ing than its pedagogical one. It is seeking halfway through her maths lesson. Instead the pilot. But even if it were happening, it $9m from its philanthropic backers for its she is eating lunch. A din echoes around would not alter the results of the evalua- work in Liberia (about $1,000 per pupil). the room of the government-run school as tion. Justin Sandefur of the Centre for Glo- Around $5.5m of its proposed budget for 70 pupils chat, fidget or sleep on their bal Development, the research group lead- Liberia is for staff costs for employees out- desks. Neither these pupils nor the rest of ing the trial, notes that operators will be side the country. The success of PSL does Liberia is learning much. Bad teaching, a held accountable for the results of all chil- not rely on that ofonly one group, but such lackofaccountability and a meagre budget dren originally at the pilot schools—includ- figures raise doubts about whether Bridge have led to awful schools. Fourteen years can everrun a cheap enough operation in a of civil war and, more recently, the Ebola place like Liberia. virus have stymied reforms. Children’s Susannah Hares of Ark says that higher prospects are shocking. More than one- costs in PSL’searlyyearsare notnecessarily third of second-grade pupils cannot read a a sign offailure. Per-pupil spending should word; since many are held back, teenagers come down ascostsare spread acrossmore often share classes with six year olds (see sites. But she adds that if the pilot is to ex- chart). In 2014 only 13 candidates out of pand widely there must be evidence that 15,000 passed an entrance exam to the Uni- the world’s fourth-poorest country can af- versity ofLiberia. In 2013 none did. ford it, even with money from donors. (Li- George Werner admits that when he beria receives more in aid—$842m in 2014— was made education minister in 2015, “my than its gross national income of$720m.) heart sank.” But he soon got to work. He re- On February 22 Mr Werner announced moved 1,892 dead or retired teachers from that, from September, PSL would add an- the government’s payroll, saving $3.3m or other 100 or so schools. Expansion would 7% of the tiny education budget ($45.6m). irk critics. But they should remember how In September Mr Werner went further, bad things are. Far too many education launching Partnership Schools for Liberia ministers choose to accept the status quo. (PSL), a pilot which, if successful, could in- PSL is an experiment, and one worth try- spire similar innovation across Africa. ing. Unfortunately, with an election due in PSL is based on charter schools in October, a new government could scrap America and academies in England. In the scheme. In Liberia, where exams are each case independent operators run free provingtoo tough fortoo many, thatwould schools that are at least partly funded by It says here, be good represent the biggest failure ofall. 7 Europe The Economist February 25th 2017 43

Also in this section 44 Mme la Presidente? 44 Russian soft power in the Balkans 45 The Martin Schulz effect in Germany 46 Charlemagne: The armies of Europe

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

France’s Europhile candidate floor office at the Elysée Palace cheerfully mulling over plans to write a book, or per- The anti-Marine hapsteach philosophy. Today, the offices of En Marche!, the movementhe founded last year, are filled with youngpeople in sweat- shirts, and feel like a cross between a PARIS AND TOULON start-up and a student society. He has at- tracted policy heavyweights, such as Jean Emmanuel Macron has gone from no-hoperto serious candidate. Now comes the Pisani-Ferry, an economist, and the sup- hard part port of François Bayrou, a centrist who has RANCE’S most pro-European presiden- seemed motivated as much by curiosity as declined to run himself. And he is recruit- Ftial candidate tookhis campaign to Lon- conviction. Jean-Luc, a high-school maths ing candidates from all backgrounds to don thisweekto a rapturouswelcome. Em- teacher, said he had never been to a politi- stand at parliamentary elections in June. manuel Macron, a 39-year-old former cal rally and was “intrigued” by Mr Mac- The objective, says Mr Macron, is to reject Socialist economy minister, was there to ron. Robert, a retired salesman, said he vot- “yesterday’s choices”, pursue “radical nov- court the French vote abroad, and is exact- ed for François Fillon, the centre-right elty” in politics, and build “a new France”. lythe sortofupbeat, international-minded candidate, at his party’s primary but was tech enthusiast that London’s latte-drink- now “looking for a way out”. (Mr Fillon is Not your regular Gilles ing French voters adore. Campaigning as under investigation for having employed Yet, besides his inexperience, two obsta- an independent for votes on the left and family members on the parliamentary cles in particular lie ahead if Mr Macron is the right, Mr Macron has pulled off the as- payroll, despite little evidence that they to beat Mr Fillon into the second round. tonishing feat of hauling himself up from did much work.) It was Mr Macron’s “dif- One is whether he can find a way to speak rank outsider to joint second place in the ferentwayofdoingpolitics” thatappealed, to a broader electorate, beyond the metro- polls. But the closer he gets to a shot at the said a retired naval worker and Socialist politan voters with a university degree French presidency, the tougher his cam- voter; he was not yet sure ofhis vote. who favour him. “He’s too intellectual,” paign is turning out to be. With two months to go before the first- says a retired antique dealer, in a café over- A few days before Mr Macron turned round, the French presidential election has looking the port in Toulon, where the air- up in London, he had been in more hostile become more unpredictable than any in craft carrier Charles de Gaulle is docked territory: the Mediterranean naval port of recent history. The only near-certainty is while undergoing repairs. Mr Macron’s Toulon, traditionally held by the right. The that the FN’s Marine Le Pen will win one of overtly pro-European politics are unfash- entrance to his rally was blocked by scores the two places in the run-off. This has ionable in parts of France these days. His of enraged National Front (FN) supporters turned the election into a race to face her. support forGermany’s open-borderpolicy and pieds-noirs (ethnic French who resided Though she has staged almost no rallies, towards Syrian refugees—he says it “saved in Algeria during colonial rule), chanting Ms Le Pen tops first-round polling, with our collective dignity”—collides with a “Macron traitor!” On a trip to Algeria that about 26% of the vote (see page 44). Over popular mood of rising nationalism. And week, he had called France’s colonisation three-quarters of her voters say they are Mr Macron’s embrace oftechnological dis- of the north African country a “crime sure of their choice. For Mr Macron, who is ruption does not resonate with those who against humanity”. neck-and-neck with Mr Fillon in second fear they will be its next victims. “He is The rally went ahead all the same. Mr place, this share is just 45%. quite weak among manual workers and Macron told the audience that he was “sor- That Mr Macron is in this position is re- employees, and it’s not possible to con- ry” ifhe had “wounded” anybody, but that markable enough. This, after all, is a young struct a successful candidacy without France needed to confront all sides of its man who in July 2014, after quitting his job them,” saysJérôme FourquetofIfop, a poll- history. The venue was a little over half as deputy chief of staff to President Fran- ing group. full, and the atmosphere flat. The crowd çois Hollande, could be found in his top- The second is how farhis poll success is 1 44 Europe The Economist February 25th 2017

2 down to an engaging personality rather Mme la Presidente? than a convincing programme. The coun- try, he says, needs “vision”, not scores of policy ideas that promptly get shelved by France’s chances presidents in power. But his reluctance to be too precise has left Mr Macron open to Populists are on a roll, but Marine Le Pen faces an uphill battle the charge of ambiguity. Asked which of his policies they liked best, supporters OURNALISTS often joke that three Mr Macron, it is 20. At this stage, voters questioned in Toulon were unable to an- Jexamples make a trend. Following the tend not to change their minds: in presi- swer. Mr Macron is due shortly to unveil votes forBrexit and Donald Trump, a dential elections since 1981, the average more specific plans which, perhaps tacti- victory by Marine Le Pen ofthe National poll ofa potential run-off70 days out has cally, he has long avoided. Yet this carries Front (FN) in France’s presidential elec- also missed by only three points. If they fresh risks. Some of the ideas he sketched tion would complete the anti-global- are similarly reliable this time, Ms Le Pen out in “Révolution”, the bookhe published isation trifecta. She has dominated the has less than a 5% chance ofvictory. last year, are profoundly radical, certainly polls ever since news broke that François Ofcourse, unusual events cannot be forFrance. He wants to curb the overall lev- Fillon, her centre-right rival, had paid his ruled out, and many voters are still un- el of public spending; have the state take wife and children about €1m ($1.05m) certain. Betting markets give Ms Le Pen over the employer- and union-run unem- over the years forjobs critics call fake. But odds of28%-43%. Punters may think ployment benefit system in place since the a deeper analysis shows that Ms Le Pen is furtherscandals could fell whoever faces second world war; and devolve most ne- more likely to end the streakthan to her in the second round. Should it be Mr gotiations on working conditions to com- continue it. Fillon, leftist voters who dislike him panies. He is liberal, he says, “in a Nordic After last year’s surprises, many peo- might stay home. But such a drop in sense”. Getting the right balance between ple stopped trusting polls. This is mis- participation would have to be huge to what France needs, and what the French guided: in both cases, surveys correctly matter. Ifthe polls hold, even ifevery FN will vote for, will be perilous. predicted that the race would be tight. If supporter actually votes, a fifth of oppos- A historically unusual opportunity is polls in France are similarly reliable, Ms ing voters would have to drop out for Ms within Mr Macron’s grasp: the chance of Le Pen’s chances in the first round of the Le Pen to win. That is much larger than beating all established party candidates election are excellent. The Economist has the shifts in Britain and America. into the second round, and from there into aggregated100 French polls (a technique The most likely outcome is that his- the presidency.Polls suggest that he would that is still rare in France, though it is de tory will repeat itself. In 2002 Jean-Marie be a more solid run-off candidate against rigueur in Britain and America). Wefind Le Pen, Marine’s father and the FN’s Ms Le Pen than would the damaged Mr Fil- that ifthe first round were held today, Ms founder, snuckinto the presidential lon. Under the Fifth Republic, no indepen- Le Pen would carry 26.1% ofthe vote. run-off, only to lose by 64 points. Just14 dent has ever pulled off such a feat. Then Emmanuel Macron and Mr Fillon would months ago, the FN topped national again, none has had such a remarkable op- trail with19.7% apiece. first-round polls forregional elections. portunity to do so. 7 These figures could change, but big But its opponents teamed up, and it failed shifts are rare. According to a database of to win a single region. Perhaps this time French polls since1965 compiled by two will be different. But ifMs Le Pen wins, it Western Balkans political scientists, Will Jennings and will be a farbigger shockeven than the Christopher Wlezien, surveys 60 days votes forBrexit and Mr Trump. Russian overtures before the first round have been off by just three percentage points on average. Using this record to run10,000 computer Ménage à trois simulations shows Ms Le Pen as the France, probability of reaching second round, %* Selected presidential candidates NIS heavy favourite. She wins the first round 77% ofthe time, and is a 96% shoo-in to Moscow fights Serbia’s turn towards 100 make the run-off. Europe Marine Le Pen The race forsecond place is much 80 François Fillon Emmanuel Macron ERE are the Russian missiles!” chor- tighter. Mr Fillon’s chances ofmaking the 60 “Htles Viacheslav Vlasenko, co-direc- run-offhave fallenfrom 79% to 50%, tor of the Russian-Serbian Humanitarian slightly more than Mr Macron’s 47%. 40 Centre in Nis, a town in central Serbia. He Benoît Hamon, the Socialist candidate, 20 gestures at the contents of his warehouse: manages just 5%. 0 tents, generators, inflatable boats and oth- However, the second round is a differ- January February er goods one would expect to use in disas- ent story entirely.When voters are asked 2017 ter relief. The centre, which shares a build- to pickbetween Ms Le Pen and Mr Fillon, Sources: National polls; W. Jennings *Based on 10,000 ing near the airport with several local IT she loses by13 percentage points. Against and C. Wlezien; The Economist simulations per day companies, is simply a facility forrespond- ing to floods, forest fires and other emer- gencies, says Mr Vlasenko. gro. Moscow’s goal is to stop Serbia, Bos- sian “state organs” of having mastermind- Yet Western analysts worry that it may nia, Macedonia and Montenegro from ed the plotin orderto preventthe country’s be somethingmore: a spyingpost oreven a joining NATO and to turn them away from imminentaccession to NATO. Russia called foothold for Russian intervention. As the the West. the claim “absurd”. influence of America and the European The most striking allegations against Russia also backs Serbia’s refusal to re- Union has receded in the western Balkans, Russia concern a purported coup attempt cognise the secession of Kosovo in 2008. Russia has been trying to fill the vacuum. It in Montenegro last October, on the day of Hashim Thaci, Kosovo’s president, says he has stepped up military co-operation with the country’s elections. Authorities arrest- fears Russian influence is growing (along Serbia, and may have been involved in a ed 20 Serbian suspects. On February 19th with that of Islamists and nationalists) be- recent alleged coup attempt in Montene- the country’s state prosecutor accused Rus- cause the EU is too consumed with its own 1 The Economist February 25th 2017 Europe 45

The German left is back employment. The Social Democrats have AUSTRIA EU members HUNGARY turned against their own reforms, de- Candidates: nouncing a neoliberal turn towards lower Official Miraculous SLOVENIA wages and away from social justice. Be- Potential recovery tween 1998 and 2013 the number of people C Belgrade ROMANIA R voting forthe SPD almost halved, to 11m. O A T BOSNIA I Mrs Merkel shrewdly helped this trend A BERLIN A SERBIA along, employing a strategy of “asymmet- d Sarajevo Martin Schulz breathes new life into the r BULGARIA SPD i Nis ric demobilisation” to keep voters at a Mitrovica Social Democrats t home. Under the rubric of modernising i Pristina c Podgorica KOSOVO HE small branch office of Dilek Kolat, a her Christian Democrats, she poached S e SPD a Skopje TSocial Democratic ( ) politician in some leftist policies, such as eliminating ITALY MONTE- Tirana NEGRO MACEDONIA Berlin’s Friedenau district, is packed with the draft, scrapping nuclear power and en- locals who have turned up for a discussion acting a minimum wage. And she gov- ALBANIA on the topic “What is social justice?” After erned, from 2005 to 2009 and again since GREECE two hours the answer is, unsurprisingly, 2013, in a coalition with the Social Demo- 150 km unclear. But the crowd’s enthusiasm is un- crats that made them look to many voters dimmed. Many sense that Martin Schulz, like an indistinguishable centrist blob. 2 problems to pay attention to the region. the SPD’s candidate for chancellor, may ac- Such disheartened Social Democrats, The centre in Nis, established in 2012, is tually defeat Angela Merkel, the Christian many of them blue-collar workers, now helping to win friends. Russia had already Democratic (CDU) incumbent, in the elec- feel energised byMrSchulz. Hislanguage is helped to clear unexploded ordnance left tion on September 24th—and believe that earthy and simple, where Mrs Merkel’s is behind by NATO’s bombing during the if he does, social justice might be more often technocratic. His grizzled looks tes- Kosovo warof1999. In 2014 Russia used the than a matter forphilosophical debates. tify to a life of hardship and perseverance. centre to fly in emergency relief when Mr Schulz’s selection as candidate in In his youth Mr Schulz dropped out of high floods hit the region. Since then Russia has late January caused an extraordinary surge school, hoping to play professional foot- helped put out forest fires, provided tents in the polls (see chart). The SPD, currently ball. After a knee injury derailed that plan, for migrants and trained emergency re- the juniorpartnerin the coalition with Mrs he took to drink and even contemplated sponders. Between 2014 and 2017, this aid Merkel’sconservative bloc, nowrunsneck- suicide. But in 1980 he turned his life will total $40m. A recent poll showed that and-neck with it, each drawing just above around, becoming a teetotaller, a book- Serbs wrongly believe Russia is one of 30%. If Germans could elect their chancel- store owner and later the mayor of his their main benefactors, even though the lor directly, he would defeat Mrs Merkel small home town. more than €3bn ($3.16bn) that the EU has 49% to 38%, according to Forschungs- That history speaks to many voters. Mr provided since 2000 dwarfs Russian aid. gruppe Wahlen, a pollster. Schulz is “an alcoholic who fell from grace Last November, Russia gave Serbia six It is too early to tell whether this popu- but rose again”, says Jan Richter, one of ageing MiG-29 warplanes. This plays well larity is a “soap bubble” destined to pop, those attending the debate at Mr Kolat’s of- among Serbs, 64% of whom see NATO as a says Manfred Güllner of Forsa, another fice. He is “a man out ofreal life”, chimes in threat. Serbia’s annual military exercises polling firm. As the formerpresident ofthe Aurel Marx, who sports a beard and with Russian troops help reassure its pro- European Parliament, Mr Schulz is well- twirled handlebarmoustache and makes a Russian electorate, while the government- known in Brussels, but he is still fresh in living running an eight-room brothel. Mr friendly media plays down the more fre- Berlin, untainted by domestic politics. Schulz “has succeeded against the discrim- quent exercises with NATO. The two coun- Yet his effect has been to awaken the ination of society and now has the gall to tries have a free-trade agreement, though it base ofa party that, like its centre-left cous- say ‘I want to be chancellor.’ That rocks,” excludesSerbia’smostvaluable export, the ins elsewhere in Europe, seemed to have Mr Marx adds. cars manufactured at Fiat’s Serbian plant. lost its way. The SPD last won an election in The passion Mr Schulz inspires could This is a perennial source of irritation, and 1998, when Gerhard Schröder became make him a mobilisation machine. He has probably one reason why a long-promised chancellor. Mr Schröder implemented a already been hinting at a rollback of Agen- visit by Dmitri Medvedev, Russia’s prime batch of market-friendly labour and wel- da 2010. The left’s rising enthusiasm makes minister, has still not taken place. fare reforms. Today it is conservatives who Mrs Merkel’s strategy of asymmetric de- Moscow’s skilled influence-peddling laud this so-called “Agenda 2010” for mak- mobilisation impossible. Meanwhile, groups are certainly active. A recent study ing Germany competitive and slashing un- turning out her own base will be harder found 109 organisations devoted to pro- than usual. Many voters have yet to forgive moting good relations with Russia. All of her open-armed refugee policies in 2015, the country’s mainstream news outlets SPD-y ascent and the CDU’s conservative sister party in run stories by Sputnik, a state-controlled Germany, average voting intention by party, % Bavaria, the CSU, has spent much of the Russian news agency. Nationalist websites CDU/CSU AfD Greens past two years criticising her. glorify Russian military might and deni- SPD The Left FDP Mrs Merkel will probably start by wait- grate Albanians and the West; one recently 40 ing for Mr Schulz to make mistakes. As the lauded Vladimir Putin for “punching” campaign heats up, however, she will have Croatia by blocking certain imports. 30 to play to her party’s conservative base, But it is not clear what Mr Putin can do thinks Timo Lochocki of the German Mar- for his local admirers. Marko Jaksic, an ac- 20 shall Fund, a think-tank. If the bail-out of tivist in Mitrovica, a mostly Serbian town Greece, say, returns to the headlines, the in Kosovo, used to plaster posters of the 10 CDU could take a hawkish line, while the Russian leader all over town. But Russia more lenient Mr Schulz might emphasise has done nothing to help Kosovo return to 0 European solidarity. And on labour-mar- Serbian rule. “Serbs are always waiting for Nov Dec Jan Feb ket regulations, taxes and more, Germany 2016 2017 something from Russia,” he says, “but it is is in for a clearer ideological clash than in Source: National polls hoping against hope.” 7 any recent election. 7 46 Europe The Economist February 25th 2017 Charlemagne The Gryfs of Europe

Donald Trump wants Europe’s herbivores to spend more on defence fence spendingin real terms, to the delightofJensStoltenberg, the secretary-general. But some, particularly in Europe’s south and west, still balkat shelling out forwhat feel like distant threats. Their arguments are well trodden. The 2% target is mercilessly crude. Few would argue that Greece, which meets the goal partly because its economy has collapsed, has a more effective fighting force than Norway, which devotes a large share of its1.5% to R&D and sends hundreds oftroops to places like Afghanistan. The alli- ance hasnine specificmeasuresforrankingitsmembers, butthey remain classified and thus less politically potent than the 2% tar- get. Europe’s problems lie in fragmentation as much as resources; NATO’s European members spend over four times as much on defence as Russia, but use 27 different types of howitzer and 20 fighter aircraft. The European Parliament reckons that joining up the EU’s defence market could save €26bn ($27bn) a year. And so as the debate heats up, the herbivores are baring their wide, flat molars. Just before Mr Pence’s visit, Jean-Claude Juncker, the president of the European Commission, irritated some in NATO by urging the Europeans not to bow to American pressure. A more expansive understanding of security was need- ed, he suggested; add development to the mix and the Europeans HE triceratops had a gentle existence that belied its fierce ap- stackup rather better. Angela Merkel, the German chancellor, de- Tpearance, keeping to itself and maintaining a strict vegetarian livered a similar message, in more diplomatic terms, in Munich. diet. But in his neglected classic Tarzan the Terrible, EdgarRice Bur- Ifpayingforboreholesin Namibia ratherthan reconnaissance roughs conjured the Gryf, a horrifying dagger-toothed descen- drones in Lithuania sounds like special pleading to America, it dantofthe three-horned dinosaurthat roamed the African plains serves a distinct purpose in Berlin. Mrs Merkel needs a story to and snacked on the locals. Europe is contemplating a similar evo- persuade sceptical German voters of the wisdom of ramping up lutionarypath asitgetsto gripswith an American administration military spending from its current level ofjust1.2% ofGDP. Warm that has tired of playing T. Rex alone. Can the herbivorous power words about preserving security through non-military means of- of the past, which has long delighted in the soft tools of diplo- ferone. (Wolfgang Ischinger, head ofthe Munich conference, sug- macy, trade and aid, really transform itself into a slavering, gests a 3% target for military, development and humanitarian armed-to-the-teeth carnivore? spending.) “Europeanising” defence is another. Germany is pur- Donald Trump’s team has spent much of the last week in Eu- suing various security arrangements with other EU countries. Mr rope cleaning up the boss’s mess. At the Munich Security Confer- Juncker is backing an EU defence fund for common research and ence, James Mattis, the defence secretary, called NATO (which Mr procurement, and for capital spending to be excluded from the Trump had written off as obsolete) “the best alliance in the commission’s rules on fiscal deficits. Whatever helps the medi- world”. In Brussels, Mike Pence, the vice-president, assured his cine go down. audience of America’s “strong commitment” to the European Union, a club the president has dismissed as a “vehicle for Ger- Beware the German Gryf many”. Europeans remain baffled by the mixed messages ema- Mr Trump cannot be accused of expedience—he has attacked se- nating from Mr Trump’s administration. It is as if Henry Kissin- curity freeloaders fordecades. But he is hardly assured ofsuccess. ger’s old (and apocryphal) question about whom to call when he Germans in particular will chafe at devoting more money to a wants to speak to Europe has been reversed, quips Hans Kund- cause they dislike to please a foreign president they detest. Slam- nani, an analyst at the German Marshall Fund in Washington. ming American-inspired militarism could prove a useful cam- But on one issue the president is in full agreement with his paign tactic for Martin Schulz, a Social Democrat who wants to team. Like his predecessors, Mr Trump grouches that America’s thwart Mrs Merkel’s bid for re-election in September (see page NATO alliesare notpayingtheirbills. Onlyfourother countriesin 45). And grand talk about joint European procurement and oper- the 28-member alliance meet its target of spending 2% of GDP on ations could easily be stymied by pressure from national defence defence. Mr Trump’sthreat to withdraw America’s security guar- champions interested only in securing the next juicy contract. antee is probably a bluff. But he has other cards to play, including Indeed, Mr Trump’s warnings could even prove counter-pro- cuts to joint training programmes. Last week General Mattis ductive. Other European countries might grow nervous at the warned his fellow NATO defence ministers that continued Euro- emergence of Germany as a military superpower with serious pean miserliness might see America “moderate” its commitment expeditionary capabilities, should it choose to travel down that to the alliance. path. Furthermore, many countries will neverreach the 2% target. America is right to make these demands, say some ambassa- But threats from the White House could force them to hedge dors; in 2014 all 28 allies vowed to meet the 2% target within a de- against American withdrawal, notes François Heisbourg, a cade. Indeed, MrTrump ispushingat a partly open door. The long French security analyst. Make NATO conditional, and you force decline in European defence spending bottomed out in 2015. Rus- your partners into independence, and a foreign policy that may sia and terrorism have restored history to Europe, and economies not suit American interests. Even the gentle triceratops some- are growing again. Almost all NATO governments are raising de- times used its horns to charge predators. 7 Britain The Economist February 25th 2017 47

Also in this section 48 Farmers and Brexit 49 Bagehot: What next for Remainers?

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

Reducing immigration Britons continuingto quit the country each year. If settling in Europe becomes harder Keep out for Britons after Brexit, that may not hap- pen. Even if the rules are changed, the number of non-Britons settling each year, minus the number leaving, would have to fall to around 150,000. Net migration of family members and refugees is around 70,000. On February Lowerimmigration could yet impose a big economic cost afterBrexit 22nd the government largely prevailed in a ESPITE its vote to leave the European about three times the attendance at a Man- case in the Supreme Court, allowing it to DUnion, plenty of Europeans still seem chester United football match. Compared set tough income requirements on those keen to move to Britain: in eastern Euro- with their population, Ireland, Australia who want a loved one to join them. The pean cities such as Kiev and Chisinau leaf- and Canada see far more new arrivals. ruling’s wording, however, implies that lets promising “English visas” still flutter. But British concern about immigration tighteningthese rules furtherwill be tricky. Marion, a lawyer who recently moved to has little to do with raw numbers. Even in Meanwhile, reducing immigration by un- London from Paris, says that Brexit barely 1995, when net migration was well under skilled workers from outside the EU is diffi- featured in her decision. “I guess that emo- 100,000, two-thirds of Britons wanted it cult since it is almost non-existent, says tionally I still find Brexit hard to believe.” cut. No reference to immigration appeared Jonathan Portes ofKing’s College London. Britain’s government, however, is busy on the ballot paper, but politicians believe About half of the EU nationals emigrat- thinking ofways to keep them out. that the Brexit vote represented a desire to ing to Britain move into less-skilled jobs. Since June’s referendum result, many “take back control” of the country’s bor- Cutting that sort might reduce net migra- have wondered anxiously whether Britain ders. Since then Mrs May and Amber tion by EU workers to 50,000 (a slowing will remain part of the EU’s single market Rudd, the home secretary, have repeated a economy is already helping). Halving net after Brexit. The pound tumbled when long-standing commitment to cut annual migration of foreign students, say by re- Theresa May, the prime minister, said that net migration to the “tens ofthousands”. stricting the growth ofuniversities (though she planned to leave it. People have wor- That will be no easy task. The govern- that would hamper a lucrative industry), ried less, however, about the economic im- ment will have to count on about 50,000 might reduce it to 50,000. But that might pact ofthe government’s post-Brexit immi- still leave total net migration at around gration policy. This is strange: the impact of 150,000. Ifthe government is serious about slashing the number of foreigners allowed Up and away hitting its tens-of-thousands target, it may into Britain could be as serious as anything Britain, long-term international migration, ’000 have to restrict skilled migration. that could happen to trade. That would sit oddly alongside its re- 800 In the year to September net migration Immigration cent white paper on Brexit, which prom- (immigration minus emigration) was un- 600 ised to “encourage the brightest and the der 300,000, split about evenly between 400 best to come to this country”. And it would EU and non-EU folk. Ithasbeen high by his- weaken Mrs May’s negotiating hand. In 200 torical standards (see chart) since the Net migration + 2015 combined net migration from Ameri- mid-2000s, when citizens from new, 0 ca and India was about 30,000. Cutting – poorer EU members acquired the right to 200 that would be awkward forthe prime min- move to Britain. ister, who is desperate to strike post-Brexit 400 Despite the continuing influx, net mi- Emigration trade deals with both. gration into Britain is hardly out of control, 600 How would the economy cope if the at least compared with other rich coun- 1970 75 80 85 90 95 2000 05 10 16 tens-of-thousands target were reached? tries. On average annually it amounts to Source: ONS Firms reliant on foreigners are worried.1 48 Britain The Economist February 25th 2017

2 Food manufacturers are vulnerable: 40% cruitment are so long that she is already of such workers are non-British. Skilled in- worrying about next year’s harvest, never dustries would also suffer: a quarter of sci- mind this year’s. entific researchers are foreign-born. With a tight labour market, few locals It may be for that reason that David Da- are available to pick fruit. Instead, farmers vis, the Brexit secretary, this week hinted have proposed a revival of the Seasonal that Britain is not about to shut the door Agricultural Workers Scheme, which even on unskilled EU migrants. OtherBrex- granted temporary visas but ended in 2013, iteers, however, counter that ending the extending it to both EU and non-EU work- supply of cheap workers would shake up ers. Butthe agriculture secretaryand prom- Britain’s business model for the better. inent Brexiteer, Andrea Leadsom, refused Firms would invest in labour-saving tech- to make any promises about the prospects nology, boosting Britain’s low productivi- for such programmes when she spoke at ty. One study ofAmerican tomato-growers the NFU’s annual shindig in Birmingham finds some evidence to support this thesis. on February 21st. Hoping for clarity, the de- If productivity rose, those workers left be- legates were disappointed by Ms Lead- hind mightsee higherwages. Britonsmight som’s reticence. also see less competition forjobs. Indeed, she seemed determined to give But these effects are likely to be small. If as few details as possible about the govern- the benefits of investing in technology ment’sintentions. Minette Batters, the dep- were so great, bosses should have already uty head of the NFU, complains that done so. And many jobs—such as care “Brexit concerns every aspect of farming, work—are not easily performed by robots. Agriculture and Brexit but we still have no idea what the plan is.” In these industries, many firms will either Trade is a good example. The latest figures become less profitable or go under. Picking fights show that sales of British agricultural pro- Few economists see lower immigration ductsto developingcountriessuch as India leading to a wage bonanza for locals. One are growing. But the EU remains a crucial paper calculates that cutting migration to market; it takes most of Britain’s lamb and the tens ofthousands could boost wages in BIRMINGHAM mutton exports, for instance. industries most affected by it by an imper- Farmers worry that the government Farmers may be among the first to feel ceptible 0.2-0.6% by 2018. might concede access to Britain’s domestic the effects ofBrexit And these tiny increases would be agricultural market in return for other dwarfed by a slowdown in the widerecon- F THE Church of England is the Conser- countries opening up their services sectors omy. According to research by Katerina Li- Ivative party at prayer, then the National to British banks, or their vehicle markets to senkova of Strathclyde University, annual Farmers’ Union (NFU) is the party at work. car exports. For all its political clout and net migration of 100,000 would lower Unlike the prelates, however, farmers are stewardship of the land, agriculture con- GDP perperson by1% in the longterm. Oth- already grappling with the adverse conse- tributes less than 1% of GDP; manufactur- ers reckon the economic cost of lower mi- quences of the referendum vote last June ing and financial services contribute 10% gration could match that of the hit to trade to leave the European Union. Worryingly each. Even as they see Ms Leadsom offer- from Britain leaving the single market. for them, Theresa May’s government ing them no reassurances on labour or The biggest loser from slashing immi- seems in no rush to help. Concerns are trade, farmers are watching the prime min- gration would be the public finances. Na- mounting among this core Tory political ister making post-Brexit promises to the tive Britons are ageing rapidly; the number constituency that agriculture might turn bosses offoreign car firms based in Britain. who are ofworkingage is shrinking. When out to be the patsy in the much-touted Most concede that their business could counting only native-born folk, Britain has post-Brexit trade deals. be more efficient. That would reduce their a higher “old-age dependency ratio” (the The greatest anxiety for farmers, and dependence on cheap foreign labour. number of elderly people as a share of the food industry as a whole, is about ac- Automated milking and drones are in those of working age) than that of many cess to labour. The food-processing indus- vogue at the moment. But delicate fruits European countries, including France, and try is dependent on EU migrants; they rep- will have to be picked by hand forthe fore- it is worsening fast. This drives up spend- resent 120,000 of its 400,000 workers. seeable future. Potatoes are picked by ma- ing on health care and pensions. Horticultural and fruit farmers also rely chines but actual people have to sort them As it stands, the flow of people into and heavily on both permanent and seasonal to check their quality before they can be out of Britain tilts the numbers favourably, workers from the rest ofthe EU, to pickpro- sold to supermarkets. Farmers are uncer- improving the dependency ratio. Britain duce from strawberries to apples. They re- tain whether to invest heavily in new tech- exports old, creaky people and imports quire about 85,000 workers annually to nology at the same time as they face the young, taxpayingones. More than 100,000 harvest their crops. Alison Capper, an ap- withdrawal of £3bn ($3.74bn) worth of EU British pensioners live it up in sunny ple farmer in Herefordshire, employs five subsidies, another subject on which Ms Spain; meanwhile, up to 100,000 working- full-time staff but 70 more seasonally; last Leadsom was quiet this week. age Spaniards brave the British cold. year all 70 came from abroad. The NFU Wearied by decades of excessive EU With low net migration, Britain’s elder- claims that the effects of Brexit are already regulation, probably a majority of farmers ly would be more burdensome. Workers being felt. The percentage of foreign EU voted for Brexit. But now that reality is be- would need to be taxed more heavily to workers recruited in the sector who failed ginning to bite, farmers argue that the time pay for care for their elders. The govern- to turn up forjobs they had already accept- has come for the Tories to repay some of ment’s fiscal watchdog suggests that by the ed rose from a paltry 2% at the beginningof the loyalty that rural Britain has shown mid-2060s, with annual net migration of 2016 to a worrying 8% by September. them. They might not matter much in about 100,000, public debt would be Some European workers may be put off terms of simple economics, but farmers roughly30 percentage pointshigherthan if by the fall in the pound; others are anxious should start getting bolshie like the French that figure were 200,000. Taking back con- about their immigration status in Britain. if Brexit becomes too damaging, says Ms trol comes with a whopping bill. 7 Ms Capper says that the lead-times on re- Batters. Tractors, to the barricades. 7 The Economist February 25th 2017 Britain 49 Bagehot Rebuild, and they will come

To win Britain’s next EU referendum, Remainers must move on from the last hurt living standards. The promises of bonus billions for public services will come to look like a bad joke. These are the makings of “Bregret”. Mr Blair is merely proposing to help that process alongand, ifhe succeeds, to carryoutthe will ofa now anti-Brexit public and stop the whole process. Bagehot can reasonably dis- agree only with his timing. Replace “stop” with “reverse” and you have a sensible political strategy. There are two problems. First, the Remainers are divided. Those who stood together during the referendum campaign last summer have fragmented into five groups which, to Brexiteers, look uncannily and unfairly (because they are not progressing) like the five stages of grief. The first is denial: public figures like A.C. Grayling, a philosopher, who simply seek to stop Brexit in its tracks. The second is anger: Mr Blair and others who accept the referendum result but want to stop Brexit by changing opinions. The third is bargaining: those Remainers who, like many of those who spoke up this week in House of Lords debates, accept that it will happen but want to moderate it or at least placate their Remainer supporters by grumbling. Many of these middle- grounders resented Mr Blair’s speech as an unhelpful polarisa- tion of the debate. The fourth category corresponds to depres- URING his unsuccessful campaign to become president of sion: thatsegmentofpolitical opinion sure thatBrexit will be “po- Dthe European Council in 2009, Tony Blair’s acolytes would tentially catastrophic” (as Margaret Beckett, a former foreign boast that their man could “stop the traffic” in capitals. He was secretary, put it) but convinced that little can be done. The fifth is box office, he could turn heads, he could make people listen. In a acceptance: the stage attained most comprehensively by Mrs speech in London on February 17th the unpopular former prime May, who opposed Brexit but is now enacting it in its harshest minister proved he still has that quality. Where other pro-Euro- form. Even discardingthe last ofthese scattered tribes, what hope pean politicians waffle and prevaricate, he was crisp and frank: is there ofuniting them into a force that can push back Brexit? Brexit will be terrible forBritain, it cannot come “at any cost”, vot- The second problem is that many Remainers—of all descrip- ers were “without knowledge of the terms” when they cast their tions—are still living last year’s referendum. For those who think ballots. Mr Blair’s intervention elicited a tsunami of furious re- Brexit should proceed with limited opposition, that vote is al- sponses from bulge-eyed Brexiteers seemingly opposed to his most all that matters in British politics today. For those who think very right to speakout. They protested too much. Brexit should be smashed, it was a festival of deceit and demo- To be sure, the speech was politically unrealistic. The pros- craticinfamythatmustbe overcome. Both are wrongin their way. pects of the electorate being moved to “rise up” against Brexit in The accepters should not abandon the anti-Brexit arguments the coming months are low. The Labour Party, from right to left, is they put with such gusto during the referendum campaign. The catatonic. The Liberal Democrats and the Scottish National Party, opposers should not assume that voters will simply admit they though robustly anti-Brexit, are small. Remainers on the Conser- were wrong about Brexit: shifting opinions is slow work. vative benches are mostly cowed and Theresa May is resolute. So Remainers must embark on a giant job of consolidation, Public opinion will probably move slowly, however disastrous melding together their agendas, groups and goals. They must be the Brexit negotiations seem once the prime minister starts the realistic about the immediate future and ambitious about the two-year process on March 9th. Voters do not tend to conclude long term. Yes, push for the softest possible Brexit now, but aim that they were “wrong”; often they are too busy with theirlives to over the following years to negotiate a newly close relationship notice that their opinions are changing and simply reimagine with the rest of the EU; perhaps gradually rejoining the single their original position. Polls in 2003 showed a majority for Brit- market or, one day, rejoining the union altogether. ain’s involvement in the Iraq War, but most people today recall having opposed it at the time. More likely in the short term is that Keep stopping the traffic the negative effects of Brexit—an investment exodus, say—will be In other words, Remainers need to disengage from the last battle, laid at the door of“Remoaners” who “talkthe country down”. the referendum, before they engage with the next, however hard Yet despite this, and MrBlair’sundoubted political toxicity, his it is to predict when this will come. In practice that means build- argument was important. This was the first big occasion on ingthe foundationsofthe next “In” campaign: popularisingyard- which a top politician had argued that Brexit should not happen sticks by which Brexit’s success (or otherwise) may be measured, despite the vote. Critics dismiss this as proof that the private-jet- setting expectations of Britain outside the EU, running single-is- bound Mr Blair is out oftouch. But his logic was sound. The refer- sue campaigns that raise the salience ofthe issues at stake (invest- endum result, now treated as a sacred unquestionable in West- ment, the benefits of migration, international influence), holding minster, isonlyasdurable and bindingasthe political realityit ex- Brexiteers to account for the commitments they make, gathering presses. And the reality of Brexit may well change this. e-mail addresses and nurturingthe networks that might, once the Anti-immigration voters will not be satisfied by whatever door- time is right, take Britain backinto the European fold. Ifthe public slam Mrs May achieves. The economic dislocation of pulling out is to turn against Brexit, it will ultimately do that on its own terms. of the EU’s single market, combined with the falling pound, will The taskofconvinced Remainers is to be ready. 7 50 International The Economist February 25th 2017

The last diamond mine synthetic ones mostly used in industry— were formed more than 1bn yearsago deep The future of forever below cratons, the oldest part of contin- ents. There, between Earth’s core and its crust, the pressure was high enough and the temperature low enough for carbon to crystallise into its hardest form. There dia- NORTHWEST TERRITORIES, CANADA monds would have remained were it not for molten rock rushing through the man- Production ofthe world’s most valuable gem may be about to peak tle and drawing diamonds, garnets and AHCHO KUÉ is too far north for trees. decade. De Beers has no plans foranother. other minerals with it, like a furious river GIn the few snowless months, its sur- It is a turning-point for one of the pulling dirt from its banks, before erupting roundings in Canada’s Northwest Territo- world’s oddest industries. The diamond through Earth’s surface faster than the ries resemble a sprawling archipelago, as business gained its sparkle around 1866, speed ofsound. much lake as land, dark ponds stretching when a farmer’sson picked up a glistening Some of the gems settled in river beds, flat to the horizon. Wolverines roam, as pebble on the bank of the Orange river in as in Brazil, or were swept to the coast, as in well as bears, foxes, hares and caribou, South Africa. Formostofthe next150 years, Namibia. Others remained encased in ex- though the herdshave dwindled. There are De Beers would dominate the global mar- tinct volcanoes, or pipes, and ended up no roads, no pipes, no electricity cables. So ket. Success depended on manipulated buried under soil or lakes. De Beers’s rich- it seems strange when, flying over the tun- supply and skilfully cultivated demand. est diamond mine was found beneath dra, a giant truck appears, then another, sand in Botswana in 1972, within the Kaap- then a steel factory, rows of trailers and a Square-cut or pear-shaped vaal craton that spans southern Africa. big grey pit, deepening by the day. Much has changed since then. De Beers Speculation that diamonds might be De Beers, the world’s biggest diamond can no longercontrol the market. Though it found in Canada dates from the 19th cen- company, marked the opening of its Gah- is the biggest producer by value, it accounts tury, when gems were found studded cho Kué mine in September. Local indige- for only a third of global sales, down from through the American Midwest. In 1888, nous leaders prayed for the mine, beating 45% in 2007. It faces many uncertainties, the year Cecil Rhodes founded De Beers in drums. Bruce Cleaver, the firm’s chiefexec- from synthetic diamonds to changing rela- South Africa, a 22-carat stone was un- utive, and MarkCutifani, the bossof itspar- tionships with polishers and cutters. Its earthed near Milwaukee. Glaciers, it was ent company, Anglo American, stood by a loosening grip is reflected in increased vo- posited in 1899, might have carried the dia- ceremonial fire, flames tilting in the wind. latility: its sales fell 34% in 2015, before monds south. It was decades before explo- Now the hard work is under way. The bouncing back by 30% last year. Mean- ration took off. De Beers began quietly area is so sodden that staff bring in heavy while the source ofthe demand that drives scouring Canada in the 1960s, but it was supplies just once a year, in the depths of sales—the link between diamonds and not until 1991 that BHP, one of its rivals, winter, when they can build a thickroad of love—looks weaker than it used to. found kimberlite, an igneous rock, with ice (pictured above). Acaravan bearing fuel But one forecast seems solid: there will enough diamonds to merit a mine. Within and equipment is slowly crossing the tun- be fewer new diamonds. De Beers contin- three years more than 100 companies had dra. At the mine, their colleagues are work- ues to seek new places to mine, but has fanned out across the wilderness, rushing ingdayand nightto ramp up to full produc- slashed its exploration budget. Another to claim some 200,000 square kilometres. tion, with the aim of extracting more than big find is unlikely. The supply of new dia- At Gahcho Kué, geologists used aerial sur- 12,000 carats (2.4kg) ofdiamonds each day. monds is expected to peak in the next few veys and soil sampling to follow trails of Gahcho Kué is an astonishing endeavour, years, before beginning a slow decline. minerals backto their kimberlite pipes. the biggest new mine in the world in over a Natural diamonds—as opposed to the The objects of these frenzied searches 1 The Economist February 25th 2017 International 51

2 have intrinsic value for scientists. Gems orably, “a diamond is forever”—and invent- deemed flawed by jewellers interest them ed social rules, urging men to spend two Little pets get big baguettes most: inclusions in diamonds can carry months’ pay on a gift for their affianced. Global rough-diamond sales, $bn samples from hundreds of kilometres be- That benchmark not only permitted high Rio Tinto Dominion Petra low the surface. Evan Smith, a scientist at margins, but suppressed the second-hand Diamond Diamonds the Gemological Institute of America, re- market—to the benefit of both the firm and 18 cently studied inclusions in shards cut its customers, who could be reassured 15 from diamonds of unusual size and quali- their investment would hold its value. Other ty. Hisfindings, reported in Science, a jour- The marketing worked. In 1939, 10% of 12 nal, are the first proof that the deep mantle American brides received a diamond en- ALROSA 9 is peppered with metallic iron—a clue to gagement ring. By the end of the century the long-ago chemical reactions that 80% did. The result was a unique industry, 6 shaped Earth. controlled by a single company that was De Beers 3 But diamonds’ principal value has both marketer and miner, a capital-inten- nothing to do with science. They have long sive business built on an ephemeral link to 0 2007 08 09 10 11 12 13 14 15 been revered for their beauty—in Septem- love, its success due to strangled supply Source: Bain & Company ber Mr Cutifani reminded Gahcho Kué’s and inflated demand. visitors that the ancient Greeks regarded But by the 1990s De Beers’s grip had diamonds as the tears of the gods. Their started to loosen. The Argyle mine in Aus- Both countries share the proceeds from modern status, though, is a corporate cre- tralia left the De Beers cartel in 1996, fed up sales of diamonds mined within their bor- ation, a story inextricably linked with that with the giant’s terms. New discoveries in ders, and can also sell some diamonds in- ofDe Beers itself. Canada, a civil war in Angola and the col- dependently, enabling them to test the Diamonds had been rare before 1866; lapse of the Soviet Union all made supply prices that De Beers is getting and further the South African finds threatened to send harder to manage, meaning that more dia- loosening the firm’s control over supply. prices plunging. Rhodes founded De Beers monds were sold outside the cartel. Con- Even in countries where De Beers does to consolidate the area’s mines and to re- cern that diamond sales were financing Af- not have a joint venture with the govern- strict sales. By his death in 1902, the firm ac- rican conflicts threatened the gem’s image. ment, it depends on local co-operation. counted for90% ofthe world market. More In 2000 De Beers said it would no longer Winning government approval for Gah- discoveries were made in the 20th century, control the market so strictly, but sell in- cho Kué required more than 15,000 pages notablyin Siberia in the 1950s, Botswana in stead to vetted buyers. Legal settlements in of environmental reviews. The firm want- the 1960s and Australia in the 1970s. But De America and Europe followed, barring the ed to expand a mine in Ontario, but a near- Beers kept tight control of supply, both by company from monopolistic behaviour. by indigenous group withheld its consent. owning mines and by buying diamonds De Beers is adjusting to the new era. Its The limits of De Beers’s power have from others. first challenge is an unfamiliarone: to grap- been revealed in the past two years. De- ple with competitors. ALROSA, Russia’s mand slumped in China in late 2014, All I need to please me state-owned diamond company, produces prompting retailers to buy fewer polished That alone would not have turned De more stones than De Beers, though it earns diamonds. Companies that cut and polish Beers into an empire. As essential was its less (see chart). New firms have cropped stones became weighed down by excess scheme for conjuring up demand. In 1938 up, too, some buying mines from De Beers inventory. But the tools De Beers once the company, then led by the Oppenhei- as it sought to shore up its balance-sheet. used to use to prop up prices were no lon- mer family, hired N.W. Ayer, an advertising De Beers’s partners, meanwhile, have ger at hand. There are legal restrictions on agency in New York, to coax Americans to become more demanding. Botswana’s the share of excess diamonds it may buy. buy more rocks. It dreamed up the notion government owns 15% of the firm; South Because it controls just one-third of the that a diamond ring should be an essential Africa’s state investment fund owns 14.5% market, any production cuts have limited display of love and status, its gift a rite of of Anglo American. De Beers’s mining op- effect on total supply. In fact, the firm may passage. In the ensuing decades De Beers erations in Botswana and Namibia are even have made matters worse. Contracts and its marketers penned slogans—mem- joint ventures with the governments there. with its customers sometimes encourage them to overpurchase—if they turn down too many of the stones De Beers offers Global diamond production them, they risk being allocated a smaller Carats, m share in future. Russia r i a There are signs of recovery. Bain, a con- Gahcho i b e Kué mine S sultancy, estimates that rough-diamond 2016* Canada 13.6 total 40.8 sales rose by 20% in 2016. De Beers is be- coming more flexible, easing rules for buy- ers ofits stones. More frequent reporting of its sales should help investors understand Other 1.7 the business. It also signals to competi- Congo 16.0 tors—withoutengagingin collusion—when the market is deteriorating, enabling them Angola 8.8 2.6 Zimbabwe 2007-16* to adjust accordingly. “The value of trans- Carats, m Namibia 1.6 Botswana 21.7 Australia parency will come to exceed the value of 50 secrecy,” argues Fraser Jamieson of J.P. 7.8 13.9 South Africa Morgan, a bank. Even so, excess inventory 25 25 may yet drag down the market. Some jew- Russia ellers have recently reported slacksales. 0 0 Mr Cleaver, an Anglo American veter- 2007 16 BotswanaCongo AustraliaCanada Angola South Zimbabwe Namibia Other Africa an, became the boss of De Beers in July. Source: Bain & Company *Estimate “The fundamentals of the industry remain 1 52 International The Economist February 25th 2017

2 very good,” he says. In the coming years, 2015 De Beers and other miners formed a company’s Canadian exploits are a re- he thinks, De Beers will benefit from rising group to pool money for generic diamond minder of just how arduous new mines incomes, particularly in China and India. advertisements. Its first campaign ran in can be. Mountain Province, a firm that Its own research shows that diamonds still America before Christmas, with the slogan now works with De Beers, discovered capture the imagination: 26% of young “Real is rare”. YouTube videos show Nick Gahcho Kué’s first pipe in 1995. The inter- American brides say they dreamed about Cannon, best known as the ex-husband of vening years brought a separate, failed their future engagement rings years before Mariah Carey, a singer, interviewing cou- mine for De Beers in Canada, lengthy ne- beginning a relationship. ples about their engagements. gotiations with local officials and, at last, But a long-term risk looms over the in- It is unclear if this will persuade young the construction ofGahcho Kué itself. dustry: one dayyoungcouplesmayno lon- romantics to spend thousands on dia- That required draining part of a lake. To ger want diamonds at all. They are a “Veb- monds. If synthetics grow in popularity, bring in building supplies, the company len good”, as items that gain their value De Beers may need to become more ag- had to build the winter road. Staff would solely from their ability to signal status are gressive. Already,it is suing a synthetic-dia- plough snow off a pond, drill through thin named, after Thorstein Veblen, an econo- mond company in Singapore forinfringing ice, then pump up water to make the ice mist who wrote about the spending of the its intellectual property. Its own synthetic- thicker, laying down a few inches at a time. rich. For Veblen goods, the normal law of diamond operation, for industrial uses, This was repeated over120km, at tempera- supply and demand does not hold: higher holds more than 450 patents. tures often plunging to -40°C, until the ice prices support demand, rather than sup- As the company works to shore up de- was thick enough to support a 500-tonne pressing it. If a big gap opens up between mand, there is a source ofsolace. For over a mining shovel, broken into dozens of the number of diamonds offered for sale century it has fretted that big new finds pieces. In total, building Gahcho Kué cost and the number of people willing to buy $1bn. That was deemed worthwhile, com- them at high prices, diamonds could suffer pared with the costs of finding and open- a big, sustained fall in value and the entire ing a mine elsewhere. business could cease to make sense. Other companies have a few mines Today’s 20- and 30-somethings grew up planned. De Beers is now focused on ex- as De Beers lost its monopoly and, wary of panding existing mines, not building new helping competitors, cut spending on the ones. New technologies may help liberate advertising that had done so much to more diamonds from kimberlite more effi- create demand for diamonds in the first ciently. Even so, Bain estimates, production place. In recent years the company’s mar- will peak in 2019. Supplies of new dia- keting budget accounted for roughly 1% of monds will then start to fall, sinking by sales, down from about 5% in the1990s, ac- 1-2% each year until 2030. cording to Morgan Stanley. At the same For now, aircraft shuttle staff to Gahcho time the notion of“conflictdiamonds” per- Kué, dropping off miners to work for two- colated through the popular conscious- week stretches. Nearly half the staff are lo- ness—a movie called “Blood Diamond”, cals, and a fair share are indigenous. “We starring Leonardo DiCaprio with a Zimba- want jobs, just like everybody else,” says bwean accent, wasreleased in 2006. Young Eddie Erasmus, grand chief of the Tlicho couples, who earn less than their parents people. Among the mine’s maze of trailers did at their age, may prefer to spend their are features typical of any big-company money elsewhere. workplace. There is a gym. Signs in the caf- Complicating matters, those who do eteria remind staff to eat fruits and vegeta- want a diamond now have an alternative. bles, though many preferheartier fare. Rob Synthetic diamonds have been available Coolen, who oversees the ice road, began for decades, but only recently has the pro- Get that ice or else no dice work at Gahcho Kué before the mine was cess become cheaper and the result more built, sleeping in a tent on the tundra. Cof- refined. In 2015a company called New Dia- would lead to plunging prices. “Our only fee and bacon, he says, are essential. mond Technology made a ten-carat pol- risk,” Rhodes declared, “is the sudden dis- The cafeteria sometimes shudders with ished diamond of excellent quality, an un- covery of new mines, which human na- the reverberations of a blast from the pit. precedented feat. Sales of synthetic ture will work recklessly to the detriment Outside, work goes on day and night. Staff diamonds are thought to amount to just 1% ofus all.” But it seems that threat is waning. pile kimberlite onto huge trucks, then haul ofthe rough-diamond market. But synthet- In total, explorers have sampled fewer the rocks to the processing plant. There, the ic-diamond sellers are appealing to young than 7,000 kimberlite pipes. Of these just ore passes through breakers, crushers and shoppers’ concerns for social and environ- 15% have held diamonds and just1% (about scrubbers until pebbles are sent through a mental causes—Diamond Foundry, backed 60) have held enough of them to justify series of X-rays and lasers, jets of air sepa- by MrDiCaprio, boasts that its products are building a mine. De Beers continues to ex- rating diamonds from worthless stones. “as rock-solid as your values”. plore in Canada, South Africa, Botswana So De Beers is trying to boost the allure and Namibia—the only thing worse than When love’s gone, they’ll lustre on of natural gems. “Long-term demand is finding a big new source would be some- No workers at Gahcho Kué touch the dia- only going to be there if we continue to one else finding it first. Some fancy tech- monds with bare hands. Only a few see generate it,” says Mr Cleaver. That means nology is supposed to help. A “Supercon- the gems before they are sent off by plane studying consumers; few other firms ob- ducting Quantum Interference Device”, to be valued. In September Mr Coolen sess over both mining-truck depreciation for example, searches for changes in mag- stood atop a steel grate in the processing and romance among young Chinese. netic fields below Earth’s surface, which plant, the platform shaking as giant scrub- It also means new advertisements. might indicate the presence ofkimberlite. bers churned beneath. “Occasionally you Some centre on De Beers’s Forevermark But De Beers regards any big discover- see one,” he shouted above the din, “and brand, a tiny code etched in a diamond ies, by itself or anyone else, as unlikely. it’s just gorgeous.” The mine is expected to that explains the gem’s provenance. Other “The best and easiest deposits are already reach full production in March. By 2030, its spending is for the industry as a whole. In found,” says Des Kilalea, an analyst. The diamonds extracted, it will close. 7 Business The Economist February 25th 2017 53

Also in this section 54 3G’s model for consumer firms 55 Independent film 55 Toy companies in Japan 56 Housing India’s upwardly mobile 57 Paris’s digital scene 58 Schumpeter: Tech valuations

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

The semiconductor industry quickly enough to be able to handle, for in- stance, machine learning and other AI ap- Silicon crumble plications, which require huge amounts of data and hence consume more number- crunching power than entire data centres did just a few years ago. Intel’s customers, SANTA CLARA such as Google and Microsoft together with other operators of big data centres, How the rise ofartificial intelligence is creating new variety in the global chip are opting for more and more specialised market, and trouble forIntel processors from other companies and are E ALMOST went out of business computers in data centres), one kind of designing their own to boot. “Wseveral times.” Usually founders microprocessor, known as a “central pro- Nvidia’s GPUs are one example. They don’t talk about their company’s near- cessing unit” (CPU), could deal with most were created to carryoutthe massive, com- death experiences. But Jen-Hsun Huang, “workloads”, as classes ofcomputing tasks plex computations required by interactive the boss of Nvidia, has no reason to be coy. are called. Because Intel made the most video games. GPUs have hundreds of spe- His firm, which develops microprocessors powerful CPUs, it came to rule not only the cialised “cores” (the “brains” of a proces- and related software, is on a winning market for PC processors (it has a market sor), all working in parallel, whereas CPUs streak. In the past quarter its revenues in- share ofabout 80%) but the one forservers, have only a few powerful ones that tackle creased by 55%, reaching $2.2bn, and in the where it has an almost complete monopo- computing tasks sequentially. Nvidia’s lat- past 12 months its share price has almost ly. In 2016 it had revenues ofnearly $60bn. est processors boast 3,584 cores; Intel’s quadrupled. This unipolar world is starting to crum- server CPUs have a maximum of28. A big part of Nvidia’s success is because ble. Processors are no longer improving The company’s lucky breakcame in the demand is growing quickly for its chips, midst of one of its near-death experiences called graphics processing units (GPUs), during the 2008-09 global financial crisis. which turn personal computers into fast New chip on the block It discovered that hedge funds and re- gaming devices. But the GPUs also have Global sales revenue CPU* GPU† search institutes were using its chips for new destinations: notably data centres % change on a year earlier new purposes, such as calculating com- where artificial-intelligence (AI) pro- 40 plex investment and climate models. It de- grammes gobble up the vast quantities of veloped a coding language, called CUDA, computing power that they generate. 20 that helps its customers program its proces- Soaring sales of these chips (see chart) + sors for different tasks. When cloud com- 0 AI are the clearest sign yet of a secular shift in – puting, big data and gathered momen- information technology. The architecture 20 tum a few years ago, Nvidia’s chips were of computing is fragmenting because of 2012 13 14 15 16 just what was needed. the slowing of Moore’s law, which until re- Every online giant uses Nvidia GPUsto cently guaranteed that the power of com- Share prices, January 1st 2012=100 give their AI services the capability to in- puting would double roughly every two 1,000 gest reams of data from material ranging Nvidia years, and because of the rapid rise of 750 from medical images to human speech. cloud computing and AI. The implications The firm’s revenues from selling chips to for the semiconductor industry and for In- 500 data-centre operators trebled in the past fi- tel, its dominant company, are profound. Intel 250 nancial year, to $296m. Things were straightforward when 0 And GPUs are only one sort of “acceler- Moore’s law, named afterGordon Moore, a 2012 13 14 15 16 17 ator”, as such specialised processors are founder of Intel, was still in full swing. Sources: IDC; *Central processing unit known. The range is expanding as cloud- †Graphics processing unit Whether in PCs or in servers (souped-up Thomson Reuters computing firms mix and match chips to 1 54 Business The Economist February 25th 2017

2 make their operations more efficient and Intel is expected also to combine its CPU’s stay ahead of the competition. “Finding with Altera’s FPGAs. the right tool for the right job”, is how Urs Predictably, competitors see the future Hölzle, in charge oftechnical infrastructure differently.Nvidiareckonsithasalreadyes- at Google, describes balancing the factors tablished its own computing platform. offlexibility,speed and cost. Many firms have written AI applications At one end ofthe range are ASICs, an ac- that run on its chips, and it has created the ronym for “application-specific integrated software infrastructure for other kinds of circuits”. As the term suggests, they are programmes, which, for instance, enable hard-wired for one purpose and are the visualisations and virtual reality. One de- fastest on the menu as well as the most en- cades-old computing giant, IBM, is also try- ergy-efficient. Dozensofstartupsare devel- ingto make Intel’slifeharder. Takinga page oping such chips with AI algorithms al- from open-source software, the firm in 2013 ready built in. Google has built an ASIC “opened” its processor architecture, which called “Tensor Processing Unit” for speech is called Power, turning it into a semicon- recognition. ductor commons of sorts. Makers of spe- The other extreme is field-programma- cialised chips can more easily combine ble gate arrays (FPGAs). These can be pro- their wares with Power CPUs, and they get grammed, meaning greater flexibility, asayinhowthe platform develops. which is why even though they are tricky Much will depend on how AI develops, to handle, Microsoft has added them to says Matthew Eastwood of IDC,amarket many of its servers, for instance those un- researcher. Ifit turns out not to be the revo- Rejected suitor derlying Bing, its online-search service. lution that many people expect, and ush- “We now have more FPGAs than any other ers in change for just a few years, Intel’s ble. Butthe episode doesn’tspell the end of organisation in the world,” says Mark Rus- chances are good, he says. But if AI contin- its model. More deals are likely. And Kraft sinovich, chief technology officer at Azure, ues to ripple through business fora decade Heinz is already changing how Unilever the firm’s computing cloud. or more, other kinds ofprocessor will have and other rivals operate. more of a chance to establish themselves. Times are hard for big consumer com- Time to be paranoid Given how widely AI techniques can be panies, once among the world’s most sta- Instead ofmaking ASICS orFPGAs, Intel fo- applied, the latter seems likely. Certainly, ble. Shoppers increasingly want products cused in recent years on making its CPU the age of the big, hulking CPU which han- they deem healthier, more natural or “au- processors ever more powerful. Nobody dles every workload, no matter how big or thentic”. New competitors have emerged expects conventional processors to lose complex, is over. It suffered, a bit like online. In middle-income markets, local their jobs anytime soon: every server Humpty Dumpty, a big fall. And all of In- actors are gaining ground fast—in Brazil, needs them and countless applications tel’s horses and all of Intel’s men cannot Botica Comercial Farmacêutica peddles have been written to run on them. Intel’s put it together again. 7 nearly 30% of perfume, says RBC Capital, sales from the chips are still growing. Yet an investment bank, and in India Ghari In- the quickening rise of accelerators appears dustries sells more than 17% ofdetergent. to be bad news for the company, says Alan 3G’s model Food companies are experiencing a Priestley ofGartner, an IT consultancy. The particularly sudden shift. The volume of more computing happens on them, the Barbarians at the products sold by big American food firms less is done on CPUs. has dropped even as they have cut prices One answeristo catch up bymaking ac- plate for consumers, notes Alexia Howard of quisitions. In 2015 Intel bought Altera, a Sanford C. Bernstein, a research firm. This maker ofFPGAs, for a whopping $16.7bn. In month General Mills and J.M. Smucker, August it paid more than $400m for Ner- two food manufacturers, lowered their es- The investors who own KraftHeinz are vana, a three-year-old startup that is devel- timates for future revenue. Nestlé, a Swiss upending the food industry oping specialised AI systems ranging from food giant, has just abandoned an overly software to chips. The firm says it sees spe- orge Paulo Lemann (pictured), a Brazilian ambitious sales target which it had missed cialised processorsasan opportunity, nota Jinvestor, is ill-accustomed to failure. On forfouryears in a row. threat. New computingworkloads have of- February 17th Kraft Heinz, backed by Mr 3G offers a simple answer: slash costs ten started out being handled on special- Lemann’s3G Capital, said it had bid $143bn and merge. Its best-known strategy, “zero- ised processors, explains Diane Bryant, for Unilever, a maker of food and personal based budgeting”, requires managers to who runs Intel’s data-centre business, only products. 3G has gobbled many a consum- justify their expenses from scratch every to be “pulled into the CPU” later. Encryp- er firm, slashed costs, then bought an even year. After 3G applies the method at one tion, for instance, used to happen on sepa- bigger one. Even so, the Unilever bid was company, it buys another and fuses them. rate semiconductors, but is now a simple surprising in its audacity—the merger Mr Lemann and his partners combined a instruction on the Intel CPUs which run al- would have been the second-largest ever. striking number ofbig brewers to form An- most all computers and servers globally. As shocking, it collapsed two days later. heuser-Busch InBev; last year it acquired Keeping new types of workload, such as Kraft Heinz had hoped to continue talks the firm’s next closest rival, SABMiller. AI, on accelerators would mean extra cost in private, but news of its offer leaked out. Kraft Heinz was formed through deals that and complexity. Its management appeared to have badly also involved Mr Buffett. On February 21st If such integration occurs, Intel has al- misjudged the depth of Unilever’s attach- another company backed by 3G said it ready invested to take advantage. In the ment to its culture and its pursuit of long- would buy Popeyes, a fried-chicken chain, summer it will start selling a new proces- term, “sustainable” growth. Unilever’sout- for$1.8bn. sor, code-named Knights Mill, to compete right rejection meant that 3G and Warren The perception of 3G’s ruthlessness with Nvidia. Intel is also working on an- Buffett, who was expected to help fund a comes chiefly from the fact that it has over- other chip, Knights Crest, which will come deal, faced the prospect of going hostile seen the sacking of thousands of workers with Nervana technology. At some point, against a revered firm. It was a rare stum- at the firms it owns. Kraft Heinz decided to 1 The Economist February 25th 2017 Business 55

2 close seven factories in North America, The independent-film business boosting its profits. Its sales have fallen in four of the six quarters since the two com- Indie blues panies combined, grist for those who say that slashing costs limits growth. Others deem its strategy admirably 3G clear-eyed. likestofosteran “ownership NEW YORK mentality” among its managers, with fi- Happy endings are rarerthan everfor nancial rewards linked to the company’s those trying to profit from indie films performance. Kraft Heinz looks after pro- mising brands, such as Heinz mustard. TMIGHTseem a great time forindie cine- Where necessary, it allows ailing lines to Ima. The Academy Awards on February wither. Unilever, by contrast, continues to 26th will be something of a showcase for support its declining spreads business, ar- films not financed by a major studio. guing that it still produces cash. Calls to “Manchester by the Sea”, a contender for dump the division are by now so intense six Oscars, including best picture, was a that Warren Ackerman, an analyst at So- darling of the Sundance Film Festival last ciété Générale, a French bank, calls the po- year. Kenneth Lonergan’smasterpiece (one tential move “Sprexit”. It is not all cuts, ei- scene is pictured) about family and loss Atypical success ther: Kraft Heinz will significantly increase has earned $46m in cinemas in America spending on advertising this year. and Canada, a spectacular return on its cillary income has in the past made a big Unilever, meanwhile, is deemed an ex- production costs of $8.5m. Amazon, which difference in getting an indie film to break emplar of responsible capitalism. Paul Pol- bought distribution rights, will benefit. even. Consumers are using Netflix and man, its chief executive, states that pro- Movie buffs can find all manner of sites like it instead, where they dispensed a ducts that meet the highest standards of films online that are made more cheaply total of$6.2bn in America last year. social and environmental sustainability still. “The Break-In”, a horror film shot by Netflix and Amazon have injected cash perform better than products that don’t. Justin Doescher on his girlfriend’s iPhone into some of the best indie films, but their For now, though, its operating-profit mar- for less than $20, has earned him more effect for lesser titles is likely to be mixed. gin is well below that of Kraft Heinz (see than $20,000, with more than half a mil- Amazon allows filmmakers to upload ti- chart), a firm that advocates of sustainabil- lion people having watched at least part of tles directly to its platform to be discov- ity in business say pays insufficient atten- it on Amazon’s streaming-video platform. ered, as “The Break-In” was. But most mi- tion to questions such as water use. For every success story there are thou- nor films disappear online, since a viewer In spite ofthe gap in culture, Unilever is sands of indie films that go unwatched. can scroll through only so many options. one of many companies that are partly The digital age has made it easier than ever Even the streaming sites themselves, says mimicking Kraft Heinz. Last year the An- to make a film, but also harder than ever to Anne Thompson of IndieWire, a website, glo-Dutch giant introduced some zero- break through the clutter of entertainment admit that “a cold start on one oftheir plat- based budgeting, forexample forits spend- options to an audience. Chris Moore, a pro- forms can be very cold indeed”. 7 ing on marketing. Kellogg, General Mills ducer of “Manchester by the Sea”, com- and Campbell Soup, all American food pares the output ofindie films now to trees makers, are among those that have made falling in the forest. “Nobody is making a Toy companies in Japan similar announcements. In January Mr dollar offthis business”, he says. Polman said he planned to require manag- Mr Moore may be dramatising but only State of play ers to invest more in the company,to boost a little. Indie filmshave alwaysbeen arisky the “owner’s mentality” among his staff. bet forinvestors. Since 2002 the median re- Some investors are now pushing Un- turn on investment at the box office for ilever to do more. On February 22nd, with films released in North America with bud- TOKYO commendable speed, the company an- gets of less than $10m has been 45 cents on Toymakers bounce backin the land of nounced a wide-ranging review ofits busi- the dollar, which is under half the median adult nappies ness. It said it wants to find ways to “accel- return of films with a budget of more than erate delivery of value”. In the meantime, $100m, accordingto an analysis ofdata col- ILLIAM ELLIOT GRIFFIS, an Ameri- 3G seems certain to be looking around for lected by The Numbers, a film-industry Wcan educator who travelled to Japan its next prey. 7 website. There are also more flops than in the 1870s, noted that in the previous two ever before. In 2016 almost two-thirds of and a halfcenturies, “the main business of the 675 filmsthatreported boxoffice results this nation was play”. He described toysh- More Beanz earned less than $1m. In 2002 only half of opsfilled asfull asChristmasstockings and Operating profit margin*, % the total released failed to reach that figure. plenty of grown-ups “indulging in amuse- Kraft Heinz merger One problem is that fewer people are ments which the men ofthe West lay aside 40 going to cinemas. Howard Cohen of Road- with their pinafores”. 3G & Berkshire Hathaway acquire Heinz side Attractions, which distributed “Man- Griffis would have found it familiar 30 chester by the Sea”, worries about the walking today around Hakuhinkan Toy Kraft Food Kraft Group Heinz young, smartphone-addicted generation Park, one of the largest toy stores in Tokyo. Heinz 20 that has grown up without the cinema-go- Teens, office workers and grandparents are Unilever ing habit. When they do flock to the cine- mostly to be seen perusing its 200,000- 10 ma it is for blockbusters. odd knick-knacks across five floors. Its di- Another problem is that the DVD mar- rector, Hiroyuki Itoh, says he wants the ket has crashed. Sales and rentals of films store to be a place where everyone can 0 in all physical formats in America plum- play. After work, suited salarymen come 2010 11 12 13 14 15 16 meted from $25bn in 2005 to $12bn last to spend ¥200 (under $2) for a five-minute Source: Bloomberg *Adjusted EBITDA year, according to The Numbers. Such an- whizz around a 36-metre slot-car racetrack. 1 56 Business The Economist February 25th 2017

2 In another corner a gaggle of university Aarusha Homes students fiddle with displays of toys from the era oftheir childhoods. Playthings aimed at the over-20s make Room to grow up 27% of Japan’s domestic toy sales, ac- PUNE cordingto figuresfrom Euromonitor, a mar- The road to Indian prosperity is paved with cheap and cheerfulhostels ket-research firm. That grown-up portion of the market has been crucial for Japan’s F SEVERAL hundred million Indians do Rent ranges between 3,500 and10,000 three biggest players, Bandai Namco, Taka- Imigrate from the countryside to cities rupees ($52-$149) a month including food. raTomy and Sanrio, as the country’s birth between now and 2050, as the UN ex- Most ofAarusha’s tenants are young, rate has slumped. Since the 1970s the pro- pects, it will be a fiendishly busy few many ofthem taking first steps into the portion of under-15s has halved, to 12% of decades forVivekAher, who runs a low- middle-class as IT or business-processing the population. By 2060 it is likely to be 9%. cost hostel, one offive, on the outskirts of outsourcing professionals. Paying up to Fumiaki Ibuki of ToyJournal, a 114-year- Pune, a well-offcity three hours’ drive six months’ deposit for a city flat is be- old trade magazine, saysJapanese toy com- from Mumbai. A fairfew ofthe new yond their means, as is the down pay- panies are pioneers in adapting to ageing. arrivals will have their first experience of ment fora motorbike that would allow Despite a sluggish economy, the sector has, urban living bunking in one ofthe hos- them to live farfrom their employer. in the past two years, done its best in a de- tels’1,350 beds. Should recent experience Aarusha’s successful pitch is that its cade: in the fiscal year ending in 2015, sales be anything to go by,most ofthe new hostels are safer than slums or informal in core categories (excluding video games) arrivals will test Mr Aher’s patience by “guest houses”, especially forwomen. It rose bya tenth on the previousyear, to over tacking posters on his hostel’s walls, or now has 4,300 beds in1,300 rooms ¥800bn. Mr Ibuki says toymakers are tak- endlessly complaining about the Wi-Fi. spread out over 20 hostels in fourcities. ing a “borderless” approach: selling to a India has two main drags on eco- The typical tenant stays forsix months. wider age range, and teaming up with nomic growth. One is the difficulty of Satyanarayana Vejella, the firm’s co- trend-driven sectors like tech and fashion. finding a job, especially in the places founder, plans to raise another $10m to When Bandai’s Tamagotchi, virtual people live. The other is a chronic short- increase capacity by12,000 beds in near- pets housed in an egg-shaped toy, were age ofcheap housing. Aarusha Homes, ly 70 new hostels, all in the next two booming in the mid-1990s, women in their Mr Aher’s employer, started in 2007 to years. Operating-profit margins are in the 20sand 30swere bigbuyers. The same age- help people seize economic opportuni- mid-teens. group snapped up Licca-chan, Japan’s an- ties farfrom home. Its rooms are basic The chain’s backers include invest- swer to Barbie, made by TakaraTomy. The and cheap. They include up to six beds, a ment funds who seeksocial as well as firm now has an adult range; its “Cappuc- bathroom forevery three or fourresi- financial returns. The latter would be cino One-Piece” doll, modelling a hounds- dents, some common areas and little else. improved ifthe chain dodged taxes by tooth dress, sells for¥12,000. operating in the informal economy,like A stigma against adults having fun, much ofits competition, but it sticks to strong in the aftermath of the second the formal side. The problems it faces are world war, has faded. Many want to recap- those confronted by any Hilton or Hyatt: ture their youth, not so much by playing, finding properties big enough to offer but by collecting and displaying toys, says over100 beds is hard. Tenants have to be Harold Meij, the boss of TakaraTomy—so, chased forpayments. An attempt to cater for its premium Tomica model-car range, to blue-collar workers at an even lower the company uses vintage designs that price didn’t workout. So Aarusha is adults admired as boys. Having only one reliant on the IT and outsourcing sectors, child laterin life, as more Japanese now do, which are hiring less eagerly than before. means that parents have more to spend on Aarusha can probably depend on their offspring. Children are said to have continuing strong demand fora room “six pockets”: two from their parents, and from which to make sense ofit all before four from their grandparents. Spending on people can get their own places. The toys per child has stayed steady. hostels have something ofa communal During the global financial crisis of feel, and parents find them reassuring 2008, cheap impulse-buy toys took off, because residents put up with not being such as trading cards and coin-operated able to drink, smoke, or mingle with the machines that dispense capsules of small opposite sex. Soon enough, they will toys—usually of well-known characters have moved on, taking their aspirations from Japanese comic books and television Rite of passage and their posters with them. series—known as gachapon (for the sound made when the dial is cranked and the sur- prise trinket falls into the receptacle). The model is known as “media mix” in yolk character that suffers from depression The big themes in the toy industry are the industry. Toymakers are now “more and is now a millennial anti-hero, was collectability and intellectual property like IP trading companies”, says Junko Ya- dreamed up through a collaboration be- (IP). A recent hit was a watch branded “Yo- mamura ofNomura, a securities firm in To- tween Sanrio (best known for its “Hello kai”, after the word in Japanese for super- kyo. Bandai, which rearranged its internal Kitty” franchise) and the Tokyo Broadcast- natural spirits, by Bandai, which chatters divisions from product-type to charac- ing System. Gudetama first appeared on a when users slot plastic medals into its face. ter-IP groups a few years ago, manages short televised animation, filling the gap It exemplifies a popular strategy: Yo-kai, about 200 of the latter, but only a handful between two daytime programmes. These whose hero wears the watch, began as a are its own. It has partnered with Dentsu, usually make no profit. But when the story cartoon series in 2013; was adapted for TV; an advertising giant, to promote anime. of a character catches on, toy- and film- and made into a hit video game. Bandai Such tie-ups are also a low-risk way of makers end up splitting fat profits. It all then won the merchandise rights. trying out new figures. Gudetama, an egg- makes for a sizzling recipe. 7 The Economist February 25th 2017 Business 57

French entrepreneurs said her firm will take spaces in Station F, lauding French talent. She said the country Less misérable now has “some of the most innovative technology companies in the world”. The main factor behind all the new ac- tivity is a change in graduates’ aspirations. A member ofthe board ofone engineering PARIS school near the capital says that there is clearly new entrepreneurial ambition The rise of“deep tech” startups boosts the French capital’s digital scene among students, especially those who do UROPE will never create a hub of tech an internship with a startup abroad. He es- Efirms and investors to rival Silicon Val- timates that a fifth of graduates from his ley, many experts on entrepreneurship school now try launching their own firms, concur. Its markets are still fragmented a big increase on five years ago. along national lines, flows of capital into Graduates are particularly keen on star- the region are limited and because of lin- tups in the so-called “deep tech” sector—in- gering, conservative attitudes to risk, few volving, among other things, artificial in- startups grow to rival American champi- telligence (AI), machine learning and big ons. “Europe is toxic”, argues Oussama data. Philippe Botteri of Accel, a venture- Ammar, an outspoken founder of an incu- capital fund, who oversees investments in bator in Paris. “Life that should happen, Europe, says80% ofhisfirm’sactivitythese does not happen”, he says. days is in deep tech, an area in which Euro- But some digital life does flourish, peans, often in possession of specialised spread among cities rather than fixing in and further degrees in engineering and one spot. Fintech firms cluster in London. maths, have advantages. France has Gamers and music-sharing sites do well in emerged fastest in the last few years as a the Nordic countries. Berlin has a crop of top destination for capital, he says, largely companies that go beyond the kind of me- because its graduates have particular too consumer sites incubated by Rocket In- strength in these fields. ternet, a notorious startup factory: new Julien Lemoine, for example, co-found- companies with expertise in the “internet ed Algolia, a startup with funds from Accel of things”, for example. Milan, with strong The Niel effect that provides customised search services medical universities, has flourishing bio- Venture capital raised by European companies using AI. From an office with glass walls in tech startups. €bn central Paris (and from a sister office that The moststrikingcase offresh growth is Britain Germany France opened in San Francisco in 2015) his firm in Paris. Mention of France has long elicit- 4 serves 2,300 paying clients globally—two- ed sighs from venture capitalists. Its rigid thirds of revenues come from America. Al- labour laws and hefty taxes on wealth and 3 golia will employ 200 people by the end of on stock options have meant that Silicon the year, up from 60-plus now. His staff Valley has more than its fairshare of entre- 2 only speak English. From the start Algolia preneurial French immigrants. Efforts by sought clients globally, while tapping a lo- the government to help startups with tax 1 cal pool of recruits. Those hired in France, reliefforresearch have mostly taught foun- notes Mr Lemoine, are far more loyal than ders to complete forms rather than win cli- 0 job-hopping staffin Silicon Valley. 2012 13 14 15 16 ents, say observers. Genuine local success- It is a similar story at Shift Technology, a Source: Dealroom es—such as BlaBlaCar, a ride-sharing Paris-based firm founded by three maths service, or Criteo, which serves targeted graduates. It uses AI to detect fraudulent in- ads online—looked like exceptions, not evi- One reason for the French gains is that surance claimson behalfofbiginsurers. Je- dence ofwider success. earlier investments in infrastructure for remy Jawish, one ofthe firm’s co-founders, Yet recently, Nicolas Brusson, a co-foun- startups are starting to pay off. Established saysParisisa suitable space to grow simply der of BlaBlaCar, says he has witnessed an business figures, such as Mr Ammar and because it is “the next AI centre”. When he upsurge in entrepreneurial ambition in Xavier Niel, who started Iliad, France’s was in university, the dream was to be a France. A venture-capital investor says fourth-largest mobile operator, which bankerin London but“noweveryone isex- there has been a “huge shift in mindset” owns the brand Free, have set up training cited about AI startups”, he says. Cisco and among founders of firms: they are now ex- facilities and incubator firms that are now Facebookhave both setup AI operationsin pert not only as inventors but as designers producing entrepreneurs. Four years ago Paris to attract local talent, he notes. ofbusiness plans. Henning Piezunka at IN- Mr Niel (pictured) co-founded 42, a com- The old problems have not vanished, of SEAD, a business school near the capital, puter-programming school with a capaci- course. Stiff labour laws still make firing says that a “new vibe” and a more global ty of 2,500 students that charges no tuition permanentstaffdifficult, a particular head- attitude are also evident in the widening fees. It trains programmers even from un- ache for young, fragile firms. But here, too, use ofEnglish. expected corners such as the capital’s trou- change may be in the air. At least one can- Venture capital is beginning to gush. bled housing projects, and has opened a didate competing in the upcoming presi- Last year France saw 590 rounds of capital sister campus in Fremont, California, near dential election is well-disposed towards raising, more than any country in Europe, Silicon Valley, encouraging ties. the technology sector. Emmanuel Macron according to Dealroom, which watches Mr Niel’s next step, in April, will be to championed digital growth when he was tech-industry trends. Although slightly open what he says will be the world’s larg- economy minister; this weekin London he more capital went to startups in Britain est incubator, called Station F, in central urged French expats to come home “to in- (€3.2bn) than in France (€2.7bn), the rate of Paris. It will have over 3,000 workstations. novate”. France might have been slow to increase in France wasdramatic(see chart). Last month Facebook’s Sheryl Sandberg get started, but it is catching up fast. 7 58 Business The Economist February 25th 2017 Schumpeter A trip to the shrink

Three sanity tests forwhethertech firms are living in a bubble S THE technology industry in La La Land? There are alarming the world’s ten biggest tech firms and for three rising stars, split- Isigns. House prices in San Francisco have risen by 66% more ting their market value into three parts: value which has already than in New Yorkoverthe past five years. Even at the height ofthe been realised in the form ofnet cash held, the present value ofex- dotcom bubble in 2001, the gap was lower, at 58%. Shares of tech- pected earnings in the next four years, and the value attributable nology firms trade on their highest ratio to sales since the turn of to what happens after 2020. Samsung and Apple are not growing the century. Four ofthe world’s most valuable firms are tech com- much but are low-risk: over 40% of their value can be explained panies: Apple, Alphabet, Microsoft and Amazon. Snap, a tiddler by cash and near-term profits. The raciest firms, such as Tesla, are with $400m ofsalesand $700m ofcash lossesin 2016, isexpected expected to generate over 90% of their value after 2020. These to list shares on March 1st that will give it a valuation of over firms could well crash and burn. The good news is that investors $20bn. are placing their most eye-watering valuations on a fringe of For companies and investors in any industry, itis hard to work smallish companies that are growing very fast indeed. out if you are living in a bubble. To help, Schumpeter has created The third test is whether there is a fallacy of composition. In a three sanity tests for global tech firms. These examine their cash- bubble the bullish claims of individual companies aren’t plausi- flow, whether investors differentiate between companies, and ble once you add them all up. In the dotcom era the market-share whether forecasts of their future earnings suffer from a fallacy of targets of internet-service providers added up to well over 100%. composition. The exercise suggests that tech valuations are In the subprime crisis every bankclaimed that it had offloaded its frothy, but not bubbling. risks onto other banks. The technology industry is less vulner- The first test is cashflow, and the industry passes it with flying able to criticism on this front. The aggregate profits of the top five colours. In 2001 about half of all listed tech firms were unable to tech firms are expected to rise from 6% of American corporate convert their sales into hard dollars. Times have changed. In the earnings last year, to 10% by 2025: bold, but not implausible. Man- past12 months the biggest150 technology companies generated a agers are not anticipating the same profit stream twice. For exam- mighty $350bn of cashflow after capital expenditures—higher ple, Facebook is not expected to become a force in search, while than the total cashflow over the same period ofall the non-finan- Google is not expected to conquer social media. cial companies listed in Japan, for instance. Although the lunatics have not taken over the asylum, there In a bubble, investors bid up the value of assets regardless of are, however, pockets of excess. Even though their valuations are their quality. The prices of good and bad tulips soared alike in now starting to deflate, there are still too many privately held 17th-century Holland, and in 2008 subprime debt was almost as technology firms with stretched valuations of $1bn-10bn. World- valuable as Treasury bonds. So the second test is whether buyers wide, such companies have a total worth of $350bn. When it are differentiating clearly between tech firms, of which there are comes to facing up to failure, too, the industry’s record is bad. three broad types. Some, such as Samsung and Apple, are mature Twitter’s sales may shrink by 14% this quarter compared with a and profitable. At other firms, including Alibaba, Tencent, Face- year earlier, and it is losing money. Past company failures in the book and Alphabet, sales are growing at an annual rate of over tech business suggest that once decline sets in, it takes only two 20%, with high margins. Then there are “blue-sky” firms that are years or so fora firm to lose a quarter or more ofits sales. Yet Twit- unprofitable but have explosive sales growth. Uber and Snap are ter is sticking to its line that rapid growth will soon return. examples. One wayto gauge whetherinvestorsare sensiblyvaluing each Truly amazing category differently is to calculate companies’ duration, or how Anotherworry is Amazon. It is one ofthe most optimistically val- much of their current market worth is expected to be realised ued firms, with 92% of its current worth justified by profits after soon and how much relies on pots of gold being found far into 2020. Outside investors have a lot at stake because it is huge, with the future (see chart). Schumpeter has crunched the numbers for a market value of$410bn. About a third ofthis value is justified by its profitable cloud-computing arm, AWS. But the rest of the firm, which straddles e-commerce, television and films, as well as lo- The good, the mad and the ugly Sales, % increase gistics, barely makes money despite generating large sales. Nor is Market value of technology firms, % on a year it growing particularly fast for its industry. To justify its valuation earlier† Comprising: net cash profits*: until 2020 after 2020 you need to believe that it becomes a sort of giant utility for e- 0 20406080100 commerce which by 2025 cranks out profits of around $55bn a Samsung nil year, orprobably more than any other firm in America. Apple 4.0 The final worry is that technology firms are flouting the laws Alphabet 22 of corporate finance, which hold that there is a relationship be- Microsoft 1.0 tween a company’smarketvalue, itsprofitsand the sums ithasin- Oracle 0.5 vested. New entrants should be attracted by the fact that compa- Intel 10 nies are winning huge valuations from tiny investments, in turn Facebook 51 Alibaba 54 dragging profits and valuations back down. As a group, the big- Uber‡ 175 gest ten technology firms have $8 ofmarket value forevery dollar Tencent 52 they have sunk in net fixed physical and intangible assets. For Snap§ 406 Snap the figure is $36, and forTencent it is $53. Ifnew competitors Amazon 22 do not, or cannot, emerge, then competition authorities are likely Tesla 145 to intervene more than they do now. It sounds odd, but the main Sources: Bloomberg; *Present value †Latest valuation riskformany ofthe world’s tech giants is that they rake company reports ‡Implied by latest funding §Reported IPO value in too much money. 7 Finance and economics The Economist February 25th 2017 59

Also in this section 62 Trade statistics 62 Securitisation in Europe 64 Fannie and Freddie 65 Feminism and fiscal policy 66 Free exchange: Taxing robots Buttonwood is away

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Fintech in China looked to developed countries for ideas about how to manage its financial system. The age of the appacus When it comes to fintech, the rest of the world will be studyingChina’s experience. The rise offintech in China ismost nota- ble in three areas. The first, obvious in daily life, is mobile payments. China’s middle- SHANGHAI class consumers, emerging as the internet tookoff, have alwaysbeen inclined to shop Good technology, stodgy banks and soaring wealth make China a leaderin fintech online (see chart1on next page). This made HINESE banks are not far removed pany, Ant Financial, has been valued at them big, early adopters of digital pay- C from the age ofthe abacus. In the 1980s about $60bn, on a par with UBS, Switzer- ments. China also had a late-starter advan- they used these ancient counting boards land’s biggest bank. tage. Developed economies long ago for much of their business. In the 1990s Howdid fintech getso bigin China? The swapped cash for plastic (credit and debit many bank employees had to pass a basic short answer is that it was the right thing at cards). China was, until a decade ago, over- abacus test. Today the occasional click- the right time in the right place. Even after whelmingly cash-based. clack, click-clack can still be heard in vil- Chinese banks tucked away their abacus- The shift to digital payments acceler- lages as tellers slide their abacus beads up es, they remained remarkably unsophisti- ated with the arrival of smartphones, and down the rack. cated fora high-speed economy. People ac- bought by many Chinese who had never But these days the abacus is mainly a cumulated wealth but had few good owned a personal computer. Today 95% of symbol, more likely to be used in the outlets for investing. Entrepreneurs were China’s internet users go online via mobile branding of China’s online-finance com- full of ideas but struggled to get startup devices. Alipay, the payments arm of Ali- panies than as a calculating tool. At least loans. Consumers were spending but baba, an e-commerce giant, soon became three internet lenders have paid homage to needed wads ofcash to do so. the mobile wallet of choice. But it quickly it in theirnames: Abacus Loans, Small Aba- New technology offered a way to vault faced a challenge, when Tencent, a gaming- cus and Modern Abacus. The prominence, over these many contradictions. During to-messaging company, launched a pay- so recently, of the abacus is testament to the past decade China became the country ment function in its wildly popular We- how backward Chinese banking was a with more internet users than any other— Chat phone app, tapping its 500m-strong short time ago. The rise of the online lend- more than 700m. A potential revolution user base. Baidu, China’s main search en- ers shows how quickly change has come. beckoned butploddingstate-owned banks gine, followed with its own wallet. By just about any measure of size, Chi- were slow to respond. The terrain was na is the world’s leader in fintech (short for open for battalions of hungry companies. Smartpurses “financial technology”, and referring here Some entrepreneurs had roots in e-com- Competition has sparked a stream ofinno- to internet-based banking and invest- merce, others in online gaming, many vations, especially in the way mobile apps ment). It is far and away the biggest market were just first-timers. can connect online to face-to-face retail for digital payments, accounting for nearly Today, the promise offintech in China is transactions. QR codes, the matrix-like bar halfofthe global total. It is dominant in on- great. It is shaking up a stodgy banking sys- codes that generally failed to catch on in line lending, occupying three-quarters of tem and helpingbuild a more efficient one, the West, have become ubiquitous in Chi- the global market. A ranking of the world’s especially for consumers and small busi- nese restaurants and shops. Users simply most innovative fintech firms gave Chi- nesses. But limitations are also clear. Banks open WeChat or Alipay, scan a QR code nese companies four of the top five slots are fighting back. And regulators, tolerant and make a payment. And phones them- last year. The largest Chinese fintech com- so far, are wading in. For years China has selves can serve as payment cards: with 1 60 Finance and economics The Economist February 25th 2017

baba’s financial arm, spun out in 2014), money. “In America people love technol- Clickaholics 1 60% ofborrowers in this category had nev- ogy, too, when they are 22. They just don’t Retail e-commerce sales, worldwide er used a credit card. On their platforms, have any money,” says Gregory Gibb, Lu- Share of total, % Ant and JD.com also lend to merchants, fax’schiefexecutive. FORECAST 100 many ofwhom are the kinds ofsmall busi- The biggest breakthrough was the nesses long ignored by banks. launch of an online fund by Alibaba in 80 However, e-commerce lending is intrin- 2013. This fund, Yu’e Bao (or “leftover trea- Rest of world sically cautious. Its targets are clients al- sure”), was promoted as a way for people 60 readywell-known to the bigshoppingplat- to earn interest on the cash in their e-com- 40 forms. For the more radical side of China’s merce accounts. The appeal, though, United States online lending, look instead at the explo- turned out to be much broader. Invested 20 sion of peer-to-peer (P2P) credit. From just through a money-marketfund, Yu’e Bao of- China 214 P2P lenders in 2011, there were more fered returns in line with the interbank 0 than 3,000 by 2015 (see chart 2). Initially market, where interest rates float freely (see 2010 12 14 16 18 20 free from regulatory oversight, P2P soon chart 3 on next page). This meant that sav- Source: eMarketer morphed into China’s financial Wild West, ers could get rates that were more than brimming with frauds and dangerous three percentage points higher than those 2 another click, users display their own bar funding models. More than a third of all banks offered. And risk was minimal, be- codes, which shopkeepers then scan. And P2P firms have already shut down. cause their cash was still ultimately in the it is as easy for people to send money to Ye t P2P lenders still have a big role to hands of banks. Yu’e Bao attracted 185m each other as it is to send a text message—a play in China. Despite a string of headline- customers within 18 months, giving it vast improvement over the bricks of cash grabbing collapses, the industry has con- 600bn yuan ofassets under management. that used to change hands. tinued to grow. Outstanding P2P loans in- As is so often the case in China, new en- Many of the payment functions within creased 28-fold from 30bn yuan at the start trants soon appeared. In 2014 Tencent WeChat or Alipay exist elsewhere in the of 2014 to 850bn yuan today. The online launched Licaitong, an online fund plat- world, but in disaggregated form: Stripe or lenders answer a basic need, like China’s form linked to WeChat. Within a year, it PayPal for online shops processing pay- grey-market lenders of old, but in modern had 100bn yuan under management. Lu- ments; Apple Pay or Android Pay for those garb and, thanks to all the competition, of- fax, meanwhile, outgrew its P2P roots to using their phones as wallets; Facebook fering credit at lower interest rates. transform itselfinto a financial “supermar- Messenger or Venmo for friends transfer- In other countries, P2P firms typically ket”, offering personal loans, asset-backed ring money. In China all these different lend to clients online and obtain funding securities, mutual funds, insurance and functions have been combined onto single from institutional investors. The most suc- more. Robo-advisers (firms that use algo- platforms. Adoption is widespread. For cessful lenders in China flip that approach rithms and surveys to let users build port- about 425m Chinese, or 65% of all mobile on its head. Because of the lack of consum- folios) also have China in their sights. users, phones act as wallets, the world’s er credit ratings, they vet borrowers in per- highest penetration rate, according to Chi- son. Lufax, China’s biggest P2P firm, oper- Give me your pennies na’s ministry of industry and information ates shops—more than 500 in 200 And it is not just about wealthy investors. technology. Mobile payments hit 38trn cities—for loan applicants. And for fund- In the West people generally need deep yuan ($5.5trn) last year, up from next to ing, Chinese P2P firms draw almost entire- pockets before they can afford to buy into nothing five years earlier—and more than ly on retail investors. More than 4m people products such as money-market funds. In 50 times the size ofthe American market. invest on P2P platforms, up by a third over China all it takes is a smartphone and an the past year. The platforms can then di- initial buy-in of as little as 1 yuan. WeChat, Small is beautiful vide loans into small chunks, parcelling with 800m active accounts, and Ant, with A second area where China has become them out to investors to disperse risks. 400m, can afford to be generous. the global leader is online lending. In most This points to the third area of China’s How to gauge the impact of fintech in countries, banks overlook small borrow- fintech prowess: investment. Until recent- China? Measured against the rest of the ers. This problem is especially acute in Chi- ly, Chinese savers faced two extreme op- country’s colossal financial system, the va- na. State-owned banks dominate the fi- tions for managing their money: stash it in rious fintech pieces are puny. Apps and on- nancial system, with a preference for bank accounts, where interest rates were line lenders might have massive user lending to state-owned companies. The artificially low, but it was as safe as the bases, but they are mainly comprised of absence of a mature system for assessing Communist Party; or punt on the stock- consumers and small businesses, not the consumer credit-risk adds to banks’ reluc- market, about as safe as playingbaccarat in hulking state-owned enterprises and gov-1 tance to lend to individuals. Grey-market a casino in Macau. “In the middle there lenders such as pawn shops provide fi- was nothing,” says Huang Hao, vice-presi- nancing but at usurious interest rates. dent of Ant Financial. Fintech has opened Peerless 2 Fintech has started to fill this gap. E- that middle ground. China, peer-to-peer lending Outstanding commerce was again the launch-pad: on- In the West asset managers increasingly Number of operating loan balance, line shopping platforms developed loan worry that they face a wave of disinterme- platforms, ’000 yuan trn services, and are using their customers’ diation as investors migrate online. In Chi- 5 1.0 transactions and personal information to na asset managers barely had a chance to 4 0.8 create credit scores. (How the government serve as intermediaries in the first place; might eventually harvest data for social the market skipped into the digital stage. In 3 0.6 control is cause for concern, but for now large part this resulted from a generational 2 0.4 lenders are merely trying to master the ba- divide that is the inverse of the global sics of credit ratings.) Shoppers on Alibaba norm: the best-paid workers in China tend 1 0.2 and JD.com, China’s two biggest e-com- to be younger, the country’s first big gener- merce portals, can conveniently borrow ation of white-collar workers. They are 0 0 2014 15 16 17 small amounts, typically less than 10,000 much more likely to be willing to trust Source: Wind Info yuan. According to Ant Financial (Ali- web-based platforms to manage their The Economist February 25th 2017 Finance and economics 61

say that banks or fintech firms are better online banks. But the government has re- 3 Treasure trove positioned. Both need each other,” says Li quired that they act in partnership with ex- China Hongming, chairman of Huishang Bank, isting banks for even the most basic func- the main lender in Anhui, a big central tions such as deposits and withdrawals. 7 Yu’e Bao money-market province. Fintech upstarts have also Yet this is not the end of the road. Ant fund, seven-day 6 learned that lesson. Look at Wheat Fi- and Tencent still have hundreds of mil- annualised yield, % 5 nance, one of the country’s earliest P2P lions of users between them on apps that lenders, established in 2009. Amy Huang, offera wide range offinancial services and 4 Wheat’s CEO, says her initial goal was to products. They just need to persuade 3 challenge banks on their home turf. But enough users to view them not simply as 2 she soon realised that banks have insuper- mobile wallets but as mobile brokers and One-year bank able advantages, with theirstable, low-cost lenders. AsLufaxand JD.com hone their of- 1 deposit rate, % funding bases. Instead of battling them, ferings, they, too, will grow more powerful. 0 Wheat is becoming their partner: 70% ofits Regulations have placed speed bumps 2013 14 15 16 17 revenues come from sellingdigital services along their path. But the path is still there. Sources: Bloomberg; Thomson Reuters to banks. Regulatory attitudes are also shifting. The Chinese are coming 2 ernment entities that form the backbone China’s government initially gave fintech China’s fintech champions are also trying of the banking system. The outstanding companies a free hand, a striking contrast to break into new territory abroad. We- balance of P2P credit is roughly 0.8% of to- to its heavy policing of traditional banks. Chat’s mobile wallet is usable internation- tal bank loans. Credit provided by the e- The hunch was that fintech firms were ally, mostly in Asia for now. Ant has invest- commerce firms adds up to even less. Earn- small enough for any problems to be man- ed in mobile-finance companies in India, ings from mobile payments amount to ageable, and might produce useful innova- South Korea and Thailand. But replicating barely 2% ofbankrevenues. tions. This wager paid off: the rise of mo- their successes in other markets will not be Wei Hou, an analyst with Bernstein Re- bile payments and online lending owe straightforward. Much of their repertoire search, reckons that the fintech firms will much to light regulation. was devised specifically to address defi- grab less than a twentieth of banks’ busi- But the era of benign neglect is over. In ciencies in China’s financial system. And ness by 2020. That is hardly to be sneezed 2016, provoked in part by the P2P scandals, anything that touches on core banking at, since itcomfortablyequatesto 1trn yuan China introduced regulations to cover abroad will require local incorporation in revenues. But it is not the kind of radical most fintech activities. Most of the rules and adherence to local regulations—head- disruption that fintech’s more ardent evan- are aimed at making fintech safer, not at winds against global expansion. gelists often foretell. curbingit. Firms can no longerpursue their China’s bigger impact is likely to be in- Nevertheless, just looking at the overall most ambitious strategies. Individuals, for direct. Its fintech giants have shown what size of fintech is insufficient. In the market instance, can borrow no more than can be done. For emerging markets, the les- segments they have set their sights on, fin- 200,000 yuan from any one P2P lender. son is that with the right technology, it is tech firms have made a big mark. Digital Some of the regulations, though, also possible to leapfrog to new forms of bank- payments account for nearly two-thirds of constrain what fintech firms can hope to ing. For developed markets, China offers a non-cash payments in China, far surpass- achieve. The central bank is overseeing the vision of the grand consolidation—apps ing debit and credit cards. P2P loans make creation of an online-payments clearance that combine payments, lending and in- up about a fifth ofall consumer credit. platform. It wants transparency: all digital vestment—that the future should hold. What’s more, fintech firms have pro- payments will be visible to the central And the biggest lesson ofall: it is not up- voked a competitive response. Take the bank. But it could neutralise one of the starts versus incumbents but rather a ques- customer experience at China’s biggest main advantages of Ant and Tencent, forc- tion ofhow banks absorb the fintech inno- banks: it has improved markedly over the ing them to share transaction data with vations blossoming around them. China, past few years. Once-cumbersome online- banks. Itseemed, fora time, thatChina’sin- an early adopter of the abacus, is, after a banking portals are much easier to use. ternet titans might go after banks’ crown long period of dormancy, once again blaz- Even more important, banks are also jewels, when they obtained licences to run ing a trail in finance. 7 changing their business models. Prodded in part by the online investment funds, they have moved away from their plain- vanilla deposit-taking roots. Their focus has shifted to “wealth-management pro- ducts” (WMPs), deposit-like investments which they sell to their clients, often via mobile apps. Returns are as high as any- thing on Alipay or Tencent. The banks’ apps are not as slick, but not far off, and they feel far safer, with their reassuringly physical thousands of branches. The out- standing value ofWMPs has reached more than 26trn yuan, quadrupling in five years. WMPs have brought new risks into the fi- nancial system, in particularconcerns over banks’ funding stability. But they have ar- guably done more to promote interest-rate liberalisation than any regulatory edict. And banks have come to appreciate their own strengths: branch networks; sol- id reputations; and riskcontrols. “Youcan’t 62 Finance and economics The Economist February 25th 2017

Trade statistics set by a corresponding adjustment to im- Coming back home ports. America’s overall trade balance Lies, damned lies United States, share of American with the rest of the world is not affected by value added in imports from: a switch to a value-added measure. and… As % of total imports, 2011 Drilling down into bilateral trade rela- 03691215 tions, accounting for value added has big Mexico effects. But these data suggest that some might not be as large as often assumed. Bilateral trade flow data are misleading. Canada One commonly-cited factoid is that 40% of But a reported tweakwill not help China Mexican exports to America are embed- IGHT Donald Trump’s promise to ded American content. New figures from South Korea Mshake up America’s trade policy ex- the OECD put that figure at14% (see chart). tend to its statistics? According to a report Germany That is still high enough to create a lot of in the Wall Street Journal, discussions are Japan American losers were America to sever afooton changingthe way trade figures are trade relations. And the effect on the re- Source: OECD tallied. The Bureau of Economic Analysis, ported trade imbalance between America the country’s main statistical body, calls and Mexico is dramatic. Overall, however, this “completely inaccurate”. But in trade can exports, such as the Mexican parts in switching to the more sophisticated value- as elsewhere, the new administration cars made in Michigan. The imports side is added measure of trade flows would not seems prone to using statistics as a drunk just as important. American imports from provide political ammunition as powerful usesa lamppost—forsupportratherthan il- Mexico include both American value add- as ditching re-exports. On a value-added lumination. ed and inputs from other countries. Ac- measure, the bilateral-trade imbalance be- The proposal reportedly involves strip- countingforall thisisfarmore complicated tween America and Mexico in 2011 was ping out some of America’s exports from than stripping out just one component. 43% smaller than the gross trade flows the gross numbers. America sold $1.5trn of LuckilyforMrTrump, trade geeks are on would suggest. The trade deficit with Can- goods abroad in 2016, but of that $0.2trn the case. Robert Johnson, a trade expert at ada would have become 39% smaller. were re-exports that left the country much Dartmouth College, talks of a “quiet revo- Focusing on value-added trade data is as they had arrived. This type of trade has lution” in economists’ thinking about better than looking at the gross flows, but been growing, reflecting America’s role as trade. Aware that gross trade flows do not Mr Johnson questions whether the debate a hub forNorth American trade. As a share capture where value is being created and should focus on bilateral imbalances at all. of its combined exports to Mexico and sent, the WTO and the Organisation for When someone incurs a trade deficit with Canada, re-exports rose from 12% to 20% Economic Co-operation and Develop- a bookshop and a trade surplus with his between 2002 and 2016. Truckers and ship- ment, a rich-country think-tank, have employer, neither matters in isolation—the persbenefitfrom thiskind oftrade. Butcrit- painstakingly constructed the very data overall balance is important. And for a ics see it as “padding”, obscuring gloomier that Mr Trump’s administration would be country’s trade, that will be most deter- trends in “made in America” exports. interested in. The latest available figures, mined by macroeconomic factors. Fid- Stripping out re-exports makes no covering 2011, suggest that foreign value dling the figures might move the lamppost; sense when thinking about the overall added makes up 15% of the content of it will still leave the future direction of trade imbalance unless a corresponding America’s gross exports. Overall, this is off- trade in the dark. 7 adjustment is made to imports. Taking out re-exports would shrink America’s record- ed exports to countries like Mexico and Securitisation in Europe Canada. Without reducing the import number, it would also puff up America’s Limping along recorded trade deficit in goods with them, by $54bn for Mexico, and $46bn for Cana- da (more than triple the raw balance). So excluding re-exports from the total would provide Mr Trumpwith some more eye-popping figures with which to bash Europe’s structured-finance market fails to live up to hopes Mexico. Abid to tweaktrade statistics need not be politically motivated, though. It ECURITISATION, the bundling and re- ability to spread risks, but also about its could also reflect the (correct) realisation Spackaging of income streams as trad- ability to channel funding to the economy, that standard measures of imports and ex- able securities, goes in and out of fashion. including small and medium-sized enter- ports do not always capture what is really America is still dealing with the fallout prises (SMEs). The ECB and the BankofEng- being “made in America”. Statisticians do from the disaster in one part of the mar- land even published a rare joint paper in sometimes adjust for re-exports, which ket—sub-prime mortgages—in 2008-09 (see 2014 making the case for a “better-func- can mask underlying trends. For example, box on next page). In Europe, the swings in tioning securitisation market in the EU”. they routinely strip out from Hong Kong’s popularity have been just as marked. Dur- This aim then became one of the main figures its re-exports (a staggering $498bn- ing the crisis, European securitised assets planks of the European Commission’s worth in 2016, compared with domesticex- were hit by only small losses but the mar- “capital-markets union” initiative—an at- ports of $13bn) to avoid double-counting ket suffered from guilt by association. It has tempt to shift Europe away from overre- China’s exports in world-trade totals. since enjoyed a limited renaissance. liance on banks. A legislative proposal put Such adjustments are supposed to deal Leading the revival, oddly, are Euro- forward by the commission in the autumn with the underlying gripe with re-exports: pean regulators. They have sought not just of2015 sought to smooth the way forsecur- that they may not reflect a country’s value to rehabilitate, but indeed actively to pro- itisation by setting up common rules and added. Buttacklingthisproperlyinvolves a mote such “structured” finance. As early as establishing a special category of “simple, much deeperdiginto the data. There is also 2013 the European Central Bank (ECB) was transparent, and standardised” securitisa- foreign value added embedded in Ameri- effusive not only about securitisation’s tions with fewer regulatory requirements. 1 RE-EMERGING ON THE GLOBAL STAGE current available This is a critical time for Argentina. Since the election of President rate with code Mauricio Macri, economic developments suggest that the country 15 % ECONMAG15 LV RSHQ IRU EXVLQHVV 6WLOO VLJQLÀFDQW FKDOOHQJHV WR UHEDODQFLQJ LWV economy, restoring its image abroad and encouraging innovation remain. What is the country’s outlook for growth? Last chance to save. Register now. 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2 This law is still in the throes ofthe EU legis- that only EU-based entities are eligible to out Alexander Batchvarov of Bank of lative process, but is nearing the end. invest in the securities, and impose va- America Merrill Lynch, but the resulting Yet despite their best efforts, the market rious onerous disclosure requirements. bonds are at least tradable, visible and cov- in Europe remains stunted—just €227bn If securitisation looks unappealing, in- ered by ratings agencies. In bilateral deals, ($251bn) of total issuance in Europe in 2016. vestorsdo have murkieroptions. There has the risks involved are opaque and cannot The amount actually available to investors been an increase in the number ofbilateral easily be quantified, nor can the exposures is even smaller: only €88bn was “placed” deals, including sales of (unsecuritised) be easily traded. Members ofthe European with (ie, sold to) investors. This is a trend loan portfolios. “Synthetic” securitisa- Parliament and others worry about tran- that has persisted for the past few years tions, where derivatives are used to trans- sparency and are still squeamish about se- (see chart). Rather than bringing new as- fer risks, are also gaining in popularity. Se- curitisation. Substitutes for it might be sets to market, many banks, particularly in curitisation has its shortcomings, points even more frightening. 7 southern Europe, are securitising existing assets. Theirsole purpose isto create collat- Fannie Mae and Freddie Mac eral that allows them to obtain cheap fund- ing from the ECB. Retention is particularly high in Spain and Italy, and for certain Still possessed types of securitisations, such as those NEW YORK backed by SME loans, of which over 90% Investors in America’s housing-finance giants have a bad day in court are retained Europe-wide. Securitisingassets to sell bonds on to in- NE unresolved issue from the fi- vestors is not an attractive source of funds Onancial crisis is the future of Fannie Losing appeal for most banks. The ECB is simply so much Mae and Freddie Mac, the two firms that Share prices, $ cheaper. At best, banks are using the tech- stand behind much ofAmerica’s housing nique to offload specific risks or types of market. Fannie and Freddie purchase 5 assets, such as non-performing loans. Mat- mortgages, bundle them into securities 4 thew Jones, head of European structured and sell them on to investors with a finance at S&P Global, a ratings agency, guarantee. When America’s housing 3 Freddie Mac says that the majority of securities on the market collapsed a decade ago, the gov- Fannie Mae placed market come from non-bank lend- ernment had to bail them out. Its treat- 2 ers or private-equity-backed deals. ment ofthe firms since then has created a 1 The forthcoming European law intends titanic legal struggle. Shareholders have to spur securitisation mainly by changing cried foul. On February 21st, a federal 0 rules imposed after the crisis. Rules were appeals court upheld a ruling in the Jul Aug Sep Oct Nov Dec Jan Feb tightened several times, notably through government’s favour. 2016 2017 the imposition in 2011ofa risk-retention re- At issue is the Obama administra- Source: Thomson Reuters quirement that issuers must hold on to at tion’s decision in 2012 to hoover up all of least 5% of the value of a securitised tran- Fannie and Freddie’s profits. Until then, it he seemed to roll backthose remarks. saction. The idea was to force issuers to had received a fixed dividend on its The firms are hardly robust. The Trea- have an incentive to monitor the credit- investment. The timing ofthe shift was sury is running down their capital by worthiness of borrowers, rather than sim- striking—just before a surge in the firms’ $600m a year. By 2018 they will have ply selling all sorts of dodgy loans. Capital profitability. Since 2008 the Treasury has none left. From then on, should the firms requirements for banks and insurers were sucked in about $250bn from the firms, make a loss, they will need to draw on an also progressively tightened, to make hold- 30% more than the cost ofthe bail-out. emergency line ofcredit from the govern- ing securitised assets much more costly. The change enraged hedge funds who ment. Doing so would be characterised Yet even the new proposal, rather than had bought Fannie and Freddie’s shares by some as a second bail-out. encouraging securitisation, may have the and found themselves expropriated. The That worrying prospect should pro- opposite effect. The European Parliament investors’ lawsuit held that the govern- vide some impetus to the search for an has made a number of amendments to ment overstepped its authority by seizing alternative solution. But it will be hard to strengthen it, including one that would all profits. A federal court dismissed that find an ownership structure forFannie raise the risk-retention requirement to 10% claim in 2014; it has taken until now for and Freddie that satisfies everyone. The oreven 20%—which investorsargue would an appeals court to uphold the most firms keep mortgages cheap by lumping stifle the market. Others would determine important parts ofthe decision. An odd taxpayers with a staggering amount of aspect ofthe ruling is that it largely ig- risk. (Ifthe housing market collapsed, the nored the substantive arguments but cost to the Treasury could be 2-4% ofGDP, Security blankets concluded the court lacked the authority according to an analysis by The Econo- Europe, securitisation, €bn to curb the government’s actions. mist). Few will want investors to make Placed Retained Its ruling sent shares in Fannie and profits on the backofsuch a taxpayer 800 Freddie tumbling (see chart). That re- guarantee. versed about halfofthe rally sparked by The court did allow the plaintiffs to 600 Donald Trump’svictory in the presi- litigate some contractual claims. And one dential election. Investors reckon that Mr ofthe three judges in this court dissented Trump’sadministration will be more starkly from the ruling. The government, 400 favourable to Fannie and Freddie’s in- she noted, had “pole-vaulted” over its vestors. Initially Steve Mnuchin, now authority. The plaintiffswere “not all 200 treasury secretary, told a business-news innocent or ill-informed investors”. But networkthat Fannie and Freddie should they had been betting the rule oflaw 0 be privatised again. But in his confirma- would prevail: “In this country, everyone 2000 02 04 06 08 10 12 14 16 tion hearing before the Senate in January, is entitled to win that bet.” Source: Bank of America Merrill Lynch The Economist February 25th 2017 Finance and economics 65

Gender budgeting Gender budgeting has won the backing of international financial institutions. Ms The fiscal mystique Elson once took the IMF and the World Bank to task for their bias, arguing that aus- terity forced on countries seeking funds in the 1980s imposed heavy burdens on women. Now the World Bank backs gen- derbudgeting. The IMF used not to see pro- motingsexual equality as its job, but Chris- Designing budgets to support sexual equality is good forgrowth tine Lagarde, its managing director, now IKE many rich-country governments, world. You don’t have to be a feminist to wants gender-budgeting to play a role in LBritain’s prides itself on pursuing poli- accept that investing in girls’ education or the advice it gives to member countries. cies that promote sexual equality. How- in women’s labour-force participation will Not everything has gone well for gen- ever, it fails to live up to its word, argues the generate a high return on investment. der budgeting, however. Some initiatives Women’s Budget Group, a feminist think- Such a utilitarian approach appeals to have proved half-hearted, short-lived or tank that has been scrutinising Britain’s finance ministries in a way that pious talk prey to party politics. Egypt introduced the economic policy since 1989. A report in of “women’s empowerment” may not. concept in 2009, encouraged by interna- 2016 from the House of Commons Library, Ministries can fail to grasp how their bud- tional donors; when the donors left, it pe- an impartial research service, suggests that gets affect women and girls. In developing tered out. Australia was the first country to in 2010-15 women bore the cost of 85% of countries, forinstance, investment in clean have genderbudgeting. But today’s conser- savings to the Treasury worth £23bn water and electricity eases housework, vative government saw it as left-leaning ($29bn) from austerity measures, specifi- freeing time for mothers to earn money and anti-austerity and dropped it in 2014, cally cuts in welfare benefits and in direct and for girls to go to school. Cutting fund- the year after it tookoffice. taxes. Because women earn less, rely more ing may save money in the short term, but on benefits, and are much more likely than when women spend their days fetching Going by the numbers men to be single parents, the cuts affected water, growth suffers. Othercountries have issued sexual-equali- them disproportionately. There are plenty of examples of the ty statements and begun tracking data, but The government does not set out to dis- idea in action. In Rwanda spending aimed have not changed budget allocations. criminate, says Diane Elson, the budget at keeping girls in school—such as provid- Much of their reluctance can be put down group’s former chair. Rather, it overlooks ing basic sanitation—has led to higher en- to bureaucratic inertia—and the sheer diffi- its own bias because it does not take the rolment. In India the use ofgender budget- culty of the process of tracking who gets trouble to assess how policies affect wom- ing in a state is a better indicator of girls’ what. Fiscal policy is based on the market en. Government budgets are supposed to school attendance than higher incomes. In economy, which generates cash, and ig- be “gender-neutral”; in fact they are gen- South Korea a lack of child care has forced nores women’s unpaid labour, and the ex- der-ignorant. Ms Elson is one of the origi- women to choose between work and fam- tentto which itlimitstheirworkin the mar- nators of a technique called “gender bud- ily. Both female labour-force participation ket economy. Rather than rethink the geting”—in which governments analyse and fertility rates are low—a poor formula system, governments rely on equal-oppor- fiscal policy in terms of its differing effects for growth in an ageing country. Gender tunity laws to cut inequality—though the on men and women. Gender budgeting budgeting helped the government design evidence is that they do not. identifies policies that are unequal as well programmes to reduce the burden of care Professing loyalty to an idea is easier as opportunities to spend money on help- on women. Around the world, safer tran- than acting on its implications. “Everyone ing women and which have a high return. sport systems can ease the vast, often un- is keen to take on gender equality if it only Britain has declined to adopt the tech- seen, burden of violence against women means marginal changes,” says Ms Elson. nique, but countries from Sweden to South and girls—in medical costs, and lost pro- “Root-and-branch changes to thinking Korea have taken it up. ductivity and labour, as they are prevented about how the fiscal system supports gen- Ms Elson and her colleagues argue that, from working or learning. der equality are much more difficult.” 7 once you breakdown public spending, the opportunities stand out. For instance, ifthe British government diverted investment worth 2% of GDP from construction to the care sector, it could create 1.5m jobs instead of 750,000. Many governments treat spending on physical infrastructure as an investment, but spending on social infra- structure, such as child care, as a cost. Yet such spending also increases productivity and growth—partly by increasing the num- ber ofwomen in the workforce. In poorer countries, the bias can be more explicit. When Uganda first looked at its budget through a gender lens, it discov- ered that little of the spending on agricul- ture was going to support women farmers, though they did most ofthe work. What may sound simply like feminism infiltrating fiscal policy is thus also about efficiency. Gender budgeting is good bud- geting, argues Janet Stotsky, who led an IMF survey of such efforts around the A good investment 66 Finance and economics The Economist February 25th 2017 Free exchange I, taxpayer

A taxon robots is an intriguing but misguided solution to workerwoes gains in workers’ incomes, then the victory is Pyrrhic. The thorniest problem for Mr Gates’s proposal, however, is that, for the moment at least, automation is occurring not too rap- idly but too slowly. The displacement of workers by machines ought to register as an increase in the rate of productivity growth—and a faster-growing economy. But since a burst of rapid productivity growth in the late 1990s and early 2000s, America’s economy has persistently disappointed on these measures. Mr Gates worries, understandably, about a looming era of automa- tion in which machines take over driving or managing ware- houses. Yet in an economy already awash with abundant, cheap labour, it may be that firms face too little pressure to invest in la- bour-saving technologies. Why refit a warehouse when people queue up to do the work at the minimum wage? Mr Gates’s pro- posal, by increasing the expense of robots relative to human la- bour, might furtherdelay an already overdue productivity boom. When faster automation does arrive, robots might not be the right tax target. Automation can be understood as the replace- ment of labour with capital. To save humans from penury, the reasoning goes, a share ofthe economy’s capital income needs to be diverted todisplaced workers. Expandingcapital ownership is ILL GATES is an unlikely Luddite, however much Microsoft one strategy; people could own driverless vehicles that operate B may have provoked people to take a hammerto theircomput- as taxis, for instance, and rely on the flow of fares for part of their ers. Yet in a recent interview with Quartz, an online publication, income. Taxingrobots and redistributing the proceeds is another. he expressed scepticism about society’s ability to manage rapid But as machines displace humans in production, their in- automation. To forestall a social crisis, he mused, governments comes will face the same pressures that afflict humans. The share should consider a tax on robots; if automation slows as a result, of total income paid in wages—the “labour share”—has been fall- so much the better. It is an intriguing if impracticable idea, which ingfordecades. Labourabundance is partly to blame; the owners reveals a lot about the challenge ofautomation. offactors ofproduction in shorter supply—such as land in Silicon In some distantfuture robotswith theirown consciousnesses, Valley or protected intellectual property—are in a better position nest-eggs and accountants might pay income taxes like the rest of to bargain. But machines are no less abundant than people. Fac- us (presumably with as much enthusiasm). That is not what Mr tories can churn out even complex contraptions; the cost of pro- Gates has in mind. He argues that today’s robots should be ducing the second or millionth copy of a piece of software is taxed—either their installation, or the profits firms enjoy by sav- roughly zero. Every lorry driver needs individual instruction; a ing on the costs of the human labour displaced. The money gen- capable autonomous-driving system can be duplicated endless- erated could be used to retrain workers, and perhaps to finance ly.Abundant machines will prove no more capable of grabbing a an expansion ofhealth care and education, which provide lots of fairshare ofthe gains from growth than abundant humans have. hard-to-automate jobs in teaching or caring for the old and sick. A new working paper by Simcha Barkai, of the University of A robot is a capital investment, like a blast furnace or a com- Chicago, concludes that, although the share ofincome flowing to puter. Economists typically advise against taxing such things, workers has declined in recent decades, the share flowing to capi- which allow an economy to produce more. Taxation that deters tal (ie, including robots) has shrunk faster. What has grown is the investment is thought to make people poorer without raising markup firms can charge over their production costs, ie, their pro- much money. But Mr Gates seems to suggest that investment in fits. Similarly, an NBER working paper published in January ar- robots is a little like investing in a coal-fired generator: it boosts guesthatthe decline in the labourshare islinked to the rise of“su- economic output but also imposes a social cost, what economists perstar firms”. A growing number of markets are “winner takes call a negative externality.Perhaps rapid automation threatens to most”, in which the dominant firm earns hefty profits. dislodge workers from old jobs faster than new sectors can ab- sorb them. That could lead to socially costly long-term unem- DOS Kapital ployment, and potentially to support fordestructive government Large and growing profits are an indicator of market power. That policy. A tax on robots that reduced those costs might well be power might stem from network effects (the value, in a net- worth implementing, just as a tax on harmful blast-furnace emis- worked world, of being on the same platform as everyone else), sions can discourage pollution and leave society better off. the superior productive cultures of leading firms, government Reality, however, is more complex. Investments in robots can protection, or something else. Waves of automation might neces- make human workers more productive rather than expendable; sitate sharing the wealth of superstar firms: through distributed taxing them could leave the employees affected worse off. Partic- share-ownership when they are public, or by taxing their profits ular workers may suffer by being displaced by robots, but work- when they are not. Robots are a convenient villain, but Mr Gates ers as a whole might be better off because prices fall.Slowing the might reconsider his target; when firms enjoy unassailable mar- deployment of robots in health care and herding humans into ket positions, workers and machines alike lose out. 7 such jobs might looklike a useful way to maintain social stability. But ifit means that health-care costs grow rapidly, gobbling up the Economist.com/blogs/freeexchange Science and technology The Economist February 25th 2017 67

Also in this section 68 The origins of asthma 68 Mining the oceans 69 Studying disease with mosquitoes 70 Peopling the Americas

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

The American Association for the Advancement of Science Solar and Heliospheric Observatory, which is a joint European-American ven- Tales of wonder ture launched in 1995. Several new sun- watching instruments are planned for the next couple of years. One is the European Space Agency’s Solar Orbiter. Another is NASA Boston ’s Solar Probe Plus. A third is a special telescope, called DKIST, to be built in Ha- This year’s meeting ofthe AAAS looked at space weather, the cause ofasthma, waii. The eventual goal, said DrPellish, isto submarine mining, mosquito traps and the peopling ofthe Americas make space-weather forecasts as easy and OMETIMES the sun burps. It flings off storm did, however, do serious damage in routine as terrestrial ones. Smighty arcs of hot plasma known as co- 1989, by inducing powerful currents in Preparing for the extraterrestrial equiv- ronal massejections(CMEs). Ifone ofthese Quebec’s grid, blacking out millions of alent of hurricanes in this way is surely hits Earth it plays havoc with the planet’s people. It would therefore be useful, Jona- wise. But space drizzle can cause problems magnetic field. Such storms are among the than Pellish of the Goddard Space Flight too. Even when the sun is quiet, Earth is most spectacularexamples ofwhat astron- Centre, a NASA laboratory, told the meet- bombarded by a steady stream of high-en- omers call space weather, a subject to ing, to be able to forecast space weather in ergy subatomic particles. Some come from which a session at this year’s meeting of much the same way as weather is forecast the sun, which is always shedding matter the American Association for the Ad- on Earth. This would permit the most vul- in small quantities even when it is not vancement of Science (AAAS), in Boston, nerable equipment to be disconnected, in throwing offCMEs. Others are cosmic rays, was devoted. A big CME can have pro- advance of a CME’s arrival, to prevent da- which originate from outside the solar sys- found effects. In 1859, for instance, a CME maging power surges. tem. Both types, when they smash through subsequently dubbed the Carrington the atmosphere, create showers of second- event, after a British astronomer who real- Sturm und drang ary particles in their wake. And, as Bharat ised its connection with a powerful solar It sounds straightforward enough, but is Bhuva, an engineer at Vanderbilt Universi- flare he had observed a few days earlier, harder than it sounds. Though CMEsare ty in Tennessee, described to the meeting, generated auroras that could be seen in the common, they cause problems on Earth this shrapnel can cause problems with the tropics. Normally, as the names “northern” only if they score a direct hit. The so-called electronic devices on which people in- and “southern” lightssuggest, such auroras “empty” interplanetary space of the solar creasingly depend. (pictured above) are visible only from high system is, in fact, suffused by a thin soup of Ifsuch a particle hits a computer chip, it latitude. More significant, the Carrington charged particles. These particles interact can inject an electrical charge into the cir- event played havoc with Earth’s new tele- with movingCMEs in ways that are hard to cuit. Since chips work their magic by ma- communications system, the electric tele- predict. That makes forecasting a storm’s nipulating packets of charge, that can graph. Lines and networks failed, and track difficult. On top of this, CMEs them- create all sorts of problems. Dr Bhuva de- some operators received severe shocks. selves have magnetic fields, with north scribed how, in 2008, the autopilot of a Today, the damage would be worse. A and south poles, just as Earth does. The Qantas airliner had been knocked out by a study published in 2013 by Lloyd’s, a Lon- way the poles of a CME line up with those rogue particle. The resulting sudden don insurance market, estimated that a of Earth can affect the intensity of the re- plunge of about 200 metres injured many Carrington-like event now would cause sulting electrical activity. ofthe passengers, a dozen seriously. damage costing between $600bn and To try to understand all this better a Subtler effects can be just as worrying. $2.6trn in America alone. Ayearbefore this number of satellites already monitor the During a local election in Belgium in 2003, report came out the sun had indeed sun, looking for, among other things, a single scrambled bit of information, al- thrown offsuch an ejection—though not in CMEs. These include a fleet of American most certainly caused by an errant particle, the direction of Earth. A much smaller environment-modelling craft and also the added 4,096 votes to one candidate’s tally. 1 68 Science and technology The Economist February 25th 2017

2 Since this gave an impossibly high total, manifest the two predictive indicators. the mistake was easily spotted. But had the Armed with these results he joined particle hit a different part of the circuit it forceswith Philip Cooper,a researcher atSt might have added a smaller number of George’s Hospital in London, to try the votes—enough to change the outcome same thing in Ecuador. This is a country without anyone noticing. Moreover, as the which has a similar prevalence (20%) of components from which computer chips asthma to that in Canada. The researchers are built continue to shrink, they become found that in Ecuador, too, infantile gut more sensitive, making the problem bacteria predict susceptibility to asthma— worse. A modern computer might expect except that in this case a completely differ- somewhere between a hundred and a ent set of bugs are responsible. thousand space-drizzle-induced errors per billion transistors perbillion hours ofoper- Bug hunt ation. That sounds low. But modern chips How the presence in three-month-olds of have tens of billions of transistors, and particularmicroorganisms protects against modern data centres have millions of asthma remains unknown. But the fact chips—so the numbers quickly add up. that two different sets of them can do so The trick is to design circuits to cope. provides a way to investigate further. It is That is where Christopher Frost, who all a question of finding out what the va- works at the Rutherford Appleton Labora- rious bugs have in common. tory, near Oxford, thinks he can help. He These discoveries, moreover, offer the and his team have modified some particle A bit of muck might have helped possibility of treatment. If a newborn is accelerators in a way that offers designers found to be deficient in the relevant bacte- of electronic equipment the ability to test immune response. The thinking behind ria, an inoculation ofthem into that child’s their products—and, crucially, to test them the hygiene hypothesis is that a lack of ex- gut, perhaps in the form of an oral pro- quickly. Dr Frost’s particle beams are mil- posure to parasites and pathogens in what biotic, might put matters right. Testing this lions of times more intense than the radia- has become an unnaturally clean environ- idea would, naturally, require clinical tion experienced by real-world devices. mentmeansa child’simmune system does trials, but it is a promising line of inquiry. They deliver in minutes a dose that would not develop appropriately. Evidence that Meanwhile, Dr Finlay’s advice to parents take years to arrive naturally. asthma is a consequence of overcleanli- of young children is that, though cleanli- This sort of pre-emptive action makes ness includes the facts that farm-raised ness may be next to godliness, it is possible sense. The threats from space drizzle (con- children are less prone to it than city-raised to go too far. 7 stant, though low-level) and from CMEs ones (farms are full of bacteria and other (rare, but potentially catastrophic) are real. critters that provoke immune responses), Hardening equipment against drizzle, and that those born by Caesarean section are Oceanography developing forecasts that tell you when to more prone than others (they do not re- disconnect it to avoid CME-induced power ceive an initial bacterial inoculation from Fruits de mer surges, are merely sensible precautions. 7 maternal faeces and vaginal fluids), and that those treated with antibiotics as ba- bies are also more prone. Dr Finlay there- Asthma fore wondered if he could find bacteria Boston which might be involved in asthma protec- Plucking minerals from the seabed is tion in the guts ofchildren. Four good bugs backon the agenda To this end he got in touch with the or- ganisers of the Canadian Healthy Infant N THE 1960s and 1970s, amid worries Longitudinal Development (CHILD) study, Iabout dwindling natural resources, sev- BOSTON which looks at the development of chil- eral big companies looked into the idea of dren from birth to the age of five. He asked mining the ocean floor. They proved the Certain bacteria protect against a if the study’s organisers could include the principle by collecting hundreds of tonnes disease that is a growing threat regular collection of faeces as part of their of manganese nodules—potato-sized min- AN you be too clean? That is the ques- protocol and he thus obtained stool sam- eral agglomerations that litter vast tracts of C tion posed by the hygiene hypothesis, ples taken at the ages of three months, 12 Davy Jones’s locker. At first sight, these which seeks to explain why, as many ill- months and annually thereafter, the bacte- nodules are attractive targets for mining nesses have become rarerin rich countries, rial contents ofwhich he analysed. because, besides manganese, they are rich some have become more common. The Asthma does not normally manifest it- in cobalt, copper and nickel. As a commer- hygiene hypothesis posits that the rise of self before a child is five, but a tendency to cial proposition, though, the idea never several of these diseases, including asth- wheeze and a reaction to a particular skin- caught on. Working underwater proved ma, eczema and type-1 diabetes (all of prick test are good indicators that the child too expensive and prospectors discovered which seem associated with malfunctions in question will eventually become asth- new mines on dry land. Worries about of the immune system), has been caused matic. Recording both of these are routine shortages went away, and ocean mining re- by improvements in hygiene of the sort parts of CHILD. Dr Finlay was therefore turned whence it had come, to the pages of that have helped get rid of other illnesses. able to correlate the composition of an in- science-fiction novels. Exactly how that might happen is unclear. fant’s gut flora with the presence or ab- Now it is back. As Mark Hannington of But at the AAAS meeting Brett Finlay of the sence of these indicators. When he did so the GEOMAR-Helmholtz Centre for Ocean University of British Columbia, in Vancou- he found that children deficient, at the age Research, in Germany, explained to the ver, persuasively filled in some of the of three months, in fourrelatively rare bac- AAAS, prototype mining machines are al- blanks in the case ofasthma. teria, Faecalibacterium, Lachnospira, Rothia ready being tested, exploration rights div- Asthma is caused by chronic inflamma- and Veillonella, were 20 times more likely vied up between interested parties, and tion ofthe airways, and inflammation isan than those playing host to these species to the legal framework put in place. Next 1 The Economist February 25th 2017 Science and technology 69

2 week the International Seabed Authority, proved, it is to nodules that people are like- Epidemiology which looks after those parts of the ocean ly to turn eventually.These really are there floor beyond coastal countries’ 200 nauti- in enormous numbers. According to Dr Snap! cal-mile exclusive economic zones, is issu- Hannington, the Clarion-Clipperton frac- ing guidelines for the exploitation of sub- ture zone, a nodule field that stretches from marine minerals. In DrHannington’s view, the west coast ofMexico almost to Hawaii, a gold rush is starting. And he was speak- contains by itself enough nickel and cop- Boston ing only partly metaphorically. per to meet global demand for several de- How to use mosquitoes to combat One of the most advanced projects is cades, and enough cobalt to last a century. disease that ofNautilus Minerals, a Canadian firm. Mining, whether on land or underwa- In January 2016 Nautilus took delivery of ter, does come at an environmental cost, MAGINE a small drone that could fly three giantminingmachines(two rock-cut- though. This was the subject of a presenta- Iaround sampling animals and people in ters and an ore-collector) that move tion by Stace Beaulieu of the Woods Hole an effort to see which pathogens are pre- around the seabed on tracks, like tanks. It Oceanographic Institution, in Massachu- sent in an area, and what host species har- plans to start testing these this year. If all setts. The nature of that cost depends on bour them. That would be invaluable to goeswell the machinescould then start op- the ecosystem. The deep-sea plains which epidemiologists seeking to understand erating commercially in Nautilus’s conces- host nodule fields tend not to be home to how diseases spread, and how to predict sion off the coast of Papua New Guinea, big animals, said Dr Beaulieu, but the sedi- and pre-empt their outbreaks. At the mo- which prospecting shows contains ore mentsthe nodulesare found in playhost to ment, such a drone is beyond human tech- with a copperconcentration of7%. (The av- microscopic critters that would be most nology. But this may not matter, because erage for terrestrially mined ore is 0.6%.) upset by the process of trawling that is nature has already come up with one. It is This ore also contains other valuable met- needed to bring the nodules to the surface. called the mosquito. als, including gold. They might take decades to recover from it. Mosquitoes (female mosquitoes, at any This approach (which is also that taken Hydrothermal vents are an even more rate) draw blood from animals to feed on. by firms such as Neptune Minerals, of Flor- peculiar environment than nodule fields. While doing so, they also ingest any blood- ida, and a Japanese consortium led by Mit- Unlike almost every other ecosystem, they born pathogens present in those animals. subishi Heavy Industries) is different from are based not on energy from the sun, but What a splendid idea, thought Ethan Jack- earlier efforts. It involves mining not man- on chemicals—particularly hydrogen sul- son and Jonathan Carlson, ofMicrosoft Re- ganese nodules, but rather a type of geo- phide—dissolved in the ejected water that search in Seattle, to design a system that logical formation unknown at the time are used by specialised bacteria to power captures mosquitoes so that the pathogens people were looking into those nodules— theirmetabolisms. This, and theirisolation they have ingested can be studied. Thus, as submarine hydrothermal vents. These from one another in the manner of small DrJackson explained to the AAAS meeting, rocky towers, the first ofwhich was discov- oceanic islands, means vents are host to was Project Premonition born. ered in1977, formin places where jets ofsu- many distinct and rare species. Conserva- The core of the project is a portable perheated, mineral-rich water shoot out tionists therefore care about them a lot. mosquito trap. The current version of this from beneath the sea floor. They are found That said, as Dr Beaulieu pointed out, is a cylinder about 35cm high, with 64 cells near undersea volcanoes and along the vent life may be more robust than many the size ofmatchboxes arranged around its ocean ridges that mark the boundaries be- people assume. One of the hazards of exterior. Each of these cells has a door that tween Earth’s tectonic plates. They gener- dwelling near an undersea volcano is that springs shut in a tenth of a second in re- ally lie in shallower waters than manga- an eruption can destroy your home in an sponse to the breaking ofan infrared beam nese nodules, and often contain more instant. The creatures that live around that is shininginvisibly inside it. The spring valuable substances, gold among them. vents seem able to bounce back from such is made from a shape-memory alloy—a They are not, though, as abundant as catastrophes fairly quickly,so a visit from a material that, when bent into a new config- manganese nodules, so if and when the mining machine might not be such a disas- uration, remains in this new shape until an technology for underwater mining is ter after all. 7 electric current is run through it. Then it suddenly reverts to the old shape. Mosqui- toes are lured to the cells by puffsof carbon dioxide (which mimic an animal’s exhala- tions), or skin odours or ultraviolet light. If they enter a cell, they break the beam and spring the trap. One crucial piece of design is that the trapscan be tuned to catch mosquitoes ofa single, target species. Different species car- rydifferentpathogens, so a studyof certain diseases may well want to trap a particular sort of mosquito. Each mosquito species has a characteristic wing-beat frequency and the beam-detectorinside a cell is sensi- tive enough to distinguish between these. It closes only when a member of the de- sired species flies inside. Once a trap has done its job, it is picked up and taken to a laboratory where the col- lected insects are extracted, mashed up and analysed metagenomically. Metage- nomics is a technique whereby the DNA in a sample containing material from several Crunch time for submarine mining species is extracted and sequenced with-1 70 Science and technology The Economist February 25th 2017

Peopling the Americas cal information, plotting the flow of lin- guistic change along the Pacific coast and Checkpoint through the river valleys. This nearly halved the time needed to give rise to the modern situation if the languages had evolved independently from a single com- Boston mon ancestor. That suggests the process of divergence may have begun as recently as The first migrants to the New World had 25,000 years ago. to wait 8,000 years to be admitted John Hoffecker, an archaeologist at the OW America was originally colonised UniversityofColorado atBoulder, drew at- His a topic of perennial interest at the tention to a study of an archaeological site AAAS. Until recently, the earliest uncon- called Bluefish Caves. This is in Yukon, a tested archaeological evidence of people Canadian territory that abuts Alaska. living in the New World came from Swan Some of the remains found in these caves Point, in Alaska. This dates back 14,400 date back24,000 years. They include stone years. Linguists, however, maintain that tools and the bones of horses, caribou and the diversity of native languages in the bison, all with marks which imply those Americas could not have arisen so quickly. bones have been stripped of their flesh by Conventional models of linguistic evolu- such tools. tion assume tongues separate in the way Athird line ofevidence, a genetic analy- populations of organisms do—so that the sis, adds weight to all this. It compared 31 Gotcha flow of vowels, words and grammatical modern genomes from the Americas, Sibe- structures between groups must cease be- ria and various Pacific islands with 23 an- 2 out first being sorted in any way. All spe- fore new languages can emerge, just as a cient genomic sequences from archaeolog- cies present thus contribute to the results, cessation of gene flow gives rise to new ical sites in the Americas. The comparison which are then matched against a data- species. This suggests it would take at least suggested that Native-American genomes base of known sequences, to see what is 50,000 yearsfora single population speak- diverged from their Siberian ancestors no there. In this way, Dr Jackson and Dr Carl- ing a single language to diversify and earlier than 23,000 years ago. It also son are able to confirm the species of mos- spread through the Americas in a way that showed that the Native-American line was quito captured (for, despite the clever elec- yielded the pattern heard today. Since Na- isolated for at least 8,000 years before big tronics, the traps do occasionally make tive Americans’ genes do, indeed, indicate genetic splits within it tookplace as people mistakes), and also the hosts it has fed on they all derive from a single population, spread through their new homeland. and any pathogens it has picked up. Even if this discrepancy in timing is a paradox. Combining everything, then, it seems an exact match is not possible for a partic- That paradox may be close to resolu- thatthe band ofbrothersand sisters whose ular piece of DNA (not all species are in the tion. Recent digs have pushed the physical descendants first populated the Americas database), the system can make an educat- evidence of America’s settlement back in lived somewhere between 25,000 and ed guess about the genus or family it came time. Meanwhile, as the meeting heard 23,000 years ago. Very neat, if it were not from. Sometimes, the absence of a match- from Mark Sicoli, a linguist at the Universi- for the fact that archaeological evidence ing sequence will be because geneticists ty of Virginia, in Charlottesville, a different appears to show that areas outside Alaska have not got around to sampling that par- model of linguistic evolution brings the and Yukon were colonised rapidly, starting ticular species. Sometimes, though (partic- common ancestor of Native-American soon after15,000 years ago. ularly with abundant, tiny things like vi- tongues forward. Apply a few error bars to That could be because the ancestral ruses), it will be because the species is the results and the two estimates touch—at band and its descendants were confined previously unknown to science. It should about 25,000 years ago. for much of the intervening period to a re- therefore be possible to discover new po- The problem with explaining linguistic gion known to palaeogeographers as Be- tential pathogens in this way. evolution in pure Darwinian terms is that ringia. This was composed of what are Dr Jackson and Dr Carlson have tested words are not genes. Species, once sepa- now eastern Siberia, bits of Alaska and Yu- the system successfully in Grenada and in rate, do not exchange genetic information kon in the Americas, and the Bering Strait Houston, Texas, and are now refining it. because they do not interbreed. Lan- between them (which was then dry land). One hoped-for refinement is to produce guages, though, can exchange grammatical Parts of Beringia were habitable wetlands traps light enough to be carried, deployed and semantic elements when they meet, and grassland steppe. But the North Amer- and collected by actual, human-built which can speed up diversification. Dr Si- ican ice sheets to its east would have drones. This will make it possible to de- coli thus turned to computational phyloge- blocked any passage beyond. That could ploy them in trackless forested areas. neticanalysis, an area oflinguistic research account for the 8,000 years of genetic au- These are often home to wild animals that that tries to work out whether and how tarky in the ancestry of Native Americans, act as reservoirs for pathogens like Ebola such interaction may have taken place. for it was not until the ice sheets retreated virus, which are mainly animal infections From the thousand or so Native-Ameri- (starting about 16,000 years ago), that any- but sometimes break out to become epi- can languages he chose four dozen spoken one in Beringia would have been able to demic in people. Indeed, an important in Alaska and northern Canada, the part of pass to the rest ofthe Americas. point about Project Premonition is that it is the Americas closest to humanity’s point To explain how languages might have not restricted to tracking pathogens which of entry from Asia. He and his colleagues continued to diversify in a genetically sta- are actually spread by mosquito but can created a database that recorded, for each ble population within Beringia, Dr Sicoli also follow those, like Ebola, which are of them, 116 linguistic features such as suggestsitsmembersmay have lived in dif- not. All that is required is for a pathogen to sounds, parts of words, the functions of ferent habitats, separate enough for lin- be in the host’s bloodstream. Mosquito these parts and the ways a language com- guistic diversification, but mixing often trapping thus promises to become an im- bines words into phrases. They then used enough to maintain a single gene pool. The portant tool in the monitoring and preven- this to identify the influences of languages answer to the question, “how was Ameri- tion ofinfectious disease. 7 on each other. They also added geographi- ca peopled?” seems tantalisingly close. 7 Books and arts The Economist February 25th 2017 71

Also in this section 72 In praise of sleeper trains 72 “Les Misérables”: a biography 73 Richard Holmes illuminates the past 74 Boris Nemtsov, the movies

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Corruption and the Patriot Act), a determination to en- force them—with help from a special anti- Despots’ jackpots kleptocracy unit in the Justice Depart- ment—and congressional backing. Senate investigations have highlighted the role of banks, lawyers and other “gatekeepers” in enabling grand corruption. America, Brit- ain and Switzerland are especially attrac- tive destinations for foreign wealth be- Why it is so difficult to hold kleptocrats accountable cause of their sophisticated financial ORRUPTION is never far from the centres. All three have made stridesin tack- The Despot’s Guide to Wealth C front page. In recent weeks, thousands ling corruption, but many gaps remain. of Romanians protested against plans to Management: On the International Anonymous shell companies, dubbed decriminalise low-level graft, and Rolls- Campaign against Grand Corruption. By the getaway cars of financial crime, are Royce was hit with a £671m ($835m) penal- J.C. Sharman. Cornell University Press; 261 legion in America. Britain also maintains a ty for alleged bribery. Meanwhile, long- pages; $29.95 and £20.95 network of opaque offshore satellites, in- running corruption scandals continue to cluding the British Virgin Islands. Police roil political and corporate leaders in Brazil amount that has been pilfered is anyone’s and regulators are keen to know more and Malaysia. The growing attention has guess, given the murkiness of offshore fi- about them, but lack funding. Switzerland spurred governments to pledge action, as nance. Estimates for Egypt under Hosni has shed some of its secrecy and passed dozensdid ata global anti-corruption sum- Mubarak range from $1bn to $70bn. One laws to ease asset recovery and repatria- mit in London last year. complicating factor is that much of the tion, but implementation tends to be Jason Sharman, professor of interna- money is siphoned off through “legal cor- patchy; Mr Sharman thinks weaklaws and tional relations at Cambridge University, is ruption”, in business ventures that comply strong enforcement do more good than particularly interested in “grand corrup- with local laws, often because of legisla- strong laws and weak enforcement. He tion”: the theft of national wealth by klep- tive tinkering by pliant parliaments. also includes a chapter on his native Aus- tocratic leaders and their cronies, often in For a long time governments, even in tralia which, he concludes (with help from poor (albeit resource-rich) countries. It is a the rich world, seemed uninterested in a private investigator hired to sift through subject he knows well, having spent over a bringing kleptocrats to book. That began to corporate records), is “able but unwilling” decade studying the offshore centres and change in the 1990s, as a result of two to stop inflows of iffy money from China vehicles—shell companies, for example— things. The end ofthe cold wartookaway a and Papua New Guinea. that are used to hide ill-gotten gains. reason to turn a blind eye to theft by heads Many of the difficulties in recovering The list of light-fingered leaders who of client states. That coincided with a shift stolen assets relate to the border-crossing feature in “The Despot’s Guide to Wealth in thinkingamongmakersofdevelopment nature ofthe theft. The “mutual legal assis- Management” is long. It includes various policy, who began to view corruption as tance” process, used by governments to re- dead ones, such as Nigeria’s Sani Abacha, one of the main causes of poverty. Mr quest or share information about bank ac- Mobutu Sese Seko of Zaire, Indonesia’s Sharman also credits the rise of anti-cor- counts and company ownership, is clunky Suharto and Ferdinand Marcos of the Phil- ruption NGOs and institutions that offer and unreliable. Mr Sharman laments the ippines (whose shoe-loving wife, Imelda, practical help to track down former lead- “inherent difficulty of international legal graces the book’s cover). These four alone ers’ loot, such as the Stolen Asset Recovery action in a world ofsovereign states”. ran off with an estimated $55bn. More re- Initiative, a joint UN-World Bankproject. Investigations become more challeng- cent examples include the pre-Arab spring America has pushed the anti-corrup- ing when the country where the alleged leaders of Egypt, Libya and Tunisia, and tion agenda hardest, with strong laws corruption tookplace refuses to co-operate Viktor Yanukovych ofUkraine. The overall (such as the Foreign Corrupt Practices Act (usually because those under suspicion 1 72 Books and arts The Economist February 25th 2017

2 still wield power). American prosecutors businesses). Egypt found itselfin a frustrat- efforts have not translated into a big in- made only limited headway in their high- ing situation. It needed to find “the specific crease in recoveries, they may still have a profile case against the free-spending son location and nature ofstolen assets abroad deterrent effect—just as speed limits make of Teodoro Obiang Nguema Mbasogo, to recover them”, yet countries holding a difference to people’s driving, even president of Equatorial Guinea since 1979. them would co-operate only once Egyp- though only a few drivers are fined. To their credit, America and Switzerland tians had located these assets. The authori- Mr Sharman ends with some sugges- seem undeterred by such blocking tactics ties in Cairo became so frustrated that in tions forstrengthening the fight against the as they probe the still-unfolding 1MDB 2012 the government sued the British Trea- mega-thieves: tougher penalties for firms scandal in Malaysia. sury after it had denied 15 of Egypt’s that help them, especially banks (fines are Even when both sides are willing, diffi- requests for legal assistance. paltry, except in America); blacklisting of culties abound. Mr Sharman describes a So far, little money has been returned to the worst kleptocracies, with their officials host of problems afflicting asset-recovery Cairo. This fits in with the broader pattern. denied physical or financial access to the efforts after the Arab revolutions in 2011, As of 2014, the worldwide amount of West; and greater use of tax policy, espe- from basic transliteration headaches to looted state wealth thathad been repatriat- cially in light ofthe recent wave of interna- proving under the laws ofthe host country ed stood at just $4.5bn, compared with tional tax-transparency agreements. Like that funds in a particular account were hundreds of billions believed stolen. Even Al Capone, most corrupt officials are also acquired through corruption (which, given seizures of criminal proceeds in America guilty of a tax crime. The fact that these are money’s fungibility, is especially difficult if are a mere “pin prick”, according to an offi- still only proposals shows just how far the account-holder also has legitimate cial. But although the extra anti-corruption there is to go. 7

Sleeper trains Literary biography The end of the line By the book

Night Trains: The Rise and Fall of the past. How different things were in the The Novel of the Century: The Extraordinary Sleeper. By Andrew Martin. Profile Books; 19th century, when a passenger on the Adventure of Les Misérables. By David 248 pages; £14.99 Orient Express could dine on gigot de Bellos. Particular Books; 307 pages; £20. To mouton à la Bretonne, épinards au sucre be published in America by Farrar, Straus & LEEPER trains occupy a romantic and champagne aplenty. The only Giroux in March; $27 Scorner ofany traveller’s soul. One of modern-day sleeper train which comes Hercule Poirot’s most gripping adven- up to Mr Martin’s exacting standards is S LONG as there are ignorance and tures takes place on the Simplon Orient the Nordland, which trundles towards “A poverty on Earth,” wrote Victor Express, which used to run from Paris to northern Norway. Hugo in his preface to “Les Misérables”, Istanbul. A famous scene in Alfred Hitch- Mr Martin has a singular fascination “books such as this one may not be use- cock’s “North by Northwest” features a with how much sex everyone had on less.” Over the 155 years since it was first night train entering a tunnel. James Bond, board. But the real question that the published in France and then elsewhere, meanwhile, detects a spy on a sleeper uninitiated most often asksleeper fanat- the novel has neverlost its relevance—or its train afternoticing him behave suspi- ics is: “Do you sleep?” After a read ofMr popularity. ciously in the dining car (“Red wine with Martin’s book, the answer would seem to Around 65 film versions (the first in fish!” Bond mutters). be a resounding “no”: clanking and 1909) make “Les Misérables” the most fre- In some parts ofthe world, the nostal- shunting wake him up time and again. quently adapted novel of all time. The first gia lives on. The Caledonian Sleeper, Still, it is hard not to be won over by his stage musical opened in Philadelphia in complete with smartly dressed waiters, enthusiasm. Catch the sleeper train, January 1863. Since 1980 Alain Boublil and neeps and tatties and a selection of whis- before it’s too late. Claude-Michel Schönberg’s operatic melo- kies, is the best way to travel between drama has been performed more than London and Scotland. Elsewhere, how- 53,000 times in 44 countries and 349 cities. ever, sleepers are on their last legs. Flights Yet, from the outset, adapters and trans- across Europe have become so cheap that lators cherry-picked elements from their fewer and fewer travellers bother with supersized source. British admirers had to the wagon-lit. Sensing that the end is nigh, wait until 2008 for a complete English text Andrew Martin, a British novelist, has of the novel in the order in which the au- written an ode to the sleeper. thor had planned it to be read. Even to lov- “Night Trains” is a potted history of ers of “Les Mis”, Hugo’s world-shaking the mode, combined with accounts of blockbuster can feel like a lost continent. journeys Mr Martin has taken on sleeper David Bellos, an English-born professor routes across Europe. The reader joins ofFrench literature at Princeton University him on a train to Munich, where he eats a and an eminent translator, navigates tuna sandwich on board. Travelling from through its five parts, 48 “books” and 365 Paris to Venice, he thinks he has been chapters with clarity and wit. At once robbed of€100 ($105). The service to Nice erudite and entertaining, he shows how is cancelled, yet such is his love for sleep- the novel’s magic lies in its multitasking ing aboard that he spends the night on versatility. Hugo’s extraordinary feat is to the train as it sits on the platform. deliver “an intricately realistic portrait” of These stories make clear that the France after Napoleon, “a dramatic page- golden age ofthe sleeper train is long Elegance on wheels turner” packed with suspense—and a de- monstration of “generous moral princi-1 The Economist February 25th 2017 Books and arts 73

ship”, “a handshake across time, but also across cultures, across beliefs, across disci- plines, across genders and across ways of life.” The idea of a quest, which seeks both knowledge and understanding, is central to his work. In “This Long Pursuit”, which came out in Britain last autumn and is about to be published in America, the 71-year-old Mr Holmes is revisiting his old heroes, bring- ing them and their milieux vividly to life. In the process he does a lot to illuminate the very nature ofbiography itself. He weaves his reflections around a collection of portraits that are, in essence, distilled miniatures. Among them are the familiar figures of Shelley, Samuel Taylor Coleridge, John Keats and William Blake, as well as many of the scientists who peo- ple an earlier book, “The Age of Wonder” (2008), itself a quest to uncover “scientific passion in all its manifestations”. Nothing miserable about it The destructive divide between the sciences and the arts, which bedevils 2 ples” that readers still find appealing today. edition among Confederate soldiers dur- contemporary life, was, as Mr Holmes Hugo, already the author of “Notre- ing the American civil war. In a weary pun shows, neither a natural nor a necessary Dame de Paris” and a literarysuperstar asa on their commander’s name, they dubbed divide. (Indeed, the word “scientist” was poet, playwright and novelist, began in themselves “Lee’s Miserables”. not coined until 1833.) To prove that, Mr 1845 to write his story of a former convict From the humane treatment of ex- Holmes draws out the unity that existed seeking a new life in a society rigged offenders to the care ofstreet children, “Les between the sciences and the arts in the against the poor and outcast. Around the Misérables” spearheaded calls for reform Romantic era. Among the many examples questing figure of Jean Valjean, freed from and contributed to “the future improve- is the complex friendship between Cole- the prison-hulks in 1815 to make his way ment of society”. Few books really change ridge and Sir Humphry Davy, the chemist against the steepest odds, Hugo stitched a the world. This one did, long before it who experimented with nitrous oxide vast but “very tightly knit” tapestry of broke box-office records on stage. In the (laughing gas) and whose descriptions of social strife and personal rebirth. musical Hugo’s hero intones—in a song its effects parallel Coleridge’s account of The revolution of 1848, in which the loved by television talent-show contes- opium hallucinations in his famous poem, radical firebrand discovered that “his head tants—“Bring Him Home”. Mr Bellos does “Kubla Khan”. was with order” although his heart “was just that, as he restores “Les Mis” to its “This Long Pursuit” also explores the with the poor”, interrupted Hugo’s mam- maker and his times. 7 lives ofsome ofthe inevitably less familiar moth project. It resumed after the exiled women writers and scientists who shaped writer, banished by the upstart emperor, this era in surprising ways, despite being Napoleon III, settled on the Channel Is- History and biography excluded bystatute from becomingfellows land of Guernsey: no longer a “brilliant of the Royal Society until 1945. There is careerist” but a “stand-alone protester”. Handshake with Caroline Herschel, an astronomer who Curiously, this “tiny feudal outpost of discovered eight comets and was the first the British crown” hosted the gestation the past woman in British science to be awarded an and birth of a book that won hearts and official salary by the Crown. Margaret changed minds across the world. The edit- Cavendish, often caricatured as Mad ing and printing of the precious manu- Madge, wrote poetry that celebrated the This Long Pursuit: Reflections of a Romantic script depended on the schedules of wonders of astronomy and protested Biographer. By Richard Holmes. William Queen Victoria’s Royal Mail and the against the cruelty done to animals in the Collins; 360 pages; £25. To be published in Guernsey steamer timetables. In 1861 “the name of science. Mary Somerville virtual- America by Pantheon in March; $30 biggest deal in book history” saw Hugo ly invented popular science writing. Mr paid the equivalent of 20 years of a ICHARD HOLMES is one of Britain’s Holmes argues that the history of British bishop’s stipend: enough “to build a small Rbest-known biographers. Ever since science needs a “subtle revision” because railway”. By late 1862, the year of publica- 1974, when his first work of non-fiction, “precisely by being excluded from the tion, Charles Wilbour’s English translation about Percy Bysshe Shelley, won the Som- fellowship ofthe Society, [women] saw the was reported to be “the largest order ever erset Maugham prize, he has delighted life ofscience in the wider world.” placed fora bookin America”. readers with his lives of the great figures of The biographer writes with insight Save for Hugo’s literary rivals (Alex- the Romantic era. about how women navigated the societies andre Dumas likened it to “wading The serious biographer, he says, has to in which they lived and wrote. Mary Woll- through mud”), everybody loved the long “step back, step down, step inside the stonecraft’s life—with all the “revolution- haul of Valjean’s rehabilitation in the com- story” to discover “the biographer’s most ary hopes and freedoms” that it represent- pany of characters who soon entered folk- valuable but perilous weapon: empathy.” ed—provides rich material for Mr Holmes. lore: the street-girl Fantine, her daughter Mr Holmes is driven by a “strange, unap- Writer, philosopher, travellerand advocate Cosette, the urchin Gavroche, the student peased sense of some continuous, intense of women’s rights, Wollstonecraft was an Marius. Shorn ofits condemnation ofslav- and inescapable pursuit.” Biography, he international literary celebrity during her ery, the novel even circulated in a pirate says, is “a simple act of complex friend- lifetime: “a woman of uncommon talents1 74 Books and arts The Economist February 25th 2017

2 and considerable knowledge”, read one study ofa living man—boastful, charismat- into an energetic Soviet song that accom- obituary when she died after giving birth ic, sincere—and is devoid ofgloss or consid- panies a kaleidoscope of photographs of to the future Mary Shelley, the author of eration for history. Her camera inhabits his Nemtsov’s political life. “Frankenstein” and the poet’s wife. world, both physically and mentally.Occa- That minute is expanded in another Mr Holmes analyses the downs and sionally he would ask: “Why are you film- film, “The Man Who Was Too Free”, made ups of Wollstonecraft’s reputation, espe- ing this, silly?” But the camera keeps roll- by Mikhail Fishman and Vera Krichev- cially in the wake of the intimate and ing, catching him, variously, asleep on a skaya for the second anniversary of Nem- revealing biography by her heart-broken bunkbed in a train, strippingalmost naked tsov’s death on February 27th. It is not so husband, William Godwin. The personal or talking about freedom and the perverse much a biography as a cardiogram of Rus- in relation to Wollstonecraft—whose life love of state power. sian political life over the past quarter of a Virginia Woolfdescribed as “an attempt to Nemtsov climbs a bell tower under a century with all its seizures and spasms. make human conventions conform more blue winter sky (“Oh, I want to be the bell The sound of a heartbeat runs through the closely to human needs”—was deeply ringer. I will wake Russia right up”). He film, until it flatlines at the end. It would political. For a century after her death, she kisses women, talks to strangers, sub- take Nemtsov’s death to reveal the scale of was reviled; only when the feminist move- mergeshimselfin an ice-hole and gets bun- Russia’s loss. ment began gaining traction was her life dled into a police van during Moscow At 32 he became Russia’s youngest and writing reassessed. Part ofthe move to street protests in 2012. The man in this film regional boss, in charge of Nizhny Nov- bring her to wider attention was made by is not a saint, but a mortal—full of life, gorod, which had served, a few years earli- Mr Holmes, the biographer with the hand- energy, pain and love for the country that er, as a place of exile for another physicist shake across time. 7 once adored him, but was then taught to and humanist, Andrei Sakharov. Nemtsov hate him. embodied the hope foran open, democrat- By 2015, after Russia’s annexation of ic and optimistic Russia. His only promise Boris Nemtsov, the movies Crimea, the Kremlin unleashed a wave of to his supporters was “not to lie”, which he anti-liberal aggression that shocked Nem- never broke. A future that tsov. The former physicist who studied The film is a montage of previously un- infrasound, laughingly explains to fellow seen footage and monologues by people wasn’t opposition leaders: “Each person has his who knew him well. It has no narrator, al- own resonant frequency.It depends on the lowing for constantly gnawing questions size of the heart and body mass. If you about missed opportunities and historical strike the heart’sresonantfrequency,you’ll alternatives. What if Nemtsov had not Two films about a slain politician have a heart attackand goodbye.” moved to Moscow as the first deputy uncoverthe darksoul ofmodern Russia A hint ofdeath runs through the film. In prime minister? What if the oligarchs who SMALL girl sits on her father’s shoul- the penultimate scene, he boards a train controlled the media had not set out to Aders, spelling out words on a poster: back to Moscow from Yaroslavl where he destroy him out of greed and arrogance? Pro-pa-gan-da u-bi-va-et (“Propaganda won a seat on a local council, and hums an What if he had become Russia’s president, kills”). Thousands of people tramp old Soviet tune: “Old motif of railroads, as Yeltsin had originally wished? What if through mud, bearing Russian flags and eternal youth of railway lines. It seems members of Yeltsin’s family hadn’t per- portraits of Boris Nemtsov, a bright and your whole life is ahead. Don’t go wrong suaded the ailing man to appoint Vladimir honest liberal politician, who had been when you are choosing your route.” Putin as his successor? shot dead two days earlier on a bridge by The next shot is of Nemtsov in a coffin, The contrast between the tall, generous Red Square. It is March 1st 2015, but it feels his mother, wife and small daughter stand- Nemtsov and Mr Putin is so obvious that, like the start ofa long winter. ing by his side. The director with the nose at a preview, a sequence showing the Rus- “Why did he take the bridge?” asks the ring stares into the camera. In the last mi- sian leader made the audience burst out little girl. “He was crossing the bridge on nute of the film, a funerary violin breaks laughing. But it was not just the Kremlin the way home, walking a bit in the eve- that came to fearNemtsov. So, paradoxical- ning. The view is nice from here,” her ly, did those who considered him an ally. father explains. “But he did good things,” Mikhail Fridman, one of Russia’s richest the little girl replies. “He did good things. men and a friend of Nemtsov’s, candidly We should not have let him get killed. We admits that he stopped seeing him: “I real- should have guarded him.” Doing the right ised that my relationship with him would thing in Russia can often get you killed. be toxic for my business, my partners and A balloon with a black ribbon flies up my colleagues.” into the low, grey wintry sky. The camera Whereas the Russian elite shunned cutstoNemtsovatarailwaystation, flirting Nemtsov for fear of upsetting the authori- with Zosya Rodkevich, a 22-year-old anar- ties, Alexei Navalny, an opposition politi- chist and documentary-maker. She would cian who spent a night in prison with him, film him for three years, not knowing that shunned him forhis past links to the Krem- “My Friend Boris Nemtsov” would be his lin. “I sawhim asa man ofthe 1990s, a good epitaph. “I saw the assignment as a chal- man but one who brought political pro- lenge,” read the film’s opening words. blems. I did not want him to support me “What could be interesting about an old, during the Moscow mayoral elections.” narcissistic bourgeois? He was 53…He had At the end, Nemtsov, who was always been deputy prime minister and the ‘heir surrounded by people, walks alone at of Boris Yeltsin’. But he turned out to be night on a Moscow street. His voice comes cool, kind and genuine. We became asthough from the otherside: “People who friends. And then he was killed.” fought for freedom in Russia were always Death changes the view of someone’s in a minority. They moved the country for- life. ButMsRodkevich’swork, one ofsever- ward, often at the cost of their lives…But I al new films on Nemtsov, is a close-up Heroes don’t die will come back! Don’t you worry.” 7 Courses Tenders 75

GHANA GRID COMPANY LIMITED EXPRESSION OF INTEREST PHYSICAL REVALUATION OF GRIDCo’s FIXED ASSETS

1. The Ghana Grid Company Limited (GRIDCo) of the Republic of Ghana intends to use part of its Internally Generated Funds (IGF) for the Physical Revaluation of GRIDCo’s Fixed Assets. 2. GRIDCo seeks to identify and prequalify a pool of well experienced and eligible Consultants for the issue of a Request for Proposal (RFP) for a further bid process for the selection of a Consultant. 3. The Terms of Reference (ToR) for the Physical Revaluation of GRIDCo’s Fixed assets shall include (but not be limited to) the following: • Determine the cost of replacing the fixed assets, including Transmission/ Communication equipment, Computers, Vehicles and Real Estate and Floating Crafts at all locations as at December 31, 2017. • Review and update the methodology for assessing on an annual basis, the asset values to reflect the current replacement cost. • Review the asset lives used to calculate depreciation etc. and suggest changes, where necessary, to obtain the best estimates of assets lives for the depreciation of assets valued at current replacement cost. • Review the indexation methodology for determining the revaluation surpluses on the fixed assets. • Advise on standard statements of accounting practice, which affect accounting for property, Plant and equipment in Public Utilities. 4. The Procurement is being carried out in accordance with the requirement of Public Procurement Act 2003 Act 663 and the Public Procurement Amended Act 2016 (Act 914). The selection of Consultant will be done using the Quality and Cost Based Selection (QCBS). 5. Proposals are invited from eligible Ghanaian and Foreign-based Consultants, who have experience in similar projects to participate in the tendering process by submitting their Expressions of Interests (EOIs) as follows; 6. GHANA GRID COMPANY LIMITED EOI: PHYSICAL REVALUATION OF GRIDCo’s FIXED ASSETS Addressed To: Director, Finance Ghana Grid Company Limited P. O. Box CS 7979 Tema, Ghana Delivered To: Conference Room, GRIDCo Procurement Ghana Grid Company Limited, (Located 2 kilometers off theTema Motorway Roundabout to the Aflao Road, near the Tema Steel Works). Closing date and time: 5:00hrs GMT of Friday March 24, 2017. 7. The EOI will be evaluated using the under listed eligibility criteria. Consultants are required to submit proposals containing the following information, as well as relevant copies of certificates/documents as evidence of their qualification: • Profile of Company or individual with relevant references. • Registered name, location and type of current business. • Experience of consulting staff in asset revaluation within the utility sector. • List of firms, which the consultant has provided similar services to in thepast,as references. • A brief proposed methodology and time frame for the execution of the project. • English Language proficiency. • Additional requirements for local firms; valid Tax Clearance Certificate, Valid SSNIT Clearance Certificate and Certificate of Incorporation. • Any other information to underscore qualification for the project, including curriculum vitae (C.V.) of full time and part time technical and support staff, working with your firm with backgrounds relevant to the advertised services. 8. Consultants may associate or form a consortium to enhance qualifications. 9. GRIDCo undertakes not to disclose any information about any respondent to this call for EOI to any other respondent. 10. Only shortlisted Consultancy Firms will be invited to submit their Technical and Financial Proposals. 11. Applicants are to submit their EOI in one (1) original and three (3) photocopies, all of which must be received by the stated closing date and time, to the above- mentioned address. 12. Electronic format (e-mails) submissions are not acceptable. 13. Interested Consultancy Firms may obtain additional information from the above- mentioned address or on: Telephone No. +233-303-308892, Fax: +233-303-318727, Email: [email protected] The Economist February 25th 2017 76 Economic and financial indicators The Economist February 25th 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 Feb 22nd year ago United States +1.9 Q4 +1.9 +1.6 nil Jan +2.5 Jan +1.3 4.8 Jan -476.5 Q3 -2.6 -3.2 2.42 - - China +6.8 Q4 +7.0 +6.7 +6.0 Dec +2.5 Jan +2.0 4.0 Q4§ +210.3 Q4 +2.4 -3.8 3.01§§ 6.88 6.52 Japan +1.7 Q4 +1.0 +0.9 +3.2 Dec +0.3 Dec -0.2 3.1 Dec +190.9 Dec +3.7 -5.5 0.10 113 113 Britain +2.0 Q4 +2.9 +2.0 +4.3 Dec +1.8 Jan +0.7 4.8 Nov†† -138.1 Q3 -5.4 -3.7 1.28 0.80 0.71 Canada +1.3 Q3 +3.5 +1.2 +1.5 Nov +1.5 Dec +1.5 6.8 Jan -53.6 Q3 -3.5 -2.4 1.72 1.32 1.37 Euro area +1.7 Q4 +1.6 +1.7 +2.0 Dec +1.8 Jan +0.2 9.6 Dec +399.5 Dec +3.3 -1.9 0.28 0.95 0.91 Austria +1.2 Q3 +2.4 +1.5 +2.3 Nov +2.0 Jan +0.9 5.7 Dec +8.0 Q3 +2.5 -1.0 0.61 0.95 0.91 Belgium +1.1 Q4 +1.6 +1.2 +0.4 Nov +2.6 Jan +1.8 7.6 Dec +3.4 Sep +1.0 -3.0 0.74 0.95 0.91 France +1.1 Q4 +1.7 +1.2 +1.3 Dec +1.3 Jan +0.3 9.6 Dec -26.8 Dec‡ -1.1 -3.3 1.10 0.95 0.91 Germany +1.8 Q4 +1.7 +1.8 -0.6 Dec +1.9 Jan +0.4 5.9 Jan +294.5 Dec +8.9 +0.6 0.28 0.95 0.91 Greece +0.2 Q4 -1.4 +0.4 +2.1 Dec +1.2 Jan -0.8 23.0 Nov -1.1 Dec -0.3 -7.5 7.34 0.95 0.91 Italy +1.1 Q4 +0.8 +0.9 +6.6 Dec +1.0 Jan -0.1 12.0 Dec +50.7 Dec +2.7 -2.5 2.19 0.95 0.91 Netherlands +2.3 Q4 +2.0 +2.0 +4.8 Dec +1.7 Jan +0.1 6.4 Jan +57.1 Q3 +8.1 -1.1 0.48 0.95 0.91 Spain +3.0 Q4 +2.8 +3.2 -1.6 Dec +3.0 Jan -0.3 18.4 Dec +24.3 Nov +1.8 -4.6 1.75 0.95 0.91 Czech Republic +1.6 Q3 +0.8 +2.4 +2.7 Dec +2.2 Jan +0.7 5.3 Jan§ +3.7 Q3 +1.7 nil 0.68 25.6 24.5 Denmark +1.1 Q3 +1.6 +1.0 +10.0 Dec +0.9 Jan +0.3 4.3 Dec +24.5 Dec +7.3 -1.4 0.31 7.05 6.77 Norway +1.8 Q4 +4.5 +0.6 -2.2 Dec +2.8 Jan +3.5 4.4 Dec‡‡ +18.0 Q3 +4.2 +3.5 1.73 8.37 8.60 Poland +2.0 Q3 +7.0 +2.8 +9.0 Jan +1.8 Jan -0.7 8.3 Dec§ -2.5 Dec -0.5 -2.5 3.90 4.08 3.96 Russia -0.4 Q3 na -0.5 +2.3 Jan +5.0 Jan +7.1 5.6 Jan§ +22.2 Q4 +2.0 -3.5 8.37 57.9 75.4 Sweden +2.8 Q3 +2.0 +3.1 -0.9 Dec +1.4 Jan +1.0 7.3 Jan§ +22.2 Q3 +4.6 +0.2 0.66 8.99 8.50 Switzerland +1.3 Q3 +0.2 +1.4 +0.4 Q3 +0.3 Jan -0.4 3.3 Jan +68.2 Q3 +9.4 +0.2 -0.15 1.01 1.00 Turkey -1.8 Q3 na +2.4 +1.2 Dec +9.2 Jan +7.8 12.1 Nov§ -32.6 Dec -4.4 -1.1 10.75 3.59 2.94 Australia +1.8 Q3 -1.9 +2.4 -0.2 Q3 +1.5 Q4 +1.3 5.7 Jan -47.9 Q3 -3.1 -2.3 2.84 1.30 1.38 Hong Kong +3.1 Q4 +4.8 +1.2 -0.1 Q3 +1.3 Jan +2.4 3.3 Jan‡‡ +13.6 Q3 +2.8 +1.3 1.90 7.76 7.77 India +7.3 Q3 +8.3 +6.9 -0.4 Dec +3.2 Jan +4.8 5.0 2015 -11.1 Q3 -0.6 -3.8 6.94 67.0 68.6 Indonesia +4.9 Q4 na +5.0 +4.3 Dec +3.5 Jan +3.5 5.6 Q3§ -16.3 Q4 -2.1 -2.3 7.50 13,367 13,438 Malaysia +4.5 Q4 na +4.3 +4.8 Dec +3.2 Jan +2.1 3.5 Dec§ +6.0 Q4 +1.9 -3.4 4.05 4.45 4.20 Pakistan +5.7 2016** na +5.7 +7.0 Dec +3.7 Jan +3.8 5.9 2015 -4.9 Q4 -1.8 -4.6 7.59††† 105 105 Philippines +6.6 Q4 +7.0 +6.9 +23.0 Dec +2.7 Jan +1.8 4.7 Q4§ +3.1 Sep +0.9 -2.3 4.96 50.2 47.6 Singapore +2.9 Q4 +12.3 +1.8 +21.3 Dec +0.2 Dec -0.5 2.2 Q4 +56.7 Q4 +23.6 +0.7 2.27 1.42 1.40 South Korea +2.3 Q4 +1.6 +2.7 +4.3 Dec +2.0 Jan +1.0 3.8 Jan§ +98.7 Dec +7.4 -1.6 2.25 1,143 1,234 Taiwan +2.9 Q4 +1.8 +1.4 +6.2 Dec +2.2 Jan +1.4 3.8 Dec +70.9 Q4 +12.9 -0.2 1.12 30.8 33.2 Thailand +3.0 Q4 +1.7 +3.2 +0.5 Dec +1.6 Jan +0.2 0.8 Dec§ +46.4 Q4 +10.7 -2.1 2.64 35.0 35.7 Argentina -3.8 Q3 -0.9 -2.2 -2.5 Oct — *** — 8.5 Q3§ -15.7 Q3 -2.7 -4.7 na 15.5 15.1 Brazil -2.9 Q3 -3.3 -3.5 nil Dec +5.4 Jan +8.1 12.0 Dec§ -23.8 Jan -1.2 -6.3 10.16 3.08 3.95 Chile +1.6 Q3 +2.5 +1.7 +0.3 Dec +2.8 Jan +3.8 6.1 Dec§‡‡ -4.8 Q3 -1.6 -2.8 4.19 642 692 Colombia +1.6 Q4 +4.0 +1.6 +2.2 Dec +5.5 Jan +7.5 8.7 Dec§ -13.7 Q3 -4.8 -3.8 7.00 2,893 3,316 Mexico +2.4 Q4 +2.9 +2.1 -0.6 Dec +4.7 Jan +2.9 3.7 Dec -30.6 Q3 -2.9 -2.6 7.32 19.9 18.1 Venezuela -8.8 Q4~ -6.2 -14.1 na na +428 7.3 Apr§ -17.8 Q3~ -2.0 -24.3 10.43 10.0 6.31 Egypt +4.5 Q2 na +4.3 +17.2 Dec +28.2 Jan +13.8 12.4 Q4§ -20.8 Q3 -6.9 -12.2 na 15.8 7.83 Israel +4.2 Q4 +6.2 +3.5 -1.2 Dec +0.1 Jan -0.5 4.3 Dec +13.3 Q3 +3.3 -2.2 2.30 3.71 3.91 Saudi Arabia +1.4 2016 na +1.4 na -0.4 Jan +3.5 5.6 2015 -46.8 Q3 -5.7 -11.4 na 3.75 3.75 South Africa +0.7 Q3 +0.2 +0.5 -0.8 Dec +6.6 Jan +6.3 26.5 Q4§ -12.3 Q3 -3.8 -3.4 8.74 13.1 15.2 Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. ~2014 **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. ***Official number not yet proved to be reliable; The State Street PriceStats Inflation Index, Jan 29.53%; year ago 30.79% †††Dollar-denominated bonds. The Economist February 25th 2017 Economic and financial indicators 77

Markets % change on Sovereign-wealth funds Assets, December 2016*, $trn Dec 30th 2016 Norway has proposed changes to its Index one in local in $ $900bn sovereign-wealth fund, including 0 0.3 0.6 0.9 1.2 1.5 1.8 Feb 22nd week currency terms increasing its stockmarket holdings by China United States (DJIA) 20,775.6 +0.8 +5.1 +5.1 about $90bn. The fund is the world’s China (SSEA) 3,414.9 +1.5 +5.1 +6.2 UAE Japan (Nikkei 225) 19,379.9 -0.3 +1.4 +4.3 largest, according to the Sovereign Norway Wealth Fund Institute, a think-tank. Britain (FTSE 100) 7,302.3 nil +2.2 +3.1 Saudi Arabia Canada (S&P TSX) 15,830.2 -0.1 +3.5 +5.3 China has the most assets under manage- Kuwait Euro area (FTSE Euro 100) 1,130.0 +0.4 +1.6 +1.6 ment though: $1.6trn between its four Euro area (EURO STOXX 50) 3,339.3 +0.5 +1.5 +1.4 funds. Oil-and-gas-based funds make up Singapore Austria (ATX) 2,787.1 -0.7 +6.4 +6.4 more than half of the market by asset Hong Kong Belgium (Bel 20) 3,623.6 +0.1 +0.5 +0.4 value and low prices have created chal- Qatar France (CAC 40) 4,895.9 -0.6 +0.7 +0.7 lenges for commodity exporters. Saudi United States Germany (DAX)* 11,998.6 +1.7 +4.5 +4.5 Arabia is trying to diversify away from oil Greece (Athex Comp) 647.1 +3.3 +0.5 +0.5 Kazakhstan and intends its Public Investment Fund to Italy (FTSE/MIB) 18,884.9 -0.9 -1.8 -1.9 Russia play a central role in the change. Saudi Netherlands (AEX) 499.1 +0.5 +3.3 +3.3 South Korea Spain (Madrid SE) 957.0 -1.2 +1.4 +1.4 Aramco’s initial public offering would Australia Czech Republic (PX) 972.7 nil +5.5 +5.5 swell it enormously, but the timing of the Denmark (OMXCB) 833.0 +0.6 +4.3 +4.3 share sale is uncertain. Source: Sovereign Wealth Fund Institute *Some figures are estimates Hungary (BUX) 34,112.9 +0.4 +6.6 +6.9 Norway (OSEAX) 770.4 +0.1 +0.8 +3.6 Poland (WIG) 59,451.1 +2.7 +14.9 +17.4 Other markets The Economist commodity-price index Russia (RTS, $ terms) 1,146.0 -2.3 -0.5 -0.5 2005=100 % change on % change on Sweden (OMXS30) 1,582.1 +0.5 +4.3 +5.4 Dec 30th 2016 one one Switzerland (SMI) 8,585.9 +1.2 +4.5 +4.9 Index one in local in $ Feb 14th Feb 21st* month year Turkey (BIST) 88,531.3 +0.7 +13.3 +10.9 Feb 22nd week currency terms Dollar Index Australia (All Ord.) 5,850.1 -0.2 +2.3 +8.8 United States (S&P 500) 2,362.8 +0.6 +5.5 +5.5 All Items 150.7 148.6 -0.8 +17.9 Hong Kong (Hang Seng) 24,202.0 +0.9 +10.0 +9.9 United States (NAScomp) 5,860.6 +0.7 +8.9 +8.9 Food 160.2 158.7 -2.6 +9.3 India (BSE) 28,864.7 +2.5 +8.4 +9.9 China (SSEB, $ terms) 349.1 +1.3 +2.1 +2.1 Indonesia (JSX) 5,358.7 -0.4 +1.2 +2.0 Japan (Topix) 1,557.1 +0.2 +2.5 +5.5 Industrials Malaysia (KLSE) 1,708.1 -0.1 +4.0 +4.8 Europe (FTSEurofirst 300) 1,472.8 +0.5 +3.1 +3.1 All 140.9 138.1 +1.4 +30.2 Pakistan (KSE) 48,981.7 -0.5 +2.5 +2.0 World, dev'd (MSCI) 1,843.1 +0.5 +5.2 +5.2 Nfa† 151.0 145.7 +0.1 +34.6 Singapore (STI) 3,122.2 +1.1 +8.4 +10.5 Emerging markets (MSCI) 945.6 +0.4 +9.7 +9.7 Metals 136.6 134.9 +2.0 +28.3 South Korea (KOSPI) 2,106.6 +1.1 +4.0 +9.9 World, all (MSCI) 445.9 +0.5 +5.7 +5.7 Sterling Index Taiwan (TWI) 9,778.8 -0.2 +5.7 +10.6 World bonds (Citigroup) 884.3 +0.3 nil nil All items 220.0 216.7 -0.7 +33.4 Thailand (SET) 1,572.0 -0.1 +1.9 +4.2 EMBI+ (JPMorgan) 794.8 +0.3 +2.9 +2.9 Argentina (MERV) 19,915.3 +1.3 +17.7 +20.3 Hedge funds (HFRX) 1,224.0§ -0.1 +1.7 +1.7 Euro Index Brazil (BVSP) 68,589.6 +0.9 +13.9 +20.5 Volatility, US (VIX) 11.9 +12.0 +14.0 (levels) All items 177.4 175.3 +1.1 +23.4 Chile (IGPA) 21,870.6 +0.7 +5.5 +10.1 CDSs, Eur (iTRAXX)† 73.5 +0.7 +1.9 +1.9 Gold Colombia (IGBC) 9,929.4 -0.4 -1.7 +1.9 CDSs, N Am (CDX)† 62.5 -0.6 -7.7 -7.7 $ per oz 1,226.2 1,234.7 +1.8 +0.8 Mexico (IPC) 47,195.7 +0.1 +3.4 +7.0 Carbon trading (EU ETS) € 5.1 +0.2 -22.9 -23.0 West Texas Intermediate Venezuela (IBC) 34,869.5 +1.7 +10.0 na Sources: Markit; Thomson Reuters. *Total return index. $ per barrel 53.2 54.1 +2.8 +80.4 Egypt (EGX 30) 12,401.1 -0.4 +0.5 +15.3 †Credit-default-swap spreads, basis points. §Feb 17th. Israel (TA-100) 1,289.3 +0.5 +1.0 +4.9 Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO; Indicators for more countries and additional ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Saudi Arabia (Tadawul) 7,062.9 -0.2 -2.4 -2.4 Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional South Africa (JSE AS) 52,088.6 -0.8 +2.8 +7.4 series, go to: Economist.com/indicators †Non-food agriculturals. 78 Obituary Norma McCorvey The Economist February 25th 2017

In her sadness she ignored how Roe v Wade was going. She didn’t testify, never went to court, and read about the decision in the newspaper like everyone else. But suddenly Jane Roe was everywhere, this unknown woman (or pawn, she felt) who had won freedom for millions of Ameri- can women, or consigned millions of little American boys and girls to slaughter, de- pending on your view. And that was her. She told very few people. Mostly she hid away with her cats and plants and her lover Connie Gonzales, which was diffi- cult also, as lesbians weren’t exactly wel- come in Texas. In the 1980s she took work in the newlylegal abortion clinicsin Dallas with theirsafe, clean white beds, and slow- ly came out to the world. That made her plenty of enemies, who called her a baby- killer and rammed their trolleys into her heels in the Tom Thumb store. But it didn’t make her the friends she expected. She was too simple for the pro-choice people, who seemed to shun herattheirrallies and sent a strong hint that she was totally stu- pid, though she had brains and ideas. She wasn’t their special chosen Jane Roe, and they didn’t want Norma McCorvey. The woman who never was This unsettled things in her mind again. The Operation Rescue folks moved in right next door to the clinic, with their posters of bloody fetuses which really freaked her out, and on her smoking breaks she would see them praying forher. She began to hear Norma McCorvey, the “Jane Roe” ofRoe v Wade, America’s most controversial infant laughter in the clinic, and when the court decision, died on February18th, aged 69 women told her why they had come she OMETIMES she just couldn’t settle at on some private doctor to help. When she would find herself thinking, that’s not a Sanything. At ten she ran away from saved up her rent money to visit the one il- reason. In 1995 she went to church one day home to staywith a girlfriend in a motel. At legal clinic she knew in Dallas, she found it and turned to Jesus right away. The ceiling 16 she married a man who took her for a had been busted the weekbefore. Through didn’t fall down, and lightning didn’t strike ride in his black Ford car, but she left after the window she could see the dirty instru- when she got baptised in someone’s two months because he beat her. She lived ments and dried blood on the floor, roach- swimming pool; just the best high of her on the streets, slept with women and men, es and creeping things. All she wanted was life. Jesus forgave her for all those dead ba- got pregnant by the men. Pot, acid, mesca- a clean white bed to lay down on in a safe bies, and now she would help save them. lin, she did it all. Work was whatever came place. She didn’t have that privilege. along: barhop, carnival barker, house- So when she was put in touch with two Still a street kid painter, cleaner. She got involved in the lawyers, Sarah Weddington and Linda Cof- For the pro-life cause she got herself arrest- whole abortion debate first on one side fee, who wanted to change the law, she ed, campaigned against Barack Obama, and then, when she took Jesus Christ for was thrilled. They met over beers and piz- testified in Congress and tried to disrupt her personal saviour, on the other. That za, and drankto women taking proper con- the appointment of a pro-choice justice. made her famous, though nobody knew trol over their own bodies. At some point But she didn’t fit neatly with these people, who the regular Norma McCorvey was. she signed an affidavit which she hoped either. Norma McCorvey was a street kid, And maybe they didn’t care. would persuade some nice judge to give rough at the edges and still wild inside. She What her mind had been crystal-clear Miss Norma McCorvey, aka Miss Jane Roe, still told tales. If she was going to be a tro- about though, in the last months of 1969, permission for an abortion right away, be- phy celebrity for the anti-abortion cause, was that she had to get rid ofherlatest preg- cause she was already five months gone. as they wanted, she would have to be an nancy. She was 22, and this was her third. But nobody was bothered about that. It ideologue and clean-cut like them. Even The first baby, her daughter Melissa, had turned out that she made a good plaintiff the Rev Flip Benham, who baptised her, been taken away by her mother who said only if she was pregnant and desperate, as called her a money-fisher because she she was a filthy whore and not fit to raise they could see she was with her swollen charged top dollar for interviews. So what her, and the second baby had been adopt- eyes and the cuts on her wrists, and the did he want her to live on? Didn’t she al- ed by its father. Now there was another case dragged on so long that her baby was ready buy her clothes at the bargain store? one growing in her body. The state of Tex- two and a half before the Supreme Court She had never been right for Jane Roe. as, where she lived, banned abortions un- decided in January 1973 that abortion was But she wasn’t wrong, either. Some poor less the woman’s life was in danger. She a constitutional right for all American woman would have to have represented couldn’t say it was. And because she was women. The baby had gone for adoption all the rest. And Norma McCorvey was as poor, she couldn’t go to Mexico (as one of again, and she felt miserable, even though conflicted about abortion as almost the herlawyers did, and nevertold her), orrely she hadn’t wanted it. whole ofAmerica was. 7 The Brightest Minds MBA Scholarship Contest

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